Module – 2 PLANNING & DECISION MAKING

“Failing to plan is planning to fail” – Alan Lakein

“Plans are nothing; planning is everything” – Dwight D. Eisenhower, former U.S. President
PLANNING AIMS AND OBJECTIVES:
After studying this lesson you will be able to:
(i) Understand the nature of planning in an organization.
(ii) Understand the importance, advantages and disadvantages of planning.
(iii) Understand the principles & types of planning.
(iv) Explore the nature of types of decision making.
(v) Know about models and issues of decision making.

Introduction to Planning

Planning is the basic function to be performed in the process of management. A manager must plan
before he organizes, directs & controls. Without proper planning other functions become ineffective. It
concentrates on setting objectives of an organization & determines the future course of operations to be
adopted for accomplishment of objectives in the best possible manner.

It is an intellectual process, which requires manager to think, imagine & judge before doing anything.
Therefore it is concerned with thinking in advance to decide the future course of action. It bridges the
gap between where we are & where we want to reach.

Meaning of Planning

Planning is a pre-determined course of action to achieve a specific goal. It is concerned with deciding in
advance what is to be done, when, where, how & by whom it is to be done.

A plan is a commitment to particular course of actions whereas planning is an activity consisting of a

process.

Definitions of Planning

According to J. P. Barger- “Planning is an ability to visualize a future process and its results”.

According to Louis A. Allen. "Management planning involves the development of forecasts, objectives,
policies, programmes, procedures, schedules and budgets."

According to Koontz & O’Donnell, “Planning is deciding in advance what to do, how to do, when to do &
who is to do it. It bridges the gap from where we are to where we want to go. It makes it possible for
things to occur which would not otherwise happen”.

Nature of Planning

i. Planning focuses on achieving objectives: Organisations are set up with a general purpose
in view. Specific goals are set out in the plans along with the activities to be undertaken to
 achieve the goals. Thus, planning is purposeful. Planning has no meaning unless it
contributes to the achievement of predetermined organisational goals.
ii. Planning is a primary function of management: Planning lays down the base for other
functions of management. All other managerial functions are performed within the
framework of the plans drawn. Thus, planning precedes other functions. This is also referred
to as the primacy of planning. The various functions of management are interrelated and
equally important. However, planning provides the basis of all other functions.
iii. Planning is pervasive: Planning is required at all levels of management as well as in all
departments of the organisation. It is not an exclusive function of top management nor of
any particular department. But the scope of planning differs at different levels and among
different departments. For example, the top management undertakes planning for the
organisation as a whole. Middle management does the departmental planning. At the
lowest level, day-to-day operational planning is done by supervisors.
iv. Planning is continuous: Plans are prepared for a specific period of time, may be for a month,
a quarter, or a year. At the end of that period there is need for a new plan to be drawn on
the basis of new requirements and future conditions. Hence, planning is a continuous
process. Continuity of planning is related with the planning cycle. It means that a plan is
framed, it is implemented, and is followed by another plan, and so on.
v. Planning is futuristic: Planning essentially involves looking ahead and preparing for the
future. The purpose of planning is to meet future events effectively to the best advantage of
an organisation. It implies peeping into the future, analysing it and predicting it. Planning is,
therefore, regarded as a forward looking function based on forecasting. Through
forecasting, future events and conditions are anticipated and plans are drawn accordingly.
Thus, for example, sales forecasting is the basis on which a business firm prepares its annual
plan for production and sales.
vi. Planning involves decision making: Planning essentially involves choice from among various
alternatives and activities. If there is only one possible goal or a possible course of action,
there is no need for planning because there is no choice. The need for planning arises only
when alternatives are available. In actual practice, planning presupposes the existence of
alternatives. Planning, thus, involves thorough examination and evaluation of each
alternative and choosing the most appropriate one.
vii. Planning is a mental exercise: Planning requires application of the mind involving foresight,
intelligent imagination and sound judgment. It is basically an intellectual activity of thinking
rather than doing, because planning determines the action to be taken. However, planning
requires logical and systematic thinking rather than guess work or wishful thinking.
Planning: the first step to management.

LIMITATIONS OF PLANNING

We have seen how planning is essential for business organisations. It is difficult to manage operations
without formal planning. It is important for an organisation to move towards achieving goals. But we
have often seen in our daily lives also, that things do not always go according to plan. Unforeseen events
and changes, rise in costs and prices, environmental changes, government interventions, legal
regulations, all affect our business plans. Plans then need to be modified. If we cannot adhere to our
plans, then why do we plan at all? This is what we need to analyse. The major limitations of planning are
given below:

(i) Planning leads to rigidity: In an organisation, a well-defined plan is drawn up with specific
goals to be achieved within a specific time frame. These plans then decide the future course
of action and managers may not be in a position to change it. This kind of rigidity in plans
may create difficulty. Managers need to be given some flexibility to be able to cope with the
changed circumstances.
Following a pre-decided plan, when circumstances have changed, may not turn out to be in
the organisations interest.
(ii) Planning may not work in a dynamic environment: The business environment is dynamic,
nothing is constant. The environment consists of a number of dimensions, economic,
political, physical, legal and social dimensions. The organisation has to constantly adapt
itself to changes. It becomes difficult to accurately assess future trends in the environment if
economic policies are modified or political conditions in the country are not stable or there
is a natural calamity. Competition in the market can also upset financial plans, sales targets
may have to be revised and, accordingly, cash budgets also need to be modified since they
are based on sales figures. Planning cannot foresee everything and thus, there may be
obstacles to effective planning.
(iii) Planning reduces creativity: Planning is an activity which is done by the top management.
Usually the rest of the members just implements these plans. As a consequence, middle
management and other decision makers are neither allowed to deviate from plans nor are
they permitted to act on their own. Thus, much of the initiative or creativity inherent in
them also gets lost or reduced. Most of the time, employees do not even attempt to
formulate plans. They only carry out orders. Thus, planning in a way reduces creativity since
people tend to think along the same lines as others. There is nothing new or innovative.
(iv) Planning involves huge costs: When plans are drawn up huge costs are involved in their
formulation. These may be in terms of time and money for example, checking accuracy of
facts may involve lot of time. Detailed plans require scientific calculations to ascertain facts
and figures. The costs incurred sometimes may not justify the benefits derived from the
plans. There are a number of incidental costs as well, like expenses on boardroom meetings,
discussions with professional experts and preliminary investigations to find out the viability
of the plan.
(v) Planning is a time-consuming process: Sometimes plans to be drawn up take so much of
time that there is not much time left for their implementation.
(vi) Planning does not guarantee success: The success of an enterprise is possible only when
plans are properly drawn up and implemented. Any plan needs to be translated into action
or it becomes meaningless. Managers have a tendency to rely on previously tried and tested
successful plans. It is not always true that just because a plan has worked before it will work
again. Besides, there are so many other unknown factors to be considered. This kind of
complacency and false sense of security may actually lead to failure instead of success.
However, despite its limitations, planning is not a useless exercise. It is a tool to be used
with caution. It provides a base for analysing future courses of action. But, it is not a solution
to all problems.
Purposes/Importance of Planning

Planning helps an organization chart a course for the achievement of its goals. In fact, most
of the company's achievements can be attributed to careful planning. The main purpose of
planning is to schedule tasks that are impossible and make them possible. The organization
without plans become victim of circumstances. Hence planning is a very important managerial
function of every organisation. Some of the importance of planning are depicted here under:

a. Planning provides Direction: Planning is concerned with predetermined course of action. It

provides the directions to the efforts of employees. Planning states in advance how work has to
be done and makes clear what employees have to do, how to do, etc. It also directs the
organisation to plan the use of time, resources, and efforts towards the achievement of their
objectives.

b. Facilitates Accomplishment of Objectives: The aim of planning is to facilitate the attainment of

objectives. It focuses its attention on the objectives of the organization. It states the objectives
of each department in the organization and of the enterprise as a whole. Through planning,
efforts of all the employees are directed towards the achievement of organisational goals and
objectives.

c. Minimising Uncertainty and Risk: Future is always full of uncertainties and changes. Planning
helps the management to have a clear-cut idea about the future and to frame a suitable
programme for action and thus minimizes business risk. Facilitates Optimum Utilization of
Resources: Various resources that are relevant to an organization namely, funds, physical
resources, manpower, technological know-how, etc., are by and large inadequate due to
demand from competing organizations and have alternative uses. This necessitates the
organization to make the best possible use of resources. Planning facilitates optimum use of
available resources.

d. Ensures Economy in Operations: Planning focuses on efficiency and economy in operation. A

plan is a course of action that can take the organisation to its objectives at the minimum cost.
Planning involves, the selection of most profitable course of action that would lead to the best
result at the minimum costs and gains economical operation.

e. Provides basis for control: The controlling function of management relates to the comparison of
the planned/standard of performance with the actual performance. Plans serves as standards of
performance. In the absence of plans, a management will have no standards for controlling
other's performance. So, planning provides the basis for control. Thus, control cannot be
exercised without plans.

f. Team Building and Cooperation: Planning promotes team building and a spirit of cooperation.
When the plan is completed and communicated to members of the organization, everyone
knows what their responsibilities are, and how other areas of the organization need their
 assistance and expertise in order to complete assigned tasks. Hence a sound planning
coordinates the activities of the organisation towards the defined and agreed upon objectives.

g. Provides for the Delegation of Authority: Planning provides for the delegation of authority to
subordinates. Well-formulated plans serve as guides to subordinates and reduce risk involved in
delegation of authority.

h. Improves Competitive Strength: Since the operations are planned in advance, company can
take its action concretely. It improves the competitive strength of the organisation.

i. Facilitates Decision-making: Planning provides a framework for decision-making. Since the

planning provides for feedback, periodic evaluation, and indication for any deviation, corrective
action can be taken which leads to better decision-making.

Planning Process

Planning is complex process that requires a high level of studies and analysis. To create a plan
there must be a determination of objectives and outlining of the course of action to achieve the
goals. There is no set formula for planning. A planning process that is suitable for one kind of
organisation may not be suitable for another type of organisation. However, the following steps
can be the guideline to design a plan:

1. Analysis of the Environment: Planning begins with the awareness of the opportunities in the
external environment and within the organisation. For this SWOT analysis is most suitable.
Strength and weaknesses are the internal factors whereas opportunities and threats and the
environmental factors which are to be analysed.

2. Setting the Objectives: The second step of planning is to set objectives and goals for the
organisation as a whole and for each department. Long-term, as well as short-term plans, are to
be created. Objectives are specified to each and every manager and department head.
Objectives gives direction to the major plans. So, managers should have an opportunity to
contribute their ideas for setting their own objectives and of the organization.

3. Develop Premises: Planning premises are the assumptions about the future on the basis of
which the plans will be ultimately formulated. Planning premises are the key to success of
planning as they supply pertinent facts and information regarding the future such as general
economic conditions, production cost and prices, probable competitive behaviour, government
control, etc., forecasting is an essential part of the premises.

4. Determine and Evaluate Alternatives: The fourth step is to search and identify the alternative
course of action. It suggests that a particular objective can be achieved in numerous ways. But
the most relevant alternatives must be listed down so that selection is made easier. Once
various alternatives are identified, they must be well analysed with their strong and weak
points.
5. Selection of Best Alternative: This is the point where a certain plan is adopted. When the
alternatives are determined most suitable alternative must be chosen out from the list which
can give maximum output with minimum risk.
6. Formulation of a Derivative Plan: Derivative plans are the backing plans which are very
essential. Once the basic plan has been formulated, it must be translated into day-to-day
operation of the organization. Middle and low-level managers must draw up the appropriate
plans, programmes, and budget for their sub-units.

7. Budget Formulation: After decisions are made and plans are set the next step is giving them
sufficient funds to carry them out. Optimum budgeting must be done for every course of action.

8. Implementation of a Plan: Once the plans are setup, now the plans must be well informed
and shared with the employees and managers expecting full commitment and trust. Finally, the
plans must be carried out.

9. Follow-up Action: Obviously once a plan is carried out it generates certain output. The
progress must be well mentioned and managers need to check the progress of their plans so
they can take necessary steps to improve the plans if needed.

Objectives of Planning

In today's ever-changing world, for the success of any business or industrial unit, Management
and Administration should lay a strong foundation, and this is achieved by Planning. Planning
initiates the intellectual process as deciding the objectives, drafting the plans and programmes,
defining the policies for optimum utilization of the accessible human and material resources. So
that pre-defined objectives may be achieved in any organization. Planning facilitates, Managers
and Administrators of any business or industrial unit to make progress as per the needs of the
desired objectives. Given below are some of the Objectives of Planning:

(a) Selection of Optimum Goals

• Planning involves rational thinking and decision-making concerning a proposed course of

action. It also implies selection of one course of action and rejection of other possible courses of
action.
• The selected course of action is naturally the one that promotes the overall organizational
goals within the frame work of the resource availability and economic, social and political
factors.
• For optimization of overall organizational operations, it may sometimes be necessary to sub-
optimize i.e., to reduce the efficiency of some departments.

(b) Tackling Increasing Complexities

• An organization is a heterogeneous group of human beings who differs from one another in
many respects. It is unlikely that they will work effectively and harmoniously in the interest of
the organization.
• Unless they have a plan in the making of which they have had a share and, which they regard
as common property.
• So, planning is 'essential' to any goal-directed activity.

(c) Meeting Environmental Changes

• Business environmental changes move rapidly and sweepingly than can be imaged.
• Change in social values, increase in competition, new product discoveries, change in consumer
tastes and preferences, have each the potential to upset any organization.
• Management should discern and exploit the emerging situation by adjusting and adapting the
inputs and transformation process to suit the environmental changes.
• Only proper and effective planning can help the management to do so.

(d) Safeguard Against Business Failures

• Business failures are blamed on cut-throat competition, unpredictability of consumer tastes
and preferences, rapid technological changes and abrupt economic and political developments.

(e) Unity of Action

• Planning enables the people within on organization to work effectively and harmoniously for
accomplishment of common goals.
• It provides them a stake in their own future and thus induces them to do their utmost to meet
the challenge.

(f) Effective Coordination and Control

• Planning makes it easy to exercise effective control and coordination.

• The work to be done, the persons and the departments which have to do it, time- limit within
which it is to be completed and the costs to be incurred, are all determined in advance.
• This facilitates proper and timely measurement of actual performance and its comparison with
the planned performance.
• In case, actual performance is not as per the plans, factors responsible for the same can be
ascertained. In the absence of planning, there will be no scientific standards to measure and
evaluate performance.

Types of Plans

Plans commit the various resources in an organization to specific outcomes for the fulfilment of
future goals. Many different types of plans are adopted by management to monitor and control
organizational activities. The most commonly used plans are as follows:
Types of Planning

1. On the basis of hierarchy/levels of management: On this basis, plans are classified into
strategic plans, administrative plans and operating plans.

a. Strategic Plan/Institutional Plan: A Strategic plan is a plan which is formulated by the top-
level management and define the framework of the organization's vision and how the
organization intends to make its vision a reality. It determines the long-term objectives of an
enterprise, the action plan to be adopted and the resources to be mobilized to achieve
these goals.It takes in a note of all the external factors and risks involved and makes a long-
term policy of the organisation. It also involves the determination of strengths and
weaknesses, external risks, mission, and control system to implement plan. These plans
provide the framework and direction for lower-level planning.
b. Administrative Plan: Administrative plans specify the allocation of organizational resources
to internal units of the organization, addresses the integration of the institutional level of
the organization with the technical core (for example, vision formulation to the vision
implementation) and also addresses the integration of the diverse units of the organization.
c. Operational Plan/Technical Core Plan: Operating plans provide direction and action
statements for activities in the organization's technical core. These plans are formulated by
the lower-level management for a short term of period. It is concerned with the day- to-day
operations of the organisations. It usually covers functional aspects such as production,
finance, human resources etc.

2. On the basis of Frequency of use or Repetitiveness: Another category of plans is

frequency-of-use plans. Some plans are used repeatedly; others are used for a single
purpose. On the basis plans are classified into standing plans and single use plans.

a. Standing plans: Standing plans, such as rules, policies, and procedures, are designed to
cover issues that managers face repeatedly. These plans are formulated once and they
are repeatedly used. These plans continuously guide managers to solve the problems.
b. Single use plans: Single-use plans are developed for unique situations or problems and
 are usually replaced after one use. Managers generally use three types of single-use
plans: programs, projects, and budgets.

3. On the basis of Time Frame: On this basis plans are classified into short range plans,
medium range plans and long-range plans.

a. Short-term Plan: The short-term plan involves plans for a few weeks or at most a
year.It allocates resources for day-to-day business development and management
within the strategic plan. Short-term plans outline objectives necessary to meet
intermediate plans and the strategic planning process.
b. Medium range plans/Intermediate Plan: This type of planning covers one year to
five years. It is designed to implement long term plans. It outlines how the strategic
plan will be pursed.
c. Long-term planning: Long-term planning usually convers a period of more than five
years, mostly between five and fifteen years. It specifies what the organization
wants to become in long run. It deals with broader technological and competitive
aspects of the organisation as well as allocation of resources over a relatively long
time period. Long- term planning is considered as strategic planning.

4. On the basis of Organizational Scope: Plans vary in scope. Some plans focus on
an entire organization. Other plans are narrower in scope and concentrate on a
subset of organizational activities or operating units. On the basis of organisational
scope, plans are classified as follows:

a. Business/divisional-level plans focus on one of the organization's businesses (or

divisions) and its competitive position.

b. Unit/functional-level plans-focus on the day-to-day operations of lower-level

organization units; marketing, human resources, accounting, and operations
plans (production).

c. Tactical plans division-level or unit-level plans designed to help an organization

accomplish its strategic plans. It involves the tactics that will be used to execute
the strategic plan. Tactical plans entail detailing resource and work allocation
among the subunits within each division.

5. Contingency Plans: Organizations often engage in contingency planning.

Contingency plans are created to deal with what might happen if these assumptions
turn out to be wrong. Contingency planning is thus the development of alternative
courses of action to be implemented if events disrupt a planned course of action. A
contingency plan allows management to act immediately if an unplanned
occurrence, such as a strike, boycott, natural disaster, or major economic shift,
renders existing plans inoperable or inappropriate. For example, airlines develop
contingency plans to deal with terrorism and air tragedies. Most contingency plans
are never implemented, but when needed, they are of crucial importance.

Basic Principles of Planning

The task of planning will be well-accomplished if some fundamental principles are

followed in the process. The important principles may be stated as follows:
1 Principle of Commitment This means that certain resources must be
committed or pledged for the purpose of
planning. The enterprise must be ready to
exhaust the available resources for the
achievement of a plan.

2 Principle of the Limiting This principle implies that more emphasis has
Factor to be put on that factor which is scarce or
limited in supply or extremely costly.

3 Principle of Reflective Planning, being an intellectual activity is based

Thinking on rational considerations. These involve
reflective thinking which signifies problem-
solving thought process-a process by which
past experiences are superimposed on the
facts of the present situation and possible
future trends.

4 Principle of Flexibility The plan should be so prepared that there is

sufficient scope for changing it from time to
time. Changes must necessarily be affected in
the plan for taking into account new
developments that may take place in the
course of the operation of the plan.

5 Principle of Contribution A major plan is prepared and it is supported by

to Enterprise Objectives many derivative plans. But all plans must
contribute in a positive way towards the
achievement of the enterprise objectives

6 Principle of Efficiency A plan should be made efficient to attain the

objectives of the enterprise at the minimum
cost and least effort. Therefore, it is to be seen
that what is expected is likely to be achieved.
7 Principle of Selection of In choosing from alternatives, the best
Alternatives alternative will be that which contributes most
efficiently and effectively to the
accomplishment of a desired goal.

8 Principle of Planning A plan is prepared against some foundations

 Premises or backgrounds known as Planning Premises'.
There must be complete agreement among
the managers in respect of planning premises
over which the structure of plan is to be
framed.

9 Principle of Timing and Timing and sequence of operations determine

Sequence of Operations the starting and finishing time for each piece
of work according to some definite schedule
and give practical and concrete shape and
form to work performance.

