Read this article to learn about the rationalization movement: genesis and insertions, aims, main causes, pros & cons and precautions!

Genesis and Insertions:

The technical cult ‘rationalization’, pioneered by Walter Rathenau was popularized in 1926, when the German public enterprises took up this plan for reorganizing and regenerating themselves on the pattern of U.S.A. industries.

Rationalization Movement

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The First World War (1914-18) and the Great Depression (1929) provided momentum to this infant movement. The Second World War (1939-45) once more brought the rationalization movement to the fore-front and on the lips of common talk of the day in the industrial world. The Advisory Committee on Management of the J.I.O. (1937) spells out rationalization in the following descriptions:

(i) Rationalization, in general, is any reform tending to replace habitual, antiquated practices by means of methods based on systematic reasoning.

(ii) Rationalization, in the narrowest sense, is any reform of undertakings, administration or other services, public or private, tending to replace habitual antiquated practices by means and methods based on systematic reasoning.

(iii) Rationalization, in a wider sense, is a reform which takes a group of business undertakings as a unit, and tends to reduce waste and loss due to unbrided competi­tion by concerted action based on systematic reasoning.


(iv) Rationalization, in the widest sense, is a reform tending into applies means and methods based on systematic reasoning to the collective activities of large economic and social groups.

Major Causes of Rationalization:

Wastage, inefficiency, low productivity, lack of resources are main causes which leads to rahandi sector. Prof. M.C. Shukla describes following four causes of rationalization.

1. Scramble for scarce resources:

If any essential factor of production is not available in sufficient quantity, then use of that factor should be done in planned way. This profitable use of factor leads to rationalization.

2. Idle capacity:

If the number of factories in any parti­cular industry is too large, the only effective remedy is to close down of the inefficient units. But for this purpose there is need of any joint authority covering the whole industry. Any independent firm will never think of closing down his plant. For joint authority rationalization movement can be helpful.

3. Obsolete machinery:


If in the production process obsolete machinery is used, it will be uneconomical due to higher repair, maintenance, operating cost, greater strain on workers and lower productivity. It can be removed by modernization of technology and using automatic machinery which leads to rationalization.

4. Unnecessary varieties:

Prof. Sargant Florence opines that the large size of the firm does not necessarily contribute to the cost reduction, but it is the output of an article on a large scale that makes for efficiency. If there are too many varieties, the output of each variety will be small, even though the total output may be large.

In rationalization process the unnecessary varieties are eliminated and only essential varieties are produced at large scale and low cost, in USA, after First World War various actions were taken to remove unnecessary varieties from many industries. The result was:

Product No. of varieties reduced/From To
Shovels, Spades and Scoops 4,460 384
Grinding Wheels 7,15,200 2,55,800
Brass Toilet and Sink Taps 1,114 72
Milk Bottles 49 9

Thus, rationalization is an attempt to achieve an equilibrium in demand and supply by the application of some ; specific tenets, much as; standardization, simplification, intensification, mechanization, specialization, fictionalization, combination, scientific management, optimal capitalization, modernization, automation, industrial research etc.


It must be noted that rationalization is, to a large extent, a technical affair, but it is also concerned with social and human aspects to achieve proper use of men and society, Dr. Charles S. Myres aptly observes about it, ‘demands the consideration of business not only in its own purely selfish, technical and commercial aspects, but also in its wider economic, social and generally human aspects; without all these aspects, it will be pseudo-rationalization of business affairs.’

Pros and cons:

For some years now, one of the guiding principles of economic growth and national planning has been rationalization of factories at micro level and whole branches of public or private sector’s specific industry at macro level. To be rational is to act according to reason, and therefore the positive results of rationalization movements are: doing away the cut-throat competition evils; making maximum utilization of available resources, e.g. materials, human efforts, machines etc; reducing the cost and price of the produced unit; preventing the wastes of materials, labour and management; providing higher standard of living to the whole community; increasing the industrial productivity and workers’ efficiency; providing standard quality of goods to common public, bringing stability in the industrial structure of the country etc. Ultimately the two basic challenges-cost reduction and quality improvement, of any industry is solved by rationalization.

