UNIT II
PