CHAPTER THREE: PLANNING
Nature & Purpose of
Planning
Every human activity is
guided by a purpose, and planning is a fundamental aspect of this guidance.
Whether in personal or professional spheres, individuals engage in planning to
achieve desired outcomes. In business, where competition, demand fluctuations,
and resource scarcity are prevalent, planning becomes even more critical.
What is
planning?
Planning is the anticipatory decision-making process that
precedes action. It involves determining objectives and selecting the best
course of action to achieve those objectives efficiently and economically.
Planning is an ongoing activity that aligns with the primary
function of management: to attain organizational objectives continuously.
Nature/Characteristics
of Planning
1. The Primacy of Planning:
Planning logically precedes all other managerial functions.
While all functions are interrelated, planning establishes the objectives
essential for the success of other functions.
2. Pervasiveness of Planning
Planning is universal, applicable to all managers, regardless
of their level, organization type, or
size. It is an integral part of all organizational processes.
3. Contribution to Purpose &
Objective
The purpose of planning is
to facilitate the accomplishment of organizational purposes and objectives. It
creates a consistent, coordinated structure focused on desired ends.
4. Planning is Directed Towards
Efficiency
Efficiency in planning
is measured by its contribution to objectives and the costs incurred. Efficient
plans achieve their purpose with reasonable costs, including time, money, and
individual/group satisfaction.
5. Concerns Future Activity
Planning involves
looking ahead and deciding in the present what actions need to be taken in the
future. It requires forecasting and decision-making based on future conditions.
6. Dynamic Aspects (Flexible &
Continuous)
Plans are made on certain assumptions, subject to change.
Planning is flexible, requiring constant revision, modification, and adjustment
based on evolving circumstances. It is not only the primary function but also a
continuous function of management.
Importance/Purpose
of Planning
1.
To
Offset Uncertainty:
Future uncertainties
and changes necessitate planning. By foreseeing future developments, planning
enables organizations to prepare for contingencies, providing strength for
continuous growth and prosperity.
2.
To
Focus Attention on Objectives:
Planning inherently directs attention towards organizational
objectives. Well-considered plans unify interdepartmental activities, ensuring
alignment with overarching goals.
3.
To
Gain Economical Operation:
Efficiency is enhanced through planning, minimizing costs and
emphasizing efficient, coordinated activities. Planning substitutes coordinated
efforts for uncoordinated actions, ensuring a steady flow of work and informed
decision-making.
4.
To
Facilitate Control:
Planning and controlling are
inseparable, often referred to as Siamese twins. You cannot effectively control
unplanned actions. Plans serve as standards for control, allowing organizations
to correct deviations and ensure activities align with the established plans.
Additional
Benefits of Planning:
- Coordinated action
- Managerial perspective
- Improved decision-making
- Increased efficiency
- Improved control and
performance
The
Planning Process
- Identifying
and Defining the Real Problem:
- Establish
Clear-Cut Objectives:
- Establishing
the Planning Premise:
- Identify
Alternative Courses of Action:
- Evaluating
Alternative Courses:
- Selecting
a Course of Action/Best Alternative:
- Formulating
Derivative Plans:
- Numbering
Plans by Budgeting:
Skills
Required in Planning
1. Forecasting
Forecasting is the
attempt to predict outcomes and future trends based on inferences from known
facts. It involves anticipating the future environment by relating past and
present information.
Importance
in Planning:
- It enables the assessment of the
dynamism of internal and external environments.
- Supports decision-making by
forecasting how events within and outside the organization will affect
each alternative.
- It is essential for effective
planning as it deals with future-oriented actions.
Forecasting
Methods:
Ø Qualitative Forecasting:
·
Description: This judgment-based technique is used when hard (quantifiable)
data is scarce or challenging to use.
·
Examples: Jury of executive opinion, market research, survey
of expert opinions.
Ø Quantitative Forecasting:
·
Description:
This is utilized when sufficient hard (quantifiable) data exist to specify
relationships between variables.
·
Examples:
Time-series analysis, extrapolation forecasting based on past or current
trends.
·
Criteria
for Quantitative Forecasting:
§ When Information about the past and present.
§ When Numerical specification of information.
§ When Assumption that past patterns will continue.
§ When generally considered more accurate than
qualitative techniques.
2. Decision
Making
Decision-making is
the process of selecting the best course of action from a set of alternatives
based on specific criteria.
Types of
Decisions:
1.
Programmed
Decisions:
·
Description: These are routine decisions with specific
procedures based on experience in similar situations.
