UNIT II

PLANNING
DEFINITION
According to Koontz O'Donnel - "Planning is an intellectual process, the conscious
determination of courses of action, the basing of decisions on purpose, acts and considered
estimates".

NATURE AND PURPOSE OF PLANNING

Nature of Planning
1. Planning is goal-oriented: Every plan must contribute in some positive way towards
the accomplishment of group objectives. Planning has no meaning without being related to
goals.
2. Primacy of Planning: Planning is the first of the managerial functions. It precedes all
other management functions.
3. Pervasiveness of Planning: Planning is found at all levels of management. Top
management looks after strategic planning. Middle management is in charge of
administrative planning. Lower management has to concentrate on operational planning.
4. Efficiency, Economy and Accuracy: Efficiency of plan is measured by its
contribution to the objectives as economically as possible. Planning also focuses on accurate
forecasts.
5. Co-ordination: Planning co-ordinates the what, who, how, where and why of
planning. Without co-ordination of all activities, we cannot have united efforts.
6. Limiting Factors: A planner must recognize the limiting factors (money, manpower
etc) and formulate plans in the light of these critical factors.
7. Flexibility: The process of planning should be adaptable to changing environmental
conditions.
8. Planning is an intellectual process: The quality of planning will vary according to
the quality of the mind of the manager.

PURPOSE OF PLANNING
As a managerial function planning is important due to the following reasons:-
1. To manage by objectives: All the activities of an organization are designed to
achieve certain specified objectives. However, planning makes the objectives more concrete
by focusing attention on them.
2. To offset uncertainty and change: Future is always full of uncertainties and
changes. Planning foresees the future and makes the necessary provisions for it.
3. To secure economy in operation: Planning involves, the selection of most profitable
course of action that would lead to the best result at the minimum costs.
4. To help in co-ordination: Co-ordination is, indeed, the essence of management, the
planning is the base of it. Without planning it is not possible to co-ordinate the different
activities of an organization.
5. To make control effective: The controlling function of management relates to the
comparison of the planned performance with the actual performance. In the absence of plans,
a management will have no standards for controlling other's performance.
6. To increase organizational effectiveness: Mere efficiency in the organization is not
important; it should also lead to productivity and effectiveness. Planning enables the manager
to measure the organizational effectiveness in the context of the stated objectives and take
further actions in this direction.
Features of Planning
• It is primary function of management.
• It is an intellectual process
• Focuses on determining the objectives
• Involves choice and decision making
• It is a continuous process
• It is a pervasive function

Classification of Planning
On the basis of content
• Strategic Planning
– It is the process of deciding on Long-term objectives of the organization.
– It encompasses all the functional areas of business
– Tactical Planning
– It involves conversion of detailed and specific plans
– It is the blue print for current action and it supports the strategic plans.
• Long term planning
– Time frame beyond five years.
– It specifies what the organization wants to become in long run.
– It involves great deal of uncertainty.
• Intermediate term planning
– Time frame between two and five years.
– It is designed to implement long term plans.
• Short term planning
– Time frame of one year or less.
– It provide basis for day to day operations.
PLANNING PROCESS
The various steps involved in planning are given below

a) Perception of Opportunities:
Although preceding actual planning and therefore not strictly a part of the planning
process, awareness of an opportunity is the real starting point for planning.
b) Establishing Objectives:
The first step in planning itself is to establish objectives for the entire enterprise and
then for each subordinate unit. Objectives specifying the results expected indicate the end
points of what is to be done, where the primary emphasis is to be placed, and what is to be
accomplished by the network of strategies, policies, procedures, rules, budgets and programs.
c) Considering the Planning Premises:
Another logical step in planning is to establish, obtain agreement to utilize and disseminate
critical planning premises. These are forecast data of a factual nature, applicable basic
policies, and existing company plans.
d) Identification of alternatives:
Once the organizational objectives have been clearly stated and the planning premises
have been developed, the manager should list as many available alternatives as possible for
reaching those objectives.
e) Evaluation of alternatives
Having sought out alternative courses and examined their strong and weak points, the
following step is to evaluate them by weighing the various factors in the light of premises
and goals.
f) Choice of alternative plans
An evaluation of alternatives must include an evaluation of the premises on which the
alternatives are based. A manager usually finds that some premises are unreasonable and can
therefore be excluded from further consideration.
g) Formulating of Supporting Plans
After decisions are made and plans are set, the final step to give them meaning is to
numberize them by converting them to budgets. The overall budgets of an enterprise
represent the sum total of income and expenses with resultant profit or surplus and budgets of
major balance– sheet items such as cash and capital expenditures.
h) Establishing sequence of activities
Once plans that furnish the organization with both long-range and short-range
direction have been developed, they must be implemented. Obviously, the organization can
not directly benefit from planning process until this step is performed.

