Unit - 1 A Conceptual Background

1.0 Introduction

When an individual or a group of people come together for commercial purpose where buying
and selling is involved, it is called a business organization. Capitalist economies have such
businesses, and by and large, these are owned by private individuals. When many people are
involved in a business, it is known as a company or a firm. The goal of all businesses is to make
profit. However, there are some which are not-for-profit; such organizations work for the better
of society.. When we refer to businesses, we generally mean a particular organization. But at
times, general references are also made especially when we talk of the film business or music
business. Here everything related to films falls under the business category.

1.2 Objectives

The chief aim of a business organization is to make profits and it generally has a time limit. Say,
a business aims to achieve 10 per cent growth in a period of a year. A company may try to attain
higher growth, increased profits and market share or just basic survival. Keeping its objectives
in mind, a company can allocate its funds and resources, whereby reaching its goals. However,
it’s important, whereby reaching its goals, that the owners must be committed to achieving the
objectives.

Sometimes, the objectives may change over a period of time because of either internal factors
like growth or external ones like economic downturn. In such a case, a company will not just
focus on surviving but few years later strive to increase its profits. Similarly, a company which
had focused on growth, may because of a sudden recession, want to save itself from closure.

1.3 Defining Organizations

The word is derived from Greek ‘Organon’, which means a group of people committed to a
purpose and working under a specific structure to achieve their goals. External environment is
important to an organization, which is based on systems of law. These laws govern contract,
property rights and incorporation of companies. Governing contract, in the book Organizations:
Management without Control, management expert H.H. Greenwald writes in the first chapter
that individuals working under a “defined system of rules, assignments, procedures and
relationships” are designed to achieve identifiable objectives and goals.

1.4 Principles of Organization

The process or organization can be accomplished effectively if the managers in a company have
certain specific guiding principles and course of action in order to allow the make decisions and
act accordingly. The following below principles of organization can be implemented by a
manager to organize in an efficient manner,

1. Principle of Specialization

As per the principle of Specialization, the complete work of a concern organization or a

team should be divided amongst the subordinates on the basis of their qualifications,
skills and abilities. Through the division of work, specialization can be attained which
lead to as effective and efficient organization.

2. Principle of Functional Definition

According to the principle of Functional Definition, each and every function in a concern
should be clearly and completely defined to the managers and their subordinates. This
can be achieved by distinctly defining the responsibilities, duties, authority and
relationships of individual towards each other. Clarification in authority-responsibility
relationships is useful in accomplishing coordination and therefore the organization in an
institution can take place efficiently. For instance, the main functions of manufacturing,
advertising and finance and the authority responsibility relationships in these departments
should be distinctly defined to each individual related to this department. Clarification in
the authority-responsibility relationship is important in effective organization.
3. Principles of Span of Control/Supervision

Span of control is a span of supervision which portrays the number of workers or

employees that can be managed and controlled efficiently by a single supervisor. As per
the principle, a supervisor should be able to manage what number of workers or
employees under him should be decided. This decision can be taken by choosing either
from narrow or a wide span. Thus, the span of control is of two following types:-

a. Wide span of control- Wide span of control is the one in which a supervisor can
supervise, manage and control efficiently large group of persons at a particular
time. The characteristics of this span are as follows:-
i. Less overhead charge of supervision
ii. Quick response from the employees or workers
iii. Improved communication
iv. Enhanced supervision
v. Improved co-ordination
vi. Appropriate form onotonous jobs

As per the span of control principle, one manager can efficiently and effectively
manage a large number of employees at a time.

b. Narrow span of control- According to the narrow span of control, the authority
and work is divided amongst many employees and a manager doesn't manage and
control a very big group of individual aligned under him. The manager supervises
a selected number of employees at a particular time. The features of narrow span
of control are:-
i. Work which needs tight supervision and control, for instance, ivory work,
handicrafts etc. which needs craftsmanship, there narrow span proves to be
more beneficial.
ii. Co-ordination is hard to be attained.
iii. Communication gaps can arise.
iv. Messages can be distorted and can be inaccurate.
v. Specialization work can be accomplished.
Factors influencing Span of Control

• Managerial abilities- In the concerns where supervisors are qualified, capable,

knowledgeable and experienced, wide span of control is always beneficial.

• Competence of subordinates- Where the subordinates are competent and

capable and their levels of understanding are proper and clear, the subordinate
employees tend to visit the managers very frequently for solving their difficulties
and problems. In these cases, the manager can manage large number of
employees. Therefore wide span is appropriate.

• Nature of work- If the work is of repetitive and monotonous in nature, wide span
of supervision is more useful. While on the other hand, if work needs
craftsmanship or mental skill, tight supervision and control is needed in which
narrow span is more beneficial.

• Delegation of authority- When the work is delegated to lower levels in an

effective and proper way, confusions are minimum and amiability and
friendliness of the environment can be sustained. In these cases, wide span of
control is appropriate and the managers can supervise and control large number of
employees at a time.

• Degree of decentralization- Decentralization is done to attain specialization in

which authority is shared by more than one individual and supervisors at different
levels. In these cases, a tall structure is beneficial. There are few concerns where
decentralization is done in very efficient way which results in personal and direct
communication between managers and sub- ordinate employees and there the
superiors can handle large number of subordinates very effectively and in an
easier way. The wide span again helps in such cases.
Principle of Scalar Chain

Scalar chain is a chain of authority or command which runs from top to bottom. The
wastages of resources are reduced, communication can be affected, overlapping of work
can be avoided and easy organization can take place with a availability of chain of
authority. A scalar chain of command enables flow of work in an organization which is
beneficial in the achievement of efficient and effective outcomes. Since the authority runs
from top to bottom, it explains the authority positions to supervisors at all level and that
enables efficient organization.

Principle of Unity of Command

The principle of Unity of Command implies one subordinate-one manager relationship.

Every subordinate employee is accountable and answerable to only one boss at a
particular time. This is helpful in avoiding communication gaps and thus the response and
feedback is prompt and early. Unity of command is also beneficial in effective
combination of resources, that is, physical, financial resources which aids in easy co-
ordination and, thus, efficient organization.
The above diagram shows that the Managing Director has the highest level of authority. This
authority is then shared by the Marketing Manager who then shares his authority with the Sales
Manager. From this chain of hierarchy, the official chain of communication becomes well
defined and which is beneficial in attainment of results and which offers stability to a concern.
This scalar chain of command always runs from top to bottom and it clearly describes the
authority positions of different managers at different levels.

1. Principle of unity of objectives: Organizational objectives, departmental objectives, and

individual objectives must be clearly and distinctly defined. All objectives and goals must have
uniformity and consistency. The desired objectives can’t be attained is there is contradiction and
inconsistency among different level of goals. Thus, unity of objectives is important.

2. Principle of specialization: Effective and sound organization believes on organization. The

term specialization is related to employees and work. When an employee acquires special and
particular type of skill and knowledge in any area, it is referred to as specialization. Modern
business organization requires the skill, specialization and knowledge by the preferred sector of
economy and therefore, efficiency would be established.

3. Principle of coordination: In an organization many tools and equipment are utilized.

Coordination can be achieved by group efforts that mainly focus on unity of action. Thus,
coordination enables in many management concepts.

4. Principle of authority: Authority is the kind of power and right through which it directs and
guides the actions of others so that the organizational objectives can be accomplished. It is also
associated with decision making. It is bestowed in specific position, not to the individual as the
authority is given by an institution and thus it is legal. It usually runs from higher level to lowest
level of management. There should be unbroken and continuous line of authority.

5. Principle of responsibility: Authentic body of an organization is top level management and

the top level management guides the subordinate employees. Departmental managers and other
staff stake the direction from top level management to execute and perform the task. Authority is
important to perform the work. Only authority is not given to the individuals but obligation and
responsibility is also given. So the commitment to perform the task and duties is referred to as
responsibility. Responsibility can neither be delegated nor be avoided.
6. Principle of delegation: The process of shifting authority and creation of responsibility
between subordinates and superior employees to achieve certain task is referred to as the
delegation of authority. Authority can only be delegated, in all levels of management, but the
responsibilities cannot be delegated to next levels. The authority delegated must be equal to
responsibility.

7. Principle of efficiency: In can organizations, various different resources are utilized. The sere
sources must be used in efficient and effective manner. When the organization fulfill the goals
with minimum cost, it is efficient. Organization must always focus on effectiveness and its
efficiency.

8. Principle of unity of command: Subordinates employees should receive orders from single
superior employee at a particular time and all subordinates should be responsible to that superior.
If there are more superiors, it leads to confusion and delay.
9. Principle of span of control: Indefinite subordinates can’t be handles by supervisor, thus this
principle helps to decide the numerical limit of subordinates to be managed by a supervisor. This
improves effectiveness and efficiency.

10. Principle of balance: The functional activities, their establishment and other performances
should be balanced appropriately. Authority, decentralization and centralization must be balance
evenly. This is very challenging job but effective management must keep it.

11. Principle of communication: Communication is the process of transferring of information

from one individual to another individual of different levels. It includes the systematic,
uninterrupted and continuous process of listening, telling and comprehending opinions feelings,
ideas, information, and views so on in flow of information. Efficient and effective
communication is essential.

12. Principle of personal ability: Human resources are significant for sound and effective
organization. Employees must be capable to perform higher. Training and development
programs must be encouraged among the employees to develop the skill and other abilities in the
employees.
13. Principle of flexibility: Organizational structure must be flexible and adaptable considering
the environmental vitality and dynamism. Occasionally, dramatic variations may happen in the
organization and in the reconditions’; organization should be ready to accept the variation.

14. Principle of simplicity: The principle of simplicity focuses on the simplicity of

organizational structure. The structure of the organization should be simple with least number of
levels of management for its employees to understand their duties, responsibilities and
authorities.

1.4.1 Objective and Principles of Organization

Before the Henri Fayol's development of an administrative theory of management, supervisors

and managers in enterprises prefer to take a scientific methodology to work, trying to increase
the overall productivity by treating their employees like machines. The Administrative theory of
management comprises of 14 Principles of Management that emphasize on the complete
organization rather than only the work. This unit will cover brief about the first seven of these
principles.

From Scientific to Administrative

In around 1860 Henri Fayol, a young engineer of that time, started working at a small coal mine
in the present country of France. When e was working in the mines, he observed that handling
the miners was quite a difficult job. Managing was not as efficient and effective as it could be.
Supervisors had few tools and resources to handle the people in the better way.
During the same time, Frederick Winslow Taylor, who was the founder of the school
of scientific management, was taking steps in increasing the productivity by emphasizing on the
worker and work relationship. One can say that Taylor considered that there was a science to
work. If workers or the labors work more like machines, then the productivity can be maximized
to a very large extent.
Unlike Taylor's scientific management theory, Fayol considered that it was more than just
workers and work. Supervisors required particular roles to handle workers and work. This was
popularly referred to as the administrative school of management and was founded on the six
roles and functions of the management. The six roles of the management as follows
 1. Forecasting

2. Planning

3. Organizing

4. Commanding

5. Coordinating

6. Controlling

Principles 1-7
The roles of management which were used as a process, emphasized on the complete
organization rather than just the tasks. These six functions or rolses evolved into Fayol's 14
Principles of Management after these are broken down into smaller parts. In this unit, we will
emphasize on the first seven principles:

1. Division of Work

2. Authority

3. Discipline

4. Unity of Command

5. Unity of Direction

6. Subordination of Individual Interests to the General Interest

7. Remuneration

Even though the Fayol's 14 Principles of Management are not as extensively implemented as
they were used once, it is significant to comprehend and analyze how the basis
of administrative management theory was established in order to address the requirements of
those times. This approach was the first of its time. One should not also forget, Taylor did not
emphasize on the human element.
The scientific approach of Taylor to work emphasized on constructing an advanced a better,
faster, robust and more productive team with the use of the physical elements. Fayol didn't
observe it that way. Fayol saw labors as human beings possessing elements that needed a more
general way of getting the work completed. He observed it as a complete organizational effort.

Principles Explained

Let's now take each principle one by one and use illustrations to better understand the working of
these principles to develop an administrative management mindset. Let's use Fayol and the
Principles, a rock band, in order to help us understand the starting 7 of the 14 Principles of
Management in a much better way.

1. Division of Work: When worker or the employees in an enterprise are specialized and expert
in specific domain, the net productivity can rise as they become more skilled efficient and
skilled.
Fayol and the Principles are made up of four members, including Fayol. Each band member is an
expert in a specific talent or instrument. For an instance, Fayol is the lead singer of the band,
while the other members of the band play different musical instruments. The band is skilled
enough to produce quality music since each member of the band performs the job that she or
he is most specialized and skilled in.
The if quality of the music would be much different if one started mixing it up by putting another
band member on singing and putting Fayol on bass guitar since neither of them possesses the
talent and skill to do the job.

2. Authority: Managers and supervisors must have the authority and power to give orders to the
workers, but they must also realize that with responsibility also comes with the authority and
must work according to the responsibility.
Fayol and the Principles realize that they should be expert in their specific domains; moreover,
there should be a leader. Fayol undertakes the leader role and gives orders to everyone. He
says '. Do this. Play that' But with this authority, there also comes responsibility. He understands
that, whatever job he assigns to the band, he must ensure that the job is finished in time and the
task is done in a creative and productive way and that it gives results.

3. Discipline: Discipline must be maintained in organizations, but approaches for doing so can
alter. Many a times, the members of the band do not perform to Fayol's standard. Although
Fayol looks at the organization as a whole organizational effort, he also understands that he must
manage discipline for unproductiveness. One of Fayol's band members wanted to take a break
from band practice in order to play a game of Pin the Tail on the Donkey. Fayol must
administer instant discipline in line with the offense. He also knows that there is no one
discipline that can be imposed against the members of the band. It must be done on a case-by-
case basis. Now in this case, the one band member was penalized pay for the time spent playing
a game when they should have been practicing for their show.

4. Unity of Command: Workers should have only one direct manager.

Sometime, more than one person gives directions. Fayol is leader in case of the rock band,.
This is expressed by the name of the band and implied by the orderly way in which work is
assigned. Fayol is the only individual to give orders.

5. Unity of Direction: Teams with the same goals should be performing their tasks under the
orders of only one supervisor and by using one plan. This will make sure that action is
coordinated properly.

1.4.2 Line and Staff

The adoption of a specific form of organizational structure mainly depends upon the nature, size
and scale of the business. The organizational structure is chiefly concerned with the assignment
of tasks or activities and delegation of power and authority.

1. Line Organization:

Line organization is the oldest and the simplest type of organization. Line organization is also
referred to as a scalar organization or military kind of organization. According to J.M. Lundy,
“It is characterized by direct lines of authority flowing from the top to the bottom of the
organizational hierarchy and lines of responsibility flowing in an opposite but equally
direct manner.”

A very important and significant feature of such type of organization is relationship between the
superior and the subordinate. Superior employee delegates power or authority to the other
subordinate employee and so on, in turn forming a line from the top to the bottom of the
organization structure. The line of authority thus created is known as the “line authority.” Under
this type of organization, responsibility moves upwards while authority flows downwards in a
straight line. Unity of command and Scalar principle are strictly followed in line organization.

Line organization looks like with the military administration or army kind of organization. Like
in case of military, commander-in-chief occupies the top most position and has the complete
control and authority over the army of the country, which in turn is developed into main area
commands under major-generals.

Each area has brigade under brigadier-generals, each brigade is fabricated into regiments under
its colonels, each regiment into battalions under majors, each battalion into companies under
captains, each company sub-divided under its lieutenants and so on drawn to corporal with his
squad.

Types of line organization:

Line organization is categorized into two type’s viz. (a) Simple or Pure Line Organization (b)
Departmental Line Organization

(a) Simple or Pure Line Organization:

In the ‘Pure Line organization’, the activities or the tasks at any level of management are similar
with each individual doing the similar kind of tasks and activities and the divisions of the tasks
mainly exist for the reason of direction and control., This type of organization hardly ever exists
in practice.
The following diagram depicts the pure line organization:

All the employees perform the similar type of work in this type of organizations. The divisions
of the department are made only for the sake of convenience of management and supervision by
the managers.

(b) Departmental line organization:

In Departmental line of organization, an organization is categorized into number of departments

that headed by different departmental heads. All the departments function under the ultimate
authority of the general manager. The general manager gives orders to all the departmental heads
that in turn pass on to their corresponding subordinate employees under each department.

Similarly the subordinate employees, in turn, convey the orders to the employees operating under
them. The several departmental heads will be operating independent of each other and they will
relish equal status the central idea, in the formation of these departments is not similarly or
dissimilarity of activities or functions, but unity of control and line authority and responsibility
from the top of the organization to the bottom.
1.4.3 Functional Organization

The Functional organizational structure is one of various reporting structures an enterprise could
implement. This section will illustrate why an enterprise might implement a functional structure
in their organizations and also the advantages and disadvantages for both employees and the
company.

What Is an Organizational Structure?

An organizational structure is defined as the reporting relationships in an enterprise. - In other
words, one can say who works for whom. Enterprises select an organizational structure on the
basis of several factors. Some of these factors include the size of the company, their geographic
location and the quantity of different goods and services the company offer to the customers.

What Is a Functional Organizational Structure?

In a functional organizational structure, the reporting relationships of the organizations are
categorized on the basis of specialty, expertise or functional area. For instance, there might be
different departments for accounting, marketing, engineering and production. Usually, all the
functional heads in a company will report directly to the CEO or company president.

Advantages of Functional Organizational Structure

There are some specific advantages of grouping all the employees on the basis of their expertise
or functional area:

• Employees are managed by an individual with experience and expertise in their same
specialty and he can effectively understand and review their activities.

• Employees have the great chance to grow within their functional areas and this gives
them a reason to stay long-term within the organization. The organization gets the
advantage of their specialty and company knowledge over time.

• Employees work with others in their areas, which enables for knowledge sharing and
lateral job moves in order to learn new skills.
Disadvantages of Functional Organizational Structure
The functional structure of the organization has few disadvantages also. The disadvantages are
as follows:

• The employees of a particular functional area may have difficulties working with the
employees of other functional areas. There is often an opinion that the employees are
always competing with other functional areas for the resources. There is a lack of
understanding of what is happening in the other functional areas in the company. Thus,
the sales department of the company may be upset that its request for an extra headcount
is rejected, but the company results point to a need for additional accountants rather
than sales peoples

• As the company grows in terms of the number of employees, the functional areas can
become problematic to handle because of their size. It can also happen than the functional
areas start working like small companies on their own, with their own facilities, cultures
and management approaches.

Functional areas may become unfocused and can be distracted by their own motives. Each
functional area may start focusing on its own goals rather than working for the overall company
objectives. For example, there may be a wish by the I.T. department to implement a new, state-
of-the-art computer system, while the overall company goals support investment in new goods in
spite of investing in computer systems. Since the unit doesn't have an overview of the whole
company, it may focus attention.

1.5 Establishment of a new business

The following steps are needed for starting a business from scratch:
Step 1:
Research and plan your business: The Small Business Administration suggests that new
companies create a business plan that comprises of a summary of the business, study of the
current market situation, outline of the company’s organizational structure and outline of the
company’s management structure, financial information, outline of the company’s marketing and
sales management structures, description of the product and goods line and capital requests.
Step 2:
Complete business assistance and training: The SBA suggests that individuals or a group of
individuals starting a new business join in-person support groups or online communities to
discuss their business ideas and questions with them. This may consists of establishing a
relationship with a mentor for support and advice.
Step 3:
Secure a location: Starting a new business also includes selecting a suitable location for
establishing the company. The SBA suggests selecting a place that could be easily accessed by
the consumers, the place should be in close proximity to other competitors to facilitate and
encourage foot traffic, and appropriate zoning ordinance compliance. It is important to ask
questions about signage rules before signing the commercial lease. Home-based businesses are
also an option, but local ordinances should be double checked about commercial and residential
zoning.
Step 4:
Seek financing: Financial opportunities for people who want to start a new business comprises
of small business loans, venture capital, government grants–that is, external investment in the
new business–and tax-exempt bonds. Tax-exempt bonds are issued by the government on behalf
of private businesses.
Step 5:
Apply for permits and licenses: To establish a new enterprise, entrepreneurs must apply for
suitable licenses and permits. These may differ by city or region, but usually, new company
owners must register for state and local taxes, secure a tax identification number and apply for
additional documents including supplemental permits and liability insurance.

1.6 Characteristics of Organizations

There are basically four to five characteristics of an organization.

Open System: To begin with, it is an open system. This means that it allows itself to be
influenced by the environment where it is found. It is the environment that plays a big role in its
functioning, growing, hiring and strategizing. The requirements of the market create an
interaction between the organization and the environment.
Goal Oriented: This is the lifeline of a company without which it is impossible for it to survive.
In order to grow, goals are extremely important. Once goals are set, the organization can work
around achieving those goals by hiring the right people, adopting the latest technology and
creating its brand value.
Employees: The types of people who are hired make the maximum difference to the success of
an organization. The right people and the motivation behind them is what differentiate a
successful company from a non-performing one. It requires skill to hire the right kind of
employees. And it’s not just enough to hire well qualified people, it’s equally important to
motivate them and keep them satisfied because only such employees can contribute to the growth
of the company.
Technology: The right type of technology helps in making work easier at the workplace. The
load of work gets balanced and as a result people can work comfortably. Hence, technology is an
essential for an organization. It can be available in the form of computers, faxes, internet, and
Photostat machines and so on; it all depends on the type of business that the company is engaged
in.
Continuity: Whether people leave an organization or not, it shouldn’t affect its continuity. What
matters most is how long an organization can survive and therein lies its success. It is up to the
people to work towards its longevity but ultimately, an organization has to fight for its survival.
Period of continuity is part of all organizations and in the end nothing can change that.

1.7 Types of Organizations

There are six types of business organizations:

• Sole Trader: In this a company is owned only by one person and may have more than
one employee. Common in the UK, it is more or less a successful venture as it has low
overhead costs and minimum investments.
• Partnership: In this form two or more people come together by signing a deed of
partnership. One of the main advantages of this type of business is that the risk gets
spread among many people. Even its credibility ranks high among customers and
suppliers who find it easy to believe a group of people than just one sole trader. A big
disadvantage may arise when partners disagree or play foul. It may then affect the
venture.
• Private and Public Limited Company: In both private and public limited firms,
shareholders own the business, directors run it and there is limited liability. In case of
limited liability, investors have a chance of losing money that they had invested. In such
an arrangement, the actual owners are the shareholders. But the difference between the
two types is the fact that shares in the public limited company can be traded on the stock
exchange and then bought by the public.
• Co-operatives: When a group of people come together voluntarily for some good/benefit
in spheres like culture, social and economic sectors. The purpose is the larger good of
society. Mostly co-operatives are non-profit organizations or businesses that are owned
by people who work there or in some manner use their services.
• Franchising: The word originates from French where franc means free. So, franchising
is a business model that allows an individual to replicate a successful business model and
brand for a certain period of time. Well-know franchises are McDonald’s, Dominos,
Reebok, Nike and so on and so forth.

1.8 Growth of Organizations

The aim of all organization – regardless of the size - is to grow. Smaller ones want to be bigger
while those which are already large want to become even bigger. Most companies wish to grow
every year. Many factors push them towards this objective especially increase in salaries and
costs of employment benefits. In order to meet their costs, companies have to grow and double
their profits. However, to different companies, growth means different things. Some companies
may measure it in terms of net profit, revenue and other financial data while some others may
perceive it in terms of sales, employees or increased market share.

So even if growth brings good news on the one hand, it can lead to some problems on the other.
Rapid growth may turn out to be chaotic especially when sales increase but there is a drop in
profits. Also, as businesses grow, grows, skills of employees and owners may get outdated and
this would affect the business. Also, growth means that technology in use has to be upgraded.
There are six commonly used methods for small businesses to grow, namely:
• Joint Ventures/Alliance
• Licensing
• Selling Of Old Winners
• New Markets
• New Product Development
• External Financing

1.9 Evolution of Organizations

It is necessary for organizations to evolve from time to time in order to stay relevant. Also, it
helps in increasing the effectiveness and efficiency of the organization. It is a planned,
systematic process of implementing effective changes in the organization. Marketing specialist
Bernard Lievegoed has beautifully captured the essence of the evolution theory. His concept was
based on the General System theory of Niklas Luhmann and Cybernetics, both of which believe
in the evolution of organizations, just as other living organisms. Lievegoed believed that every
organization evolved in different phases immediately after it was established. He identified the
phases as pioneering, differentiation and integration phases. In 1993, however, Friedrich Glasi
added the associative phase.

1.10 A Theoretical Perspective

1.10.1 Internalization Theory

When multinational enterprises (MNEs) deal with transactions within their organizations instead
of relying on the external market, it results in internalization theory. In conventional
internationalization theory, emphasis is on the factors which would encourage firms to expand
across borders, and on entry mode choice. This theory is highly specialized and its strength lies
in explaining where boundaries exist and the way they shift as a response to changing
circumstances.

The theory was conceptualized by Buckley and Casson. They had argued that internalization is a
good alternative to the outside market for developing and exploiting knowledge.

There is a possibility of internalization when firms perceive that the costs would be less than the
benefits.
1.10.2 Oligopoly Theory

This theory is based on the concept of a market form in which an industry is dominated by a few
small sellers who are interdependent on each other. It is based on the Game theory, in which
decisions of one firm influence others and vice versa. An oligopoly will have its own market
structure.

Different outcomes can be expected from oligopolistic competition. In order to raise prices and
limit production, limiting practices of trade such as collusion, sharing of markets and so on may
be applied. This may be similar to a monopoly. Cartel is a formally agreed upon group, such as
OPEC, of a cartel which has a profound influence on the international price of oil.

The game theory is used to model the behaviour of oligopolies, which are:
• Stackelberg’s duopoly in which there is a sequential movement of organizations.
• Cournot’s duopoly involves firms choosing quantities at the same time
• Bertrand’s oligopoly takes place when firms choose prices at the same time.

The various characteristics of an oligopoly are:

• Maximizing profits: Most profits are made by oligopolies
• Price setting ability: They don’t take away prices but set it
• Entry and exit: Barriers such as government licenses, economies of scale, patents etc are
steep at entry point.
• Long run profits: As high entry barriers don’t allow too many smaller firms to enter the
market, oligopolies can hold on to excess profits.
• Product differentiation: Oligopolies may have the same type of products or ones which
are varied
• Perfect knowledge: They have thorough knowledge of cost and demand functions
• Interdependence: This is a distinctive feature wherein a firm has to take into
consideration the reactions of all other firms that are competing. Such a strategy is
reminiscent of a game of chess.
• Non-price competition: Loyalty schemes, advertisements are non-price competition
examples
1.11 The Tariff-Jumping Hypothesis

When multinational companies (MNCs) try to jump over tariff or non-tariff barriers by setting up
foreign subsidiaries, it is known as the tariff-jumping hypothesis. This is usually done through
foreign direct investment (FDI). By locating production in a distant market, a foreign firm is
allowed to avoid a trade barrier. The welfare consequences of the original trade’s protection
policy can be reduced. Theoretically, tariff-jumping and its effect on welfare depend on a
numbers of factors such as cost differences of production, costs of relocation, conditions under
which demand is made and other entry barriers. For simple monopoly and duopoly markets, as
proved by marketing specialist Smith, FDI may or may not be encouraged by rates. Neither the
market structure can be changed by them. They may have pro-or anti-competitive effects.

1.12 Obsolescing Bargain Theory

This theory was first developed in the 1970s. It described the negotiations between host
governments and MNEs who were interested in investing in a particular country. The host
countries lacked the financial resources and technological expertise in developing and marketing
their natural resources. The MNEs had the financial wherewithal as well as the knowledge but
were reluctant to risk huge investments without any promise of profit. Thus, the two negotiated.
Raymond Vernon who pioneered the OBT approach in his book Sovereignty at Bay, believed
that the bargain would become obsolesce or obsolete over a period of time as the initial
uncertainty would diminish.

In this theory, MNEs are favoured by the relative bargaining power because they can invest in
many areas. Unlike the country that hosts them, they can easily move around and have the
resources to extract raw materials. Thus, the original bargain obsolesces over a period. The
resources can be held hostage by a greedy HC once the MNE has made sector-specific
investments in the host country. As long as the MNE is in the country that hosts it, there are
chances that the government’s perception of benefit-cost ratio offered by the MNE will fall. This
will be more so if the money invested is much more profitable than it was anticipated to be.
Local competitors may emerge as a result of technological spillovers and economic development
and this will make the HC less dependent on the MNE’s resources. In case the host government’s
perception of the benefit-cost ratio changes negatively, then the host country would demand
more commitments from the MNE, thus causing the original bargain to obsolesce.

1.13 The Three Models of Internationalization Strategy

Basically, there are three models:

• Uppsala Internalization Process Model
The internationalization of firm across national boundaries has been a major area of research in
international business. An individual firm’s internationalization in an incremental manner was
first proposed by researchers from Sweden’s Uppsala University (Johanson and Weidersheim-
Paul, 1975; Johanson and Vahlne, 1977) and is now regarded as the Uppsala model or school of
internationalisation. Learning and knowledge acquisition about the foreign market and operation
have made it possible for a series of decisions. Based on four case studies of Swedish firms,
Johanson and Weidersheim-Paul distinguished four successive steps in the international
expansion process of the firm. These are: (i) No regular export activities (ii) Export via
independent representatives (agents) (iii) Sales subsidiary, and (iv) Overseas
production/manufacturing. Johanson and Vahlne further refined the approach in a dynamic
model in which the outcome of one cycle of events becomes the next one’s input. The main
factors of internationalization are the stage and aspects of change. In the stage aspects fall
knowledge of foreign markets and market commitment (defined as the amount of resources and
the degree of commitment for the foreign market). Market knowledge (particularly experiential
knowledge) and commitment is postulated to be directly related. The stage aspects affect the
subsequent change aspects in terms of commitment decisions and activities of business.
Therefore, an increase in market knowledge and commitment will translate into commitment
decisions to increased business activities in the foreign market. Internationalization is, therefore,
an evolutionary process linked to learning.
• Network Theory
As management expert Emerson suggested a network is a set of two or more connected business
connections which has an exchange relation between business firms that are conceptualized as
collective actors. A firm’s internationalization is seen as a natural development from network
relationships with foreign individuals and firms as seen by network theorist. Market information
and knowledge, considered a networking source, are often taken up for a longer term especially
when there are no relationship with the country playing the host. So, it can be said that rapid
internationalization is allowed by networks which also act as bridges. It is the focus of network
approach to bring the involved parties closer by using the information that the firm acquires by
establishing close relationships with suppliers, customers, distributors, regulatory and public
agencies, industry and other market players. The basis of an enduring relationship in this case is
trust between them, sharing of knowledge and commitment towards each other is the basis of a
relationship.

• International Entrepreneurship Theory

The term ‘international entrepreneurship’ first appeared in a short article by Morrow in 1988, as
recorded by Zahra and George. Morrow suggested that once-remote foreign markets had opened
up to all companies because of growth in technology, falling cultural barriers and growing
awareness of culture. This has been true of small firms, new enterprises and established
organizations. Later, McDougall’s study comparing domestic and international new ventures
paved the way for academic study in international entrepreneurship. International
entrepreneurship is the study of behaviour studies behaviour of entrepreneurs across borders and
focuses on how the players, with the aim of creating new goods or services, discover, enact,
analyze and exploit options Opportunities. Marketing experts McDougall and Oviatt brought in
their definition of international entrepreneurship as a coming together of innovative, proactive
and risk seeking behavior that crosses borders and is intended to create value in firms. This
definition is widely accepted.

1.14 Three Phase Internationalization Model

This comprises entry, local network trajectory and supra-local network trajectory. Foreign
market Entry is the first step wherein a company ties up with players in a foreign market. Then
comes the focus on Local Network Trajectory that exists in the market and a firm can follow
different servicing methods. For example it can enter and develop in a foreign market or
alternatively, decrease levels of resources to that foreign market. The last stage is supra-local
network trajectory. Responsibilities can be taken up in other countries by the subsidiary and
these nations can be accessed initially through the foreign market as a platform after having
followed a particular sequence of servicing modes in the foreign market where it is established,.
This is known as the Supra-local Network.
The following illustration explains this in details:
The Analytical Framework

Headquarters Other Subsidiaries

Focal Subsidiary

Entry

Local Network

Super Local Network Trajectory

Servicing
Mode

Degree of
Degree of Localisation of
Integration of Activities
Activities
Degree of
Externalisation
of Activities

External Actors

Figure 1: The Analytical Framework

1.15 Passive or Dependent Internationalization

When MNCs do not upset the prevailing order, and let growth in the organization take place that
is passive or dependent internationalization.

1.16 Active and Independent Internationalization

In this form, the focal partner initiates internationalization as he wants to make his business
global. But the MNC doesn’t know and hasn’t decided which market to enter and in which form.
So, an active search is launched by the internationalizing firm and this may include attending
trade fairs etc. in foreign markets that have a potential. Also important is the fact active search
may be taken up by some external independent actors to attract and to offer to represent some
business firms in search of overseas market. This creates a chance for the company intends to
internationalize its operations to meet an independent actor who convinces the former to enter
the independent actor’s country market. So what happens is that the independent actor’s
experience is shared with the one who is being convinced to enter a new and unknown market.
When the two firms agree to work together, they are both active and independent in their
decision to internationalize.

1.17 Active and Cooperative Internationalization

When cooperative internalization is suggested it means that firms have to cooperate in order to
facilitate internalization. Basically, this is done for the larger good of the organization.

There is the danger of opportunistic behavior for all cooperation partners in cooperative forms of
internationalization. Short-term gain is sacrificed for the sake of a joint, long-term advantage in
cooperative internationalization. Opportunistic behaviour is influenced by (i) the fact that it is
proportional to the opportunities (control loopholes) for unfair conduct, and (ii) the cooperation
partner’s uncertain conduct is dependent upon the likelihood that the cooperation partner will
take advantage of situations to act opportunistically.

1.18 Scalar Chain Theory

The concept of chain of command principle is very old, though the application of scalar chain
theory to the management of organizations was only schematized in the 20th century. Two
persons—the German sociologist Max Weber and the French executive and engineer Henri
Fayol —worked and contributed much to the understanding of the principle. In the
book, General and Industrial Management, Fayol mentioned few principles that have come to
be known as the fourteen principles of management. These principles comprise of both the scalar
chain (line of authority) and the unity of command (his fourth principle). Fayol's principle of the
unity of command states that a subordinate employee should report to only one manager. Fayol
supposed that this was essential to provide the manager with clear picture of position of power
and authority, and to avoida subordinate employee from getting conflicting orders from different
managers. Fayol's principle of scalar chain states that responsibility and authority flow in
a vertical line from the highest level to its lowest level in an organization one level at a time,.
This line of authority determines a hierarchy in the organization. Fayol believed that it was a
management mistake to abandon the chain of command for no reason, but he also permitted for
situations in which the chain of command might be avoided for the good sake of the company.
For instance, Fayol proposed that sometimes communication delays might be caused by blind
adherence to the unity of command and the chain of command principles, and suggested what he
referred as the "gangplank," which enables communications outside the chain of command as
long as superiors are made aware of the communication. Weber also studied the difficulties
inherent in large organizations, as organizations grew from family structures to much larger
entities during the Industrial Revolution (1760–1850). Weber suggested the bureaucracy as a
model of efficient and effective organization. Bureaucratic features have clearly defined
hierarchies of responsibility and authority, coherent with the chain of command principle.

1.19 Summing Up

In this Chapter, we studied about business organization. What is an organization? Basically, it

refers to a group of people who are committed to a purpose and work under a specific structure
to achieve their collective goals. An organization is linked to an external environment. There are
basically four to five characteristics of an organization: Open System; Goal Oriented;
Employees; Technology and Continuity. We discussed the types of organizations such as
Partnership which is defined as when two or more people come together by signing a deed of
partnership. One of the main advantages of this type of business is that the risk gets spread across
many people. Also, it has credibility among customers and suppliers who find it easy to believe a
group of people than just one sole trader. A big disadvantage may arise when partners disagree
or play foul. It may then affect the venture. The Chapter deals with Internationalization Theory
which is when multinational enterprises (MNEs) deal with transactions within their organizations
instead of relying on the market outside. An important part of the Chapter is the part on the
Three Models of Internationalization Strategy, which are Uppsala Internalization Process Model,
Network Theory and International Entrepreneurship Theory. Lastly, Active and Cooperative
Internationalization is discussed.
1.20 Suggested Readings

1) John D. Daniel and Radebangh Lee H: International Business (Addison Wesley)

2) V.K. Bhalla: International Business Environment and Management