·
Characteristics:
·
Standard
procedures are established.
·
Primarily found
at middle and lower management levels.
·
Data used are
complete and well defined.
2.
Non-Programmed
Decisions:
·
Description: These type of decision used for nonrecurring
problems with no established procedure due to a lack of experience.
·
Characteristics:
·
No
well-established procedure exists.
·
Found at middle
and top management levels.
·
It involves
incomplete data.
Decision
Making Process:
- Ascertain
the Need for a Decision/Identify the Problem:
- Establish
Decision Criteria:
- Allocate
Weights to Criteria:
- Develop
Alternatives:
- Evaluate
Alternatives:
- Select
the Best Alternative:
- Putting
Decision Into Action:
- Following
up Decisions:
Decision
Making Situations:
- Decisions Under
Certainty:
·
Conditions are identified and very
predictable.
·
Complete data and information are
available.
- Decisions Under Risk:
·
Probabilities
assigned to expected outcomes.
·
It involves some
level of uncertainty.
- Decisions Under
Uncertainty:
·
Neither complete
data nor probabilities assigned.
·
Conditions are
uncontrollable by management, such as competition, regulations, technological
advances, and economic factors.
Types of
Plans
Planning classified based on various dimensions, providing
insights into the nature and scope of organizational activities. Here are two
common bases of classification:
1. Duration
(Time Dimension)
Plans are often
categorized based on the time they cover. The planning horizon, or the time
between formulation and execution, helps classify plans into three categories:
·
Short-Range
Plans:
ü Duration: One year or less
ü Examples:
Annual plans for sales, revenue, production, material requirements, and
operating expenses budget.
·
Intermediate-Range
Plans:
ü Duration: Between one year and five years
ü Examples: Development of new products, modernization of
facilities.
·
Long-Range
Plans:
ü Duration:
Five years or more
ü Examples:
Long-term leases on production or warehouse facilities.
2. Scope Dimension
Plans classified
based on the scope or breadth of activities they represent:
A. Strategic Plans:
·
Scope:
it is comprehensive and reflects long-term needs and direction.
·
Characteristics:
ü It is concerned with solving long-term problems
associated with external influences.
ü It includes the development of overall company
objectives.
ü It establishes the mission of the organization.
·
Components of Strategic Plans:
Ø
Mission/Purpose:
·
Definition:
Describes the organization's reason for existence.
·
Example: The
purpose of a business is the production and distribution of goods and services.
Ø
Objectives/Goals:
·
Definition:
Desired future results representing the end toward which activity is directed.
·
Example:
Organizational objectives are the basic plan of the firm; a department may have
its own objectives.
Organizational
Objectives:
o
Mission
Definition: A mission is the organization's reason
for existence, guiding values, aspirations, and reason for being.
o
Mission
Statement: A written mission
statement is used to guide managers and employees throughout the organization.
o
Setting
Objectives: Objectives are end results upon which
the organization's existence depends and provide a standard for success.
o
Classification
of Objectives: Objectives can be strategic, tactical,
or operational based on decision-making authority and time coverage.
o
Hierarchy
of Objectives:
a)
Strategic Objectives:
1. Focus:
involves broad statements that describe where the organization wants to be in
the future.
2. Responsibility:
Top-level management.
3. Example:
Achieve a 10% net profit; improve market share by 15-20% over the next three
years.
b)
Tactical Objectives:
1. Focus:
involves outcomes that major departments and divisions must achieve to reach
overall objectives.
2. Responsibility:
Middle management holds the responsibility.
3. Example:
Communicate in writing with clients and customers via a newsletter once a
month.
c)
Operational
Objectives:
1. Focus:
Specified and measurable results expected from departments, first-level
managers, workgroups, and individuals.
2. Responsibility:
Departments and first-level managers holds the responsibility.
3. Examples:
Set daily, weekly, and monthly sales targets; process 200 sales applications
each week; reduce overtime by 10% next month.
d)
Time Frame
Objectives:
o
Categories:
Long-term objectives (up to 5 years), intermediate objectives (1-3 years), and
short-term objectives (less than a year).
Characteristics
of Sound Objectives
Setting objectives is
a crucial aspect of effective management, and sound objectives possess specific
characteristics that contribute to their effectiveness. Here are key features
of sound objectives:
1.
Specific
and Measurable:
Ø Not
all objectives can express in numeric terms, but quantifying them when possible
enhances clarity and measurability.