TYPES OF PLANS / COMPONENTS OF PLANNING

In the process of planning, several plans are prepared which are known as components of
planning.
 Plans can be broadly classified as
a) Strategic plans
b) Tactical plans
c) Operational plans
d) Contingency plans
a) Strategic plans

i) Mission:
The mission is a statement that reflects the basic purpose and focus of the
organization which normally remain unchanged. The mission of the company is the answer of
the question : why does the organization exists?
ii) Objectives or goals:
A goal is an abstract and general umbrella statement, under which specific objectives
can be clustered. Objectives are statements that describe—in precise, measurable, and
obtainable terms which reflect the desired organization‘s outcomes.
iii) Strategies:
Strategy is the determination of the basic long term objectives of an organization and
the adoption of action and collection of action and allocation of resources necessary to
achieve these goals.
b) Tactical plans:
A tactical plan is concerned with what the lower level units within each division must
do, how they must do it, and who is in charge at each level. Tactics are the means needed to
activate a strategy and make it work.
c) Operational plans
The specific results expected from departments, work groups, and individuals are the
operational goals. These goals are precise and measurable. ―Process 150 sales applications
each week‖ or ―Publish 20 books this quarter‖ are examples of operational goals.
i) Single-use plans apply to activities that do not recur or repeat. A one-time
occurrence, such as a special sales program, is a single-use plan because it deals with the
who, what, where, how, and how much of an activity.
¨ Programme: Programme consists of an ordered list of events to be followed to execute a
project.
¨ Budget: A budget predicts sources and amounts of income and how much they are used for a
specific project.
¨ Standing plans are usually made once and retain their value over a period of years while
undergoing periodic revisions and updates.
¨ Policy: A policy provides a broad guideline for managers to follow when dealing with
important areas of decision making. Policies are general statements that explain how a
manager should attempt to handle routine management responsibilities. Typical human
resources policies, for example, address such matters as employee hiring, terminations,
performance appraisals, pay increases, and discipline.
¨ Procedure: A procedure is a set of step-by-step directions that explains how activities or tasks
are to be carried out. Most organizations have procedures for purchasing supplies and
equipment, for example.
d) Contingency plans
Contingency planning involves identifying alternative courses of action that can be
implemented if and when the original plan proves inadequate because of changing
circumstances.
OBJECTIVES
Features of Objectives
• The objectives must be predetermined.
• A clearly defined objective provides the clear direction for managerial effort.
• Objectives must be realistic.
• Objectives must be measurable.
• Objectives must have social sanction.

Advantages of Objectives
• Clear definition of objectives encourages unified planning.
• Objectives provide motivation to people in the organization.
• When the work is goal-oriented, unproductive tasks can be avoided.
• Objectives provide standards which aid in the control of human efforts in
an organization.
• Objectives serve to identify the organization and to link it to the groups upon which
its existence depends.

PROCESS OF SETTING OBJECTIVES

• Objectives are required to be set by management in every area which directly
and vitally affects the survival and prosperity of the business.
• The objectives to be set in various areas have to be identified.
• While setting the objectives, the past performance must be reviewed, since past
performance indicates what the organization will be able to accomplish in future.