10 Principle of Securing To secure participation of the employees with

Participation: whole-hearted co- operation in execution of
the plan, it is necessary that the plan must be
communicated and explained to them for
their full understanding. This is needed for
improvement in the quality of planning. It also
ensures an obligation of the personnel of the
enterprise to execute the plan by individual
and joint participation.

11 Principle of Pervasiveness Though major planning function is entrusted

to the top management, it is not restricted to
the top level only. It is a function of every
manager at every level in the organisation.

12 Principle of Strategic Strategic planning must be prepared in the

Planning light of what the competitors are intending to
do. Planners must take into account the
strategies of the rival organisations, otherwise
the planning projection may land them in
trouble.

13 Principle of Innovation A good system of planning should be

responsive to the opportunities for innovation.
Innovation is a necessity for its sustaining
growth in this dynamic world. Innovation is
achieved through research and development
and planning is required to provide such
scope.
14 Principle of Follow-up In the course of execution of a plan, certain
obstacles may crop up in midway and planning
may require revision, alteration or correction.
This is why there must be a follow-up system
in the planning process itself. This allows
timely changes in the planning and makes it
 more effective.

Strategy - The Concept

Strategy is a term which is normally used in the battlefields for planning a military
movement handling of troops, etc.

In modern times, the word 'strategy' has found its way into the management field.
In the context of a business concern, strategy indicates a specific programme of
action for achieving the organisation objectives by employing the firm's resources
efficiently and economically. It involves preparing oneself for meeting unforeseen
factors. It is also concerned with meeting the challenges posed by the policies and
actions of other competitors in the market.
For Ex: You have the objective of regaining the market share of your company
product, which you have lost. Another objective is to gain quality reputation that is
lost due to some malpractices.

Strategy to achieve these two objectives are as follows.

1. Resize or down-size the present manufacturing process to produce affordable

units of the product, reachable to common man.
2. Continue to produce standard and luxury units also.
3. Use consumer-friendly ingredients.
4. Expand the market.
5. Explore new markets.

Thus, strategy gives a guideline to overcome a critical situation.

Definition and characteristics of strategy

Strategy is "the determination of the basic long-term goals and objectives of an

enterprise and the adoption of courses of action and the allocation of resources to
carry out these goals." (A.D. Chandler)

"Strategy" is the process of defining the objectives of the organisation, on changes

in their objectives, on the resources used to attain these objectives, and on the
policies that are to govern the acquisition, use and disposition of these resources."
(R.N. Anthony)

These two definitions provide the theme of strategy. Strategy is a specific tactful
action that managers take to attain one or more of the organization's goals. Strategy
also means that is "A general direction set for the company and its various
components to achieve a desired state in the future, to attain competitive
advantage".

Strategic Planning

Strategic Planning The basic objective of planning is to help organisations set goals
and develop a feasible plan to achieve these goals. Strategic planning, the first step
in strategic management, facilitates the achievement of organisational goals.
Strategic planning process considers issues such as vision, mission, values & goals of
the organisation, analysis of strengths, and challenges (internal factors) and analysis
of opportunities and threats (External factors). Based on these analyses, an action
plan is prepared focusing on the strategy to be adapted and it will be implemented.
Progress will be reviewed to find out whether the strategy has worked. If not, plan
will be redrafted considering the weak spots.

Meaning
Strategic planning, simply means, is the method that organisations develop and
implement a specific plan incorporating a required strategy to achieve a particular
objective. For ex: A company wants to increase its market share by 10% in the
coming year. This is a specific objective. To achieve this objective, a plan will be
prepared adapting certain strategies. Strategies will be decided after making a
SWOT analysis.

Strategic planning can be prepared for the whole organisation called "Master
Strategic Plan" or for functional departments viz, "Finance". "Marketing", "HRM"
etc. In functional departments, strategic planning may be developed to address
some major problem encountered by them.

Thus, strategic planning helps the organisation in creating a road map to prioritize
objectives to have sustained growth.

Strategic planning process

Strategic planning is integral to a company's long-term success. By adapting a

strategic plan, company's resources can be effectively utilised. Following steps are
followed to develop a strategic plan.
1. Find out whether there is a need for strategic plan i.e. understanding the need.
2. Set objectives as per need.
3. Determine strategic positions.
4. Prioritize objectives
5. Explore the means to achieve objectives
6. Decide about plan of action
7. Develop a plan
8. Implement the plan.
9. Review the plan

These stages of developing a strategic planning are briefly analyzed.

1. Understanding the need: Business units will have several opportunities for grow
Governments will be releasing several types of incentives and subsidies to support
industries and trading activities. For ex: The government is offering interest subsidy
for loans availed by exporters. This is an opportunity for exporters to increase their
turnover. They (Exporters) have to be aware of this opportunity. Companies should
be aware of the industry or trade environment in which they operate. This helps
them to identify opportunities for development. Understanding the external
business environment helps business units to know whether there is a need to
develop a strategic plan. Besides understanding external environment, businesses
should also be aware of their internal operations. This awareness helps them to
identify problem areas which need correction. Make SWOT/C analysis to understand
the need.

Thus, understanding both internal and external environment of business, facilitates

the business unit to know where the business stands, where should it go and how
business gets there.This understanding will help the business to develop a workable
strategic plan.
2. Set objectives as per need: This refers to the specific objective to be achieved for
the success of the business. Goals can be set for the organisation as a whole or for
individuals departments. Goal setting helps in developing a strategic plan for each
objective. For ex: The management has decided to adopt most advanced digital
technology to have aggressive marketing. This is an objective, which prompts the
management to develop a strategic plan.

3. Prioritize objectives: Objectives have to prioritized in line with the company's

mission and vision. While deciding the priorities, following aspects have to be
examined.
•The type of initiative to be introduced which impacts much to achieve company's
mission and vision.
•The level of competition the company is facing at present and how it can be
contained by introducing an initiative viz. Strategy.
•Examine which segment has to be more focused to achieve organisational goal.
This means whether the company has to focus on earning more profit or more
customer acquisition.
•Find out which initiatives are most important and urgent.
•Decide what plan of action the company has to take to achieve focused objective?
• Examine how the company can measure progress and ascertain whether it has
achieved the desired objective.
By examining these aspects the company will be in a position to prioritize objectives
to develop a strategic plan.

4. Explore the means to achieve objectives: Different ways can be adapted to

achieve an objective. Detailed examination of different solutions to complete the
prioritized objective has to be done. This gives flexibility to managers when they are
directing their teams who are involved in the execution of strategic plan. Alternative
ways such as traditional and innovative methods are also available. By examining
different methods, managers can decide the suitable method to successfully
implement the plan. Multiple ways are available in good number. They have to
narrow down the ways that are suitable to selected objective and select the most
appropriate method after evaluation.

5. Decide about the plan of action: The next step to be taken is deciding the course
of action. Normally every business house design a strategic plan that is most
profitable. Before deciding a plan of action, following aspects are to be considered.
• A plan that costs much to design and implement has to be avoided. Design a plan
which can be effectively implemented at a lesser cost.
•The designed plan, as far as possible, should have potential positive consequences.
• Design an action plan which is workable. This means that the designed plan should
be flexible and is capable of incorporating corrective measures when obstacles are
encountered. For ex: A strategic plan is prepared considering the existing policies
and
procedures of the management and the legislations of the government. If any
manageme or government policy changes when plan is on, the plan has to be
reviewed to incorporate such change.
•Clear communication of responsibilities has to be incorporated in the plan.
•The time within which the plan has to be completed should be incorporated.

• Do not consider an initiative that won't enhance the company's long-term

position. Considering all the aforesaid aspects a feasible, positive action plan has to
be designed. Such plan ensures the filling up of gaps in operation.

Sometimes, supporting plans have to be developed to support the main plan.

Supposing a strategic plan is developed to launch a new product. This plan includes
activities such as new product research, establishing manufacturing facilities,
marketing plan for the proposed product etc.

Supporting plan will include all aspects that the company need to take to support
the main plan These aspects may be (i) expanding product research team which
involves new recruitment, (ii) increasing company's manufacturing facilities to
produce new product, (iii) training the existing staff of acquaint themselves with
new programme etc.
6. Developing the plan: After undergoing all preliminaries stated earlier, manager
has to develop a strategic plan suiting to desired objective. Plan may be in different
forms and sizes. But all plans contain the following common elements, which have
to be considered, while formulating the plan.

• Mission statement - This is to be stated according to the desired objective i.e.

what the organisation wants to achieve by adopting a strategy and should be within
the organisational goal.
• Vision statement - Short and concise statement about what company looks like in
next five or more years.
• Value statement - This speaks about distinctive core beliefs of the company. They
are the guiding principles, which never change and are part of the strategy to be
adapted.
• SWOT/C Analysis - It is a summarized view of current situation of the organistion.
This analysis helps in knowing "Strengths", "Weaknesses" (Internal aspects),
"opportunities" and "Threats/Challenges" (External aspects) of the organisation.
⚫ Competitive advantage - Organisation's strength in facing competition (Focus on
the strong areas to face competition)
⚫ Long-term strategic objective-State on what objectives the organisation has to
achieve in next three to five years. This will be a long-term strategic objective.
⚫ Incorporate strategies - State the strategic methods the organisation wishes to
adopt to reach the vision.
• Short-term/goals/priorities/initiatives - These will convert the strategic objectives
into specific performance targets to be achieved in one-to-two year time period.
They that, when and who and are measurable.
•Action items/plans-These statements explain how the desired strategic objectives
have to be achieved. Methodology will be explained to convert strategy into
operations. Whether it is to be executed by a team or by individuals will also be
stated.
• Scorecard - Incorporate scorecard to report the progress of key performance
indications (KPI) against the target fixed (Monthly, quarterly, half-yearly etc.)

These are the components of a strategic plan. The plan, if honestly implemented will
help the management to gain much better control over its financial performance.
7. Implement the plan: This is the crucial stage of strategic planning process.
Managers, before implementing the plan, should have meeting with team members
drafted for implementing the plan. In this meeting, they have to have elaborate
discussion about the method of implementing the strategic plan. This interaction
will help the implementing team to clearly understand the process. Each member of
the team will understand his/her responsibility and implement the plan smoothly.
Manager has to monitor the progress and see that plan is effectively implemented.
8. 8. Review the plan: As the implementation progresses, manager will review the
outcome of implemented plan and if any deviation of obstacle is noticed, he/she has
to revise the plan. Generally review reevaluate priorities and strategic position to
put the plan on track to ensure that the strategy has worked in the long-run.

Importance and benefits of strategic planning

⚫ Planning identifies strategic goals and strategic intent. As chief executives will
always be busy and find no time to search for best operation, strategic plan will
guide them to do the right job.
•It facilitates the judicious allocation of resources to various functions of the
organisations including strategic objectives.
•As plan process is explained to every manager before implementation, they will
not resist to implement the plan. They may be having apprehension about its
success, as they are uncertain about the future. When they work as per planned
procedure, they don't resist to implement.
•When plans are implemented with strategies, organisation achieves sustainable
competitive advantage.
•Strategic plan facilitates better communication between functional and strategic
managers. Better communication between them facilitates collaboration and
coordination. They do not compete but complement each other. Organisation
functions well.

Limitations

• Strategic planning is an expensive proposition for small and medium enterprises.

These organisations have to spend on hiring experts to prepare a strategic plan and
develop special tools to implement. This involves huge expenditure. Hence, they
may not attempt to develop this plan.
• Designing a strategic plan is a complex process. This plan consists of many steps
that are connected to each other and must be constantly adjusted. Some
unexpected factors have to be adjusted in the plan, which may change the whole
strategy and the plan. Other limitations are (i) it is a time consuming process (ii)
difficult to implement and (iii)requires skilful planning.
Because of these limitations, many strategic plans have faded.

Environmental analysis is related to strategic planning. To develop a strategy for

any functional (Finance, Marketing, HRM etc) or general activity, environmental
analysis of the organisation has to be made. This can be done by using certain tools
or techniques such as SWOT/ TOWS/WOTS-UP analysis, BCG Matrix, Competitor
analysis etc.

Environmental analysis-Meaning

Environmental Analysis is described as the process which examines all the

components, internal or external, that has influence on the performance of the
organization. The internal components indicate the strengths and weakness of the
business entity whereas the external components represent the opportunities and
threats outside the organization.

This meaning provides certain components of environmental analysis, which are as

follows.

•Internal factors, which involve strengths and weaknesses.

•External factors, which encompass opportunities and threats.

Internal factors include organisational structure (levels of administration), authority

and power each level enjoys, organisational policies and programme, workload
distribution, workplace environment, employee engagement position,
compensation model and the like.

External factors cover factors such as competition level, legal and government
regulations, economic - social - political and natural environment aspects,
technological aspects etc.

Importance/Benefits of environmental analysis

•It facilitates designing a sound strategy to overcome an impacted segment.

•It helps in achieving organisational goals. Analysis also helps to know whether
organisational goals are achievable or they have to be refixed according to
organisational strength.

• Identifies strengths, weaknesses, opportunities and threats.

•EA, as a strategic tool, identifies all internal and external elements, which affects
the

• It evaluates existing strategies, sets new strategic objectives to overcome the

defects in the strategy and formulate new strategies accordingly.

• Facilitates the forecasting of future development of the business in question. This

means that it cautions the organisation about unforeseen events that may occur in
the days to come. It aims at minimising the frequency and extent of surprises that
may attack the business.

Thus, EA helps in detection of threats at an early stage that organisation and suggest
to develop a strategy to overcome this.

Limitations
• Environmental analysis does not predict the exact future happening. It only says
that certain uncertainties may prevail in the organisation. Thus, it may not occur
also. Hence it prevents formulating appropriate action plan.
•EA will not assure the organisation about its effectiveness. Sometimes
questionable data are taken for analysis, which defeats the very purpose of analysis.
Such analysis becomes futile and unreliable.
• Analysed data provides too much information, which confuses the organisation to
take appropriate steps to address the identified problem. Information overload is
one of the limitations of EA.
•When organisations implement new strategies, they will be doing at risk. Before
implementing such strategies, managements weigh the implications and exercise
too much care before implementing, to avoid risk. Over cautiousness may disrupt
the implementation of required and right strategy.

Supposing the organisation has overloaded the human resources at work. EA says to
adopt a strategy to optimise the workload of human resources. But organisation
may take its own time to implement this strategy. Quality suffers in the process.

Techniques adapted in environmental analysis. Environmental analysis models are

useful techniques that can help the organisations to think more strategically and
adopt a feasible technique that suits to the existing organisational situation.

Following are the various techniques available for environmental analysis

•SWOT analysis
•TOWS/WOTS-UP analysis BCG Growth Share Matrix
•Competitor analysis
•PEST analysis
•The Five Forces analysis
•Scenario Planning

•Benchmarking
•QUEST

These techniques are very briefly analysed

1. SWOT analysis

Organisations, while conducting environmental analysis to develop a strategy, one

of the most effective techniques they adopt is SWOT analysis. This technique was
developed by Albert Humphery of the Stanford Research Institute in 1960s. Since
then, this technique has become popular.
This technique easily helps in analysing the situation in four straightforward steps
viz. "Strength", "Weaknesses", Opportunities and Threat. This tool is so simple that
even ordinary business owners can understand and analyse the situation
themselves.

Meaning: SWOT Analysis is a strategic management tool that assists an enterprise in

discerning their internal Strengths, Weaknesses, external Opportunities and Threats,
to determine its competitive position in the market.

When can it be applied?

SWOT techniques can be used in the following circumstances.

• When the organisation intends to expand business.
Considering opportunities to altering a plan midway through its execution.
•At the revamping of business policies.
• Routine checking of the business's current landscape, with the objective of
improving the business.

Features of SWOT Analysis

•A SWOT analysis focuses on four elements of acronym viz. Strengths, Weaknesses,

Opportunities and Threats to identify the forces influencing a strategy. (These days
analysers are using "Challenges" in place of "Threats").
•The positive (Strengths and Opportunities) and negative (Weaknesses and Threats
(Challenges) elements identify the parts of a plan, where rectification is immediately
required.
• Pairing external threats with internal weaknesses can highlight the most serious
issues an organisation faces.
•After identifying risks, it helps the organisation to take sound decision to develop a
strategy.

Components of each element

SWOT analysis takes place usually in the following format considering internal and
external factors.
This is a normal chart drawn to identify weak areas. Many other formats are also
used as per convenience of organisations. Strengths and Weaknesses are internal
factors and Opportunities and Threats (challenges) are external factors.

Components of each element of acronym are as follows.

1. Strengths: The strengths are core competencies, in which the organisation has an
edge over its competitors. These are commonly considered as internal factors.
Following aspects are covered in this element. TOWE quinM

•A large customer base.

• Strong brand name or a unique product
• Latest technology or patents
• Influential advertising and promotion
• Cost Advantage
• Quality in product and customer service

2 Weaknesses: These areas exhibit the limitations of the business, which hinder the
growth of the organisation. Aspects covered in this internal element are as follows
• Obsolete facilities and outdated technology.
•The unit cost of a product is higher than the competitors.
•No or less internal control.
•Less quality in products and services offered.
• Weak brand image.
• Financial condition is not very sound.
•Underutilization of plant capacity.
•Lack of major skills or competencies, and intellectual capital.

3. Opportunities: Favourable situations available to the organization from external

environment to exploit for betterment of the business. Aspects this element are as
follows.
⚫ Looking for areas of development, by utilizing skills and technology to enter new
markets.
•Adding new products to the existing product line to increase customer base.
•Forward and backward integration.
•Tapping new markets.
•Acquiring rival's businesses.
•Expansion in international markets
⚫ Joint ventures, mergers and alliances to increase market coverage.
• Social media marketing

4. Threats (Challenges): These will speak about adverse conditions which affect the
business, resulting in financial loss and harm the reputation of the organisation.
They are as follows.

• A downtrend in market growth

•A new entrant to the market
•Substitute products that can decrease sales Increasing the bargaining power of
customers and suppliers
• Changing customer preferences
•New regulatory requirements
•Major technological changes
• Changes in a demographic environment that will decrease demand for firm's
product.
After analysing the situation through SWOT technique, analyst has to give a suitable
action plan to improve the identified situation.

One simple example of SWOT analysis

You are running a stationery store in a college campus. The business space is
provided by the college management at a very nominal rent with the condition that
the stationery should be sold at a price with marginal profit. Business is normal and
you are not in a position to have more financial gain. Prepare a SWOT analysis to
improve your financial situation.
By analysing all the aspects of SWOT, you will have the following option to improve
the business.

• Retain the existing shop following guidelines of college management and hire also
the adjoining private place and add photocopier unit and a coffee shop. This avoids
the threat of rival entry and your business will improve for extra financial gain.

SWOT analysis can be made on the above said lines for corporate, partnership firms,
small business units and solve any social or personal problem

2. TOWS analysis

TOWS analysis is the extension of SWOT analysis. This helps in better understanding
of the strategic choices that organisation has to implement. TOWS matrix is usually
focused on external aspects.

The process of TOWS analysis involves the matching of external opportunities and
threats with internal strengths and weaknesses of the organisation. TOWS analysis is
based on SWOT analysis for understanding SWOT in a simple and more focused
way. Following two figures show how SWOT matrix is converted into TOWS matrics.
How to use TOWS?
1. Create a SWOT matrics for analysis.
2. Use SWOT to create TOWS
3. Analyse TOWs, by picking one or two strategies from each box.
4. Rank options on priority to implement

The identified options are strategic alternatives. These can be listed in the
appropriate quadrant of the TOWS worksheet (As shown in the figure).

The TOWS Matrix is a relatively simple tool for generating strategic options. By using
it, organisation can look intelligently at how it can best take advantage of the
opportunities open to it. At the same time that organisation minimizes the impact of
weaknesses and protect it against threats.
Used after detailed analysis of organisations threats, opportunities, strength and
weaknesses, it helps the organisation to consider how to use the external
environment to its strategic advantage, and to identify some of the strategic options
available to it.
•Uncontrollable factors such as government policies, business cycle variations which
pose threat in future are not covered.

•The effects of synergy between business units is neglected. Political imbalances,

social changes, ecological imbalances are also not considered.

•The model employs only two dimensions-market-share and product/service

growth rate, Low share can be profitable. Dogs can also generate more cash.

Because of these limitations of BCG matrix, planners or managers while designing

the strategies, should not forget to keep these limiting factors while designing.

5. Competitor analysis

This analysis will be a segment analysis of the five forces analysis frame work that
affect competition.

A competitive analysis is a strategy where organisations identify major competitors

and research their products, sales, and marketing strategies. By doing this, they can
create solid business strategies that improve upon organisation's competitors.

Benefits
•CA helps to learn the ins and outs of how the organisation's competition works and
identify potential opportunities where it can outperform competitors.
•The analysis enables the organisation to be on top of industry trends and ensure
that its product is constantly meeting or exceeding industry standards.
• Helps in identifying its product's unique value proposition (ULP) to make the
product different from competitors' products and suggests to take future positive
action to sustain ULP
• Facilitates to know the weak areas of competitors and develop strategies to
occupy such weak areas to gain more market share.
• Provides a benchmark against which organisation can measure its own growth.

Competitor Analysis Process

Following stages are involved in CA process.

• Assess the status (level of competition) of competitors.
• List the products that are offered to consumer by competitors in the market.
• Examine in detail competitors' sales strategy and tactics, results, pricing, perks
they offer technology used by them, their marketing content promotion etc.
• Analyze the level of engagement on your competitor's content.
• Perform a SWOT analysis to arrive at a suitable strategy to overcome the hurdles
of
competitors.
• Prepare a comprehensive report suggesting the methods to beat competitors.
• Benchmark organisation against the whole industry to find new growth avenues.
• Spot seasonal ups and downs to prepare for future challenges.
•Identify demographics of consumers in the market to develop a better consumer
fit.

Organisations conduct competitor analysis, when they want to launch new product
or to know market trends or to improve sales by expanding operations in new
markets. Increasing the market share is the main criterion.

6. PEST Analysis

This is a technique adopted to understand the external forces which influence the
business. Political, economic, social and technological forces are the ones which
impact the business operations. This analysis provides the information about the
climate prevailing in the market. On this basis companies can decide about their
future business operations.

7. Scenario Planning

This is a technique that builds various justifiable scenario of possible futures of a

business. It defines critical circumstances to develop viable scenarios to discuss the
impacts and the responses of each one of them. From this, organisation
understands what can happen in each scenario and adopts a workable scenario.

8. The Five Forces analysis

The Five Forces analysis is a framework for looking at the strength of five important
factors that affect competition - potential entrants, existing competitors, buyers,
suppliers and alternative products/services. Using this model, you can build a
strategy to keep ahead of these influences.

9. Benchmarking

This technique facilitates the comparison of business processes and performance

metrics to industry bests and best practices form other companies. Benchmarks are
designed to mimic (preparing a replica) particular type of business practices, which
are considered to best in the industry. Accordingly action plan is prepared suiting to
the organisation.
10. QUEST

QUEST stands for "Quick Environment Scanning Technique" analysis. This will be
designed to assist organisational strategies by adhering to change and its
implications. Besides these techniques, various other techniques (MOST analysis,
ETOP analysis etc.) are also adapted to assess the organisational status in a given
situation. Strategies are developed based on environmental analysis technique and
implemented to overcome the identified problems.

To conclude, environmental analysis is a process which examines all the internal and
external components which influence the performance of an organisation. The
analysis by adopting a suitable technique, gives a direction to develop an
appropriate strategy to cross over the disturbed performance.

Meaning and Definition of Decision Making

The word decision has been derived from the Latin work "decider" which means
"cutting off". Thus, decision involves cutting off of alternatives between those that
are desirable and those that are not desirable. A decision is the selection from
among alternatives. It is a solution selected after examining several alternatives and
decisive because the decider foresees that the course of action he selects will be
more effective than the others to further his goals and will be accompanied by the
fewest possible objectionable consequences. Decision is a kind of choice of a
desirable alternative. A few definitions of decision making are given below:

In the words of Ray A. Killian, "A decision in its simplest form is a selection of
alternatives
Dr. T. G. Glover defines decision "as a choice of calculated alternatives, based on
judgment"

In the words of George R. Terry "Decision making is the selection based on some
criteria from two or more possible alternatives"

Felix M. Lopez says that "A decision represents a judgment, a final resolution of a
conflict of needs, means or goals; and a commitment to action made in face of
uncertainty, complexity and even irrationally"

In the words of Hodge and Johnson, "Decision making is to solve any obstacle that
stands between decision maker and accomplishment of organizational goals."

According to Szilagyi, "Decision making is a process involving information, choice of

alternative actions, implementation, and evaluation that is directed to the
achievement of certain stated goals."
In the words of Haynes and Massie, "A decision is a course of action which is
consciously chosen for achieving a desired result"

From the above definitions, we can conclude that, Decision Making involves the
process of establishing goals, tasks and searching for alternatives for a decision
problem.
a. A manager faced with two or more feasible alternatives must decide which one
to select. Decision-making is, therefore, the process of identifying a set of
feasible alternatives and choosing a course of action from them. Weihrich and
Koontz defined decision-making as the selection of a course of action from
among alternatives. According to them. "it is the core of planning A plan cannot
be said to exist unless a decision- a commitment of resources, direction or
reputation -- has been made."

b. Decision-making is a step in planning but it occupies a major part and the core
of planning The process leading to a decision is completed in four phases: (1)
planning, (2) identifying alternatives, (3) evaluating alternatives in terms of the
goal sought, and (4) choosing an alternative, that is, making a decision.

c. Decisions are judgements which directly affect a course of action. An example

will make the point clear. While still in the second year HSC (Science Group), Mr.
X had to decide what to do after passing the HSC examination go to a general
university to do a B.Sc. (Hons.) degree or seek admission in a Medical or an
Engineering College or University? Mr. X collected information about a number
of general and technical universities or institutes, reviewed the material,
narrowed that list down to a number of alternatives, evaluated each alternative,
applied to several such universities and institutes and then chose to give
Entrance Examination. In other words, Mr. X did not merely go to college. He
decided to go to a particular institution. Many managers use the terms "choice-
making," "decision-making" and "problem-solving" interchanging. But in fact,
these are different. Choice-making refers to the narrow set of activities
associated with choosing one option from a set of already identified
alternatives. Choice making is involved when a manager selects one of five
applicants to hire for a computer operator's job.

Decisions that take place at the top of the organization typically are labelled
strategic or high-risk decisions. These may involve gathering intelligence, setting
directions, uncovering alternatives, assessing these alternatives to choose a plan of
action, or implementing a plan.

Decision Making Process

1. Specific Objective: The need for decision making arises in order to achieve certain
specific objectives. The starting point in any analysis of decision making involves the
determination of whether a decision needs to be made.

2. Problem Identification: A problem is a felt need, a question which needs a

solution. In the words of Joseph L. Massic "A good decision is dependent upon the
recognition of the right problem". The objective of problem identification is that if
the problem is precisely and specifically identified, it will provide a clue in finding a
possible solution A problem can be identified clearly, if managers go through
diagnosis and analysis of the problem.

⚫ Diagnosis: Diagnosis is the process of identifying a problem from its signs and
symptoms. A symptom is a condition or set of conditions that indicates the
existence of a problem. Diagnosing the real problem implies knowing the gap
between what is and what ought to be, identifying the reasons for the gap and
understanding the problem in relation to higher objectives of the organization. •
Analysis: Diagnosis gives rise to analysis. Analysis of a problem requires:

o Who would make decision?

o What information would be needed?
o From where the information is available?
o Analysis helps managers to gain an insight into the problem.
3. Search for Alternatives: A problem can be solved in several ways; however, all
the ways cannot be equally satisfying. Therefore, the decision maker must try to find
out the various alternatives available in order to get the most satisfactory result of a
decision. A decision maker can use several sources for identifying alternatives:
(a) His own past experiences
(b) Practices followed by others and
(c) Using creative techniques

4. Evaluation of Alternatives: After the various alternatives are identified, the next
step is to evaluate them and select the one that will meet the choice criteria, the
decision maker must check proposed alternatives against limits, and if an alternative
does not meet them, he can discard it. Having narrowed down the alternatives
which require serious consideration, the decision maker will go for evaluating how
each alternative may contribute towards the objective supposed to be achieved by
implementing the decision.

5. Choice of Alternative: The evaluation of various alternatives presents a clear

picture as to how each one of them contribute to the objectives under question. A
comparison is made among the likely outcomes of various alternatives and the best
one is chosen. Action: Once the alternative is selected, it is put into action. The
actual process of decision-making ends with the choice of an alternative through
which the objectives can be achieved.
6. Results: When the decision is put into action, it brings certain results. These
results must correspond with objectives, the starting point of decision process, if
good decision has been made and implemented properly. Thus, results provide
indication whether decision making and its implementation is proper.

MBO AND MBE

2.3.1 Management by Objectives (MBO)

Management by Objectives (MBO) Management by objectives (MBO) is a

comprehensive management system based on measurable and participatively set
objectives. MBO is now widely practiced all over the world. But, despite its large-
scale application, the meaning of MBO is not yet always clear. To some people, it is
an appraisal tool; others consider it a motivational technique, while others look
upon it as an instrument of planning and control.

Management by objectives (MBO) has been defined by Weihrich and Koontz as "The
comprehensive managerial system that integrates many key managerial activities in
a systematic manner and that is consciously directed toward the effective and
efficient achievement of organisational and individual objectives."
Emphasising management by objectives was not initiated or originated by any single
person. Such management has been dictated by the prudence or common sense of
innumerable people. However, certain individuals have long placed emphasis on
management by end results.

MBO is a comprehensive management system based on measurable and

participatively set objectives. It has come a long way since it was first suggested by
Peter F. Drucker in 1954 as a way of promoting managerial self-control. The
common factor that has made MBO programmes so popular in both management
theory and practice is the emphasis on objectives that are both measurable and
participatively set MBO is a management technique for increasing employee
involvement in the planning and controlling activities. Through involvement, it is
believed that employee commitment to a planned course of action will be enhanced
and performance will be more efficient.

Many variations are found in the practice of MBO. But basically, it is a process
through which goals, plans, and control systems of an organization are defined
through collaboration between managers and their subordinates) Jointly they
identify common goals, define the results expected from each individual, and use
these measurements to direct the operation of their unit and to assess individual
contributions. In this process, the knowledge and skills of many members of the
organization are pressed into service. Instead of telling subordinates about their
goals. managers ask subordinates to participate and decide about what their goal
should be.

After setting up of an acceptable set of goals for each employee through a give-and-
take collaborative process, the employee is asked to play a major role in devising an
action plan for achieving these goals. In the final stage of the MBO process,
employees are asked to develop control processes, to monitor their own
performance and to suggest corrective measures deviations from plans do occur.
The entire process is a combination of planning and control.
Peter F. Drucker proposed this concept. MBO is a process through which specific
goals are set collaboratively for the organization as a whole and every unit and
individual within it. Each individual's major area of responsibilities in term of
expected of results are defined General Electric appears to be the first organization
that implemented MBO. According to Peter Drucker MBO is regarded as a system
for improving performance, both of individual manager and enterprise as a whole
by setting of goals at the corporate, departmental and individual manager's level.
Robert Krether: MBO is a comprehensive management system based on measurable
and anticipatively set objective, Stephen P. Robbins: A programme that
encompasses specific goak anticipatively set for an explicit time period with
feedback on goal purpose.

Management by Exception (MBE)

Management by Exception is a "policy by which management devotes its time to

investigating only those situations in which actual results differ significantly from
planned results". In short management by exception means selectivity in work and
priority in decisions known as employee involvement or participative decision
making, encourages the involvement of stakeholders at all levels of an organization
in the analysis of problems, development of strategies and implementation of
solutions.

Management by exception has been defined as a "system of identification and

communication that signals the manager when his attention is needed. Conversely,
it remains silent when his attention is not required. The primary purpose of MBE is
of course, to simplify the management process itself to permit a manager to find the
problems that need his attention and action and to avoid dealing with those that
are, better handled by his subordinates

MBE Process
1. Measurement: Assignment of values to the past and present performances, so as
to easily recognize an exception.
2. Projection: Forecasts that measurement which is relevant to the organizational
objectives and extends the same, to future expectations.
3. Selection: Determines the parameters used by the management to pursue
organizational objectives.
4. Observation: Measurement of existing performance so that the managers are
having the knowledge of the existing state of affairs of the organization.
5. Comparison: Compare the actual and planned performance and indicating the
exception which needs managerial action and reports the variances.
6. Decision Making: Prescription of the course of action which needs to be taken so
as to ensure that the performance back in control or to adjust expectations, which
represents the changing conditions.

Difference Between MBO and MBE

Sl Basis MBO MBE
no
1 Full Form Management By Management By
Objectives Exception
2 Definition MBO is a process of MBE is policy by which
defining objectives within management devotes
an organization so that its time to investigate
management and only those situations
employee agree to the in which actual result
objectives and differs significantly
understand what they from planned results.
need to do in the
organization

3 Employee High Low

Participation
4 Decision Making Employee participation is Employee
high on decision making participation minimal
on decision making

5 Responsibility No responsibility Responsibility

ambiguity ambiguity responsibilities ambiguity
are clearly assigned.

6 Dependency Dependency on one Dependency is high

group or department is
low

7 Appropriate for Experienced Managers Experienced

Executives

8 Efficiency Whole organization takes High efficiency

part in decision making
so it reduces efficiency.