Ø Example:
·
Increase profit by 5%.
·
Decrease scrap by 1%.
·
Raise the average teacher effectiveness
ratings from 3.5 to 3.7.".
2.
Challenging
but Realistic:
Ø Objectives
should be challenging yet attainable given available resources and skills.
Ø Overly
difficult objectives may lead to failure and decreased morale, while overly
easy objectives may result in a lack of motivation.
3.
Cover
Key Result Areas:
Ø Objectives
should focus on key result areas, i.e., activities that contribute most to
overall company performance.
Ø Example:
Key results may include sales, profits, production, or quality.
4.
Defined
Time Period:
Ø Objectives
should specify a realistic time for achievement.
Ø Short-term
objectives should align with long-term objectives for strategic planning.
Ø Example:
Establish strategic sales objectives with specific targets for each year in a
three-year time horizon.
5.
Linked
to Reward:
Ø The
impact of objectives is enhanced when linked to rewards such as salary
increases, promotions, and awards.
Ø Rewards
provide meaning and significance to objectives, fostering commitment among
employees.
6. Conflicts Among Objectives:
Ø Managers
face trade-offs and conflicts among different objectives from internal and
external forces.
Ø Common
conflicts include short-term profits vs. long-term growth, profit margin vs.
competitive position, and others.
Ø Balancing
the interests of various stakeholders is crucial.
7.
Priority
of Objectives:
Ø Prioritizing
objectives is essential, emphasizing that accomplishing one objective may be
more important than others at a given time.
Ø Survival
of the organization often takes precedence over other objectives.
8.
Measurement
of Objectives:
Ø Objectives
must be understandable and acceptable for those involved in their achievement.
Ø Measurement
involves quantifying performance in different areas, such as market standing,
innovations, productivity, profitability, and social responsibility.
Ø Measurement of Profitability Objectives:
·
Profitability objectives include ratios
of profits to sales, profits to total assets, and profits to capital (net
worth).
·
Measuring efficiency, recovering costs,
and providing funds for future expansion are purposes of profitability
objectives.
Ø Measurement of Marketing Objectives:
·
Marketing objectives focus on products,
markets, distribution, and customer service.
·
Performance metrics may include market
share, sales volume, outlets carrying the product, and new product development.
Ø Measurement of Productivity Objectives:
·
Productivity is measured using ratios of
output to input.
·
Drucker proposes ratios of value added
to sales and profit as superior measures of productivity, emphasizing the
increase in value due to the firm's efforts.
9.
Physical
and Financial Objectives
1. Physical Objectives:
- Reflect
the firm's capacity to acquire resources to achieve its goals.
- Can
be easily measured using accounting measures.
- Examples
of measurement metrics include current ratio, working capital turnover,
acid-test ratio, debt-to-equity ratio, and turnover of accounts receivable
and inventory.
2. Financial Objectives:
- It
is concerned with the acquisition of financial resources to support
organizational objectives.
- It
can be measurable using various accounting measures and financial ratios.
- Examples
include profitability ratios (profits to sales, profits to total assets,
profits to capital), liquidity measures, and efficiency metrics.
Other Objectives:
- Measurable Objectives:
Objectives related to profitability, market standing, productivity, and
physical and financial resources are easily measurable using quantitative
metrics.
- Non-Measurable Objectives: Objectives related to innovation,
employee attitudes, manager behavior, and social responsibility are not
easily identifiable or measurable in concrete terms. Clarity in
measurement is crucial for conclusive evaluation.
Management by Objectives
(MBO)
Introduced by Peter Drucker, MBO involves joint goal
setting between superiors and subordinates, defining responsibilities in terms
of expected results, and using these measures as
B.
Operational/Tactical
Plans
Types:
·
Standing Plans:
ü Policies,
Procedures/Standard Operating Procedures (SOPs), Rules & Regulations.
ü Provide
guidelines for decision-making, action, and specific situations.
ü Policies
allow some discretion, procedures are guides to action, and rules are
must-follow restrictions.
·
Single Use Plans:
ü used
once and discarded after meeting a specific need.
ü Designed
for unique or special projects or tasks.
ü Include
Programs (Projects) and Budgets.
Programs:
- Comprehensive
plans with goals, policies, procedures, rules, task assignments, and
resources.
- Supported
by budgets and cover a large set of activities.
Budgets:
- Statements
of expected results or resources allocated for specific activities.
- Expressed
numerically, setting limits on expenditures.
- Important
for controlling activities and ensuring financial discipline.