MANAGEMENT BY OBJECTIVES (MBO)

Definition
―MBO is a process whereby the superior and the mangers of an organization jointly identify
its common goals, define each individual‘s major area of responsibility in terms of results
expected of him, and use these measures as guides for operating the unit and assessing the
contribution of each of its members.‖
Features of MBO
1. MBO is concerned with goal setting and planning for individual managers and their units.
2. The essence of MBO is a process of joint goal setting between a supervisor and
a subordinate.
3. Managers work with their subordinates to establish the performance goals that
are consistent with their higher organizational objectives.
Steps in MBO:

The typical MBO process consists of:

1) Establishing a clear and precisely defined statement of objectives for the employee
2) Developing an action plan indicating how these objectives are to be achieved
3) Reviewing the performance of the employees
4) Appraising performance based on objective achievement

1) Setting objectives:
For Management by Objectives (MBO) to be effective, individual managers must
understand the specific objectives of their job and how those objectives fit in with the overall
company objectives set by the board of directors.
2) Developing action plans
Actions plans specify the actions needed to address each of the top organizational
issues and to reach each of the associated goals, who will complete each action and according
to what timeline.
3) Reviewing Progress:
Performance is measured in terms of results. Job performance is the net effect of an
employee's effort as modified by abilities, role perceptions and results produced. Effort refers
to the amount of energy an employee uses in performing a job.
4) Performance appraisal:
Performance appraisals communicate to employees how they are performing their
jobs, and they establish a plan for improvement. Performance appraisals are extremely
important to both employee and employer, as they are often used to provide predictive
information related to possible promotion.
Advantages
• Motivation – Involving employees in the whole process of goal setting and
increasing employee empowerment. This increases employee job satisfaction and
commitment.
• Better communication and Coordination
• Clarity of goals
• Subordinates have a higher commitment to objectives they set themselves than those
imposed on them by another person.
• Managers can ensure that objectives of the subordinates are linked to the
organization's objectives.
Limitations
• It over-emphasizes the setting of goals over the working of a plan as a driver of
outcomes.
• It underemphasizes the importance of the environment or context in which the goals
are set. That context includes everything from the availability and quality of resources,
to relative buy-in by leadership and stake-holders.

STRATEGIES
According to Koontz and O' Donnell, "Strategies must often denote a general programme of
action and deployment of emphasis and resources to attain comprehensive objectives".
Strategies are plans made in the light of the plans of the competitors because a modern
business institution operates in a competitive environment.
Characteristics of Strategy
• It is the right combination of different factors.
• It relates the business organization to the environment.
• It is an action to meet a particular challenge, to solve particular problems or to
attain desired objectives.
Strategic Planning Process / Strategic Formulation Process
1. Input to the Organization: Various Inputs (People, Capital, Management and
Technical skills, others) including goals input of claimants (Employees, Consumers,
Suppliers, Stockholders, Government, Community and others)need to be elaborated.
2. Industry Analysis: Formulation of strategy requires the evaluation of the
attractiveness of an industry by analyzing the external environment.
3. Enterprise Profile: Enterprise profile is usually the starting point for determining
where the company is and where it should go. Top managers determine the basic purpose of
the enterprise and clarify the firm‘s geographic orientation.
4. Orientation, Values, and Vision of Executives: The enterprise profile is shaped by
people, especially executives, and their orientation and values are important for formulation
the strategy.
5. Mission (Purpose), Major Objectives, and Strategic Intent: Mission or Purpose is
the answer to the question: What is our business?
6. Present and Future External Environment: The present and future external
environment must be assessed in terms of threats and opportunities.
7. Internal Environment: Internal Environment should be audited and evaluated with
respect to its resources and its weaknesses, and strengths in research and development,
production, operation, procurement, marketing and products and services.
8. Development of Alternative Strategies: Strategic alternatives are developed on the
basis of an analysis of the external and internal environment. Alternatively, a firm may
diversify, extending the operation into new and profitable markets.
9. Evaluation and Choice of Strategies: Strategic choices must be considered in the
light of the risk involved in a particular decision.
10. Medium/Short Range Planning, Implementation through Reengineering the
Organization Structure, Leadership and Control: Implementation of the Strategy often
requires reengineering the organization, staffing the organization structure and providing
leadership. Controls must be installed monitoring performance against plans.
11. Consistency Testing and Contingency Planning: The last key aspect of the strategic
planning process is the testing for consistency and preparing for contingency plans.

TYPES OF STRATEGIES
According to Michel Porter, the strategies can be classified into three types. They are
a) Cost leadership strategy
b) Differentiation strategy
c) Focus strategy
The following table illustrates Porter's generic strategies:

a) Cost Leadership Strategy

Firms that succeed in cost leadership often have the following internal strengths:
• Access to the capital required to make a significant investment in production assets; this
investment represents a barrier to entry that many firms may not overcome.
• Skill in designing products for efficient manufacturing, for example, having a
small component count to shorten the assembly process.
• High level of expertise in manufacturing process engineering.
• Efficient distribution channels.
b) Differentiation Strategy
Firms that succeed in a differentiation strategy often have the following internal strengths:
• Access to leading scientific research.
• Highly skilled and creative product development team.
• Strong sales team with the ability to successfully communicate the perceived
strengths of the product.
c) Focus Strategy
The focus strategy concentrates on a narrow segment and within that segment attempts to
achieve either a cost advantage or differentiation. The premise is that the needs of the group
can be better serviced by focusing entirely on it. A firm using a focus strategy often enjoys a
high degree of customer loyalty, and this entrenched loyalty discourages other firms from
competing directly.
A Combination of Generic Strategies
These generic strategies are not necessarily compatible with one another. If a firm attempts to
achieve an advantage on all fronts, in this attempt it may achieve no advantage at all. For
example, if a firm differentiates itself by supplying very high quality products, it risks
undermining that quality if it seeks to become a cost leader. Even if the quality did not suffer,
the firm would risk projecting a confusing image. For this reason, Michael Porter argued that
to be successful over the long-term, a firm must select only one of these three generic
strategies.

POLICIES
Policies are general statements or understandings that guide managers‘ thinking in
decision making. They usually do not require action but are intended to guide managers in
their commitment to the decision they ultimately make.
The first step in the process of policy formulation, as shown in the diagram below, is
to capture the values or principles that will guide the rest of the process and form the basis on
which to produce a statement of issues.
Essentials of Policy Formulation
The essentials of policy formation may be listed as below:
• A policy should be definite, positive and clear. It should be understood by everyone
in the organization.
• A policy should be translatable into the practices.
• A policy should be flexible and at the same time have a high degree of permanency.
• A policy should be formulated to cover all reasonable anticipatable conditions.

Importance of Policies
Policies are useful for the following reasons:
• They provide guides to thinking and action and provide support to the subordinates.
• They delimit the area within which a decision is to be made.
What is Planning Premises?
A planning premise is a set of assumptions that are derived from forecasting the future. It is a logical and
systematic estimate of the future factors that can affect planning. Planning premises provide a background
against which the estimated events take place. These are the events that affect planning. Establishing
planning premises is a critical element in the planning phase, which ensures that all managers in the
organisation are in sync with each other. To explain planning premises, let us consider a few examples from
business and government planning:
● In the budget, there is an announcement of even changes in the tax laws. These are known
conditions on which planning is based.

● A competitor might enter the same market as yours with the same kind of product. This is an
anticipated event; the possibility of that happening is not particular.

Importance of Planning Premises

The premise of planning is the framework on which planning is based. Amid uncertainty surrounding
business and management, it is these planning premises that imply not just assumptions about the future
but also predictions. They are the bedrock on which managers plan the future course of action. Without
proper planning premises, the planning does not have a solid foundation. If panning premises change, the
plans need to change as well. Here are the primary reasons for establishing planning premises:
● They help in well-organised planning.

● The risk of uncertainty is reduced considerably.

 ● There is a reduction in the risk of flexibility.

● Managers can do effective coordination.

● It also increases profitability.

Types of Planning Premises

Planning premises in management are vital in making important decisions that are based on certain
predictions about the future. Managers build the superstructure of planning based on their ability to identify
the crucial, strategic, or limiting factors that allow them to select the proper planning premises. Planning
premises in business management can be classified based on many factors, as described below:
Internal and External Premises
● The premises which exist within the boundaries of the business are internal premises. Some of the
internal premises are men, money, material, and methods. Your planning would be based on how
competent is your workforce and how much money you have at your disposal.

● External premises are derived from the environment that surrounds the business. They are centred
around the market like money market, product market, government policies, growth in population,
etc.
Tangible and Intangible Premises
● Any premise which can be quantitatively measured is a tangible premise. These premises can be
quantified in terms of time, money, and units of production.

● On the other hand, intangible premises cannot be quantified. Some of the intangible premises are
public relations, business reputation, the morale of employees, etc.

Controllable, Semi-Controllable, and Uncontrollable Premises

● Those premises which can be controlled by the management to a large extent come under
controllable premises. Management has a lot of control over their future commitments when it
comes to material, machines, and money.

● The business can partially control some premises or assumptions about the future. These fall under
semi-controllable premises. Few examples of such planning premises are trade union relations,
product demand, etc.

● Those premises which can not be controlled by the management of an organisation come under
uncontrollable planning premises. Some examples are weather conditions, natural disasters, etc.

Constant and Variable Premises

● These premises which do not change irrespective of actions taken are constant premises like men,
money, etc. These premises behave similarly under all circumstances.

● Based on the course of action taken, some premises change which is termed as Variable premises.
These premises cannot be controlled or predicted, for example, the sales volume of a firm, union
and management relations, etc.

Establishment of Planning Premises

Developing Planning Premises needs the planners to do realistic forecasting. Determining planning
premises involves
 ● Calculating the probability of events.

● Analysing changes in consumer behaviour, technology, government policies, etc.

● Implementing systematic investigation to develop the basis for planning.

Predicting future events is a complex process; hence, premises must consider limited assumptions that are
most critical for the plant. A typical process of developing premises in planning is:
● Selecting the Premise - Not all the factors in the environment affect the operations of the business.
The management must list down those premises which directly influence the development of
organisational plans.

● Reviewing Limitations - Several practical factors limit the abilities of an organisation to achieve
its goals. Such limitations should be anticipated and provided for. A few examples of such
limitations are power, labour, money, and material.

● Developing Alternative Premises - Since it is not possible to predict all the factors that can affect
organisational planning, managers must develop a set of alternative premises. These premises are
established based on separate assumptions of future events. The alternative plans are developed
since premises keep changing, some change slowly and some fast.

● Verifying Premises - In an organisation, there are different departments and planning happens at
different levels as per the judgement of people in that department. All these premises are sent to the
top management for their approval. The premises developed by line managers and staff are more
consistent with each other than those of the top executives.

● Communicating Premises - The premises developed through this process are then supported by
budget and various programs. Then the premises are communicated to all those who are part of the
planning process at different levels of business. Documents like ETOP (environmental threat and
opportunity profile) contain planning premises.

DECISION MAKING
Characteristics of Decision Making
• Decision making implies that there are various alternatives and the most
desirable alternative is chosen to solve the problem or to arrive at expected
results.
• The decision-maker has freedom to choose an alternative.
• Decision-making may not be completely rational but may be judgment and emotional.
• Decision-making is goal-oriented.
TYPES OF DECISIONS
a) Programmed and Non-Programmed Decisions: Herbert Simon has grouped
organizational decisions into two categories based on the procedure followed. They are:
i) Programmed decisions: Programmed decisions are routine and repetitive and
are made within the framework of organizational policies and rules.
ii) Non-Programmed Decisions: Non-programmed decisions are decisions taken
to meet non-repetitive problems.
b) Strategic and Tactical Decisions: Organizational decisions may also be classified as
strategic or tactical.
i) Strategic Decisions: Basic decisions or strategic decisions are decisions which are
of crucial importance. Strategic decisions a major choice of actions concerning
allocation of resources and contribution to the achievement of organizational
 objectives.
ii) Tactical Decisions: Routine decisions or tactical decisions are decisions which
are routine and repetitive. They are derived out of strategic decisions. The various
 features of a tactical decision are as follows:
• Tactical decision relates to day-to-day operation of the organization and has to be taken
very frequently.
• Tactical decision is mostly a programmed one. Therefore, the decision can be

made within the context of these variables.

DECISION MAKING PROCESS

The decision making process is presented in the figure below:

1. Specific Objective:
2. Problem Identification:
Diagnosis: Diagnosis is the process of identifying a problem and symptoms.
Analysis: Diagnosis gives rise to analysis.
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:
4. Evaluation of Alternatives:
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.
6. 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.
7. 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.

RATIONAL DECISION MAKING MODEL

The Six-Step Rational Decision-Making Model

1. Define the problem.
2. Identify decision criteria
3. Weight the criteria
4. Generate alternatives
5. Rate each alternative on each criterion
6. Compute the optimal decision