The path of rational is best and it cannot be imagined about harm if all the tenets of rationalization are put into practice in any industrial unit. But the partial application of the rationalization arises some doubts. Due to some difficulties and dangers the attitude of democratic government as employer and workers have been hostile and it remains hostile even today, about rationalization schemes.

Rationalization involves huge capital outlay for implementing various costly plans as mechanization, automation, computerization, researches etc., which may result in over-capitalization. But this objection has less reality. Firstly, the Government has not to so bother about public money and secondly, rationalization is not only concerned with costly automation and mechanization, rather than standardization, mental revolution and scientific management etc., which can be fruitful without capital expenditure and can contribute adequate return in long run for any business.


Another serious danger is that rationalization methods leads in creation of state monopoly, and thus through combination and amalgation public enterprises (PEs) may charge higher prices from the public by restricting the supply. But this concept is not true because Government is meant to be great welfare authority of the public and in democracy, like ours, exploitation of public is not possible.

In India, the railway can be presented as instance of model big Government business. Sometimes, it is also felt that increasing the size of the unit may be gigantic to efficient management, but in fact, we have top managerial personnel’s, at present, who are capable to manage and control any big holding company.

It is wrong to presume that with the increase in the business size there will be oppres­sion and mismanagement. Dr. C.S. Myres in his work ‘Business Rationalization’ takes the instance of a small motor car in com­parison of a big over-burdened lorry. The later can no doubt move at greater speed but the former can pass through narrow lands and may thus in some cases reach its destination earlier. Therefore, the managerial problem in eliminated by rationalization through ending the competition.

Rationalization is a continuous dynamic process, under which most up-to-date instruments and techniques are used. In general, we do not like change but it is a naked fact, to accept the slogan ‘change for growth’. Change is the law of nature, so without quicker change, any enterprise either public or private cannot be successful in the competitive world.


The fear of ‘obsolescence of the machines’ cannot prevent the current of modernization. Basically the initiative for change is a psychological matter rather than financial. The management should remain mentally prepared for change, and then try to adjust all other things accordingly.

The greatest serious danger from rationalization is the creation of unemployment and that is why organized labour opposes it. It is true that automation and mechanization leads to certain degree of unemployment and the workers may lose their job on that account. Whether that unemployment, is merely of a temporary nature or permanent feature, depends on the particular circumstances.

In short period there is direct adverse affect on employment resulted from rationalization. The machines take the place of workers, then the demand of employee’s decreases. But in long run, rationalization may lead to increase the employment opportunity, as with the reduction in price and improvement in the product quality.

Trade unions have been opposing tooth and nail the rationalization due to increase in unemployment and work-load, ascendancy of capital and exploitation of labour, mechanized life and decrease in trade union’s strength. But there is no absolute evidence behind these observations.

Suggestions for rationalization without tears:

Rationalization may be an unmixed blessing, if following precautions are adopted:


(i) All the concerned sections as government, management, workers, consumers should be properly coordinated before implementing any rationalization scheme. For this purpose a committee, consisting the representatives of all sections should be constituted.

(ii) An alternative arrangement of employment should be done so that the problem of retrenchment and lay-off can be solved easily in short-term.

(iii) For replacement of old plants, conducting researches and development activities a special development fund must be established in every business organization.

(iv) Workers’ participation in management will be helpful in boosting morale and discipline of workers and industrial democracy. In this connection the idea of “workers’ sector” given by Mr. Subramaniam, Ex Finance Minister, may be useful.

(v) Worker should be given due share of the profit earned by rationalization schemes. Some extra remuneration must be given to them as quid pro quo of the increased work load.


(vi) The rationalization plan should be put into practice slowly and after adequate thinking, not at random.

(vii) All the fields as production, material, finance and marketing should be rationalized in parj passu.

(viii) The rationalization schemes must be in accordance with the Government policy and steps as Indian standards Institute, National Laboratories Atomic Researches etc.

Prof. J. Prakash rightly observes that rationalization schemes, if executed properly would offer numerous advant­ages to the producers, the workers, the consumers and the community as a whole.

The prudent rationalization leads to higher and steadier profits to the Government as owner, better wages and employment for the workers, lower prices and better quality of goods to the consumers; and therefore is only the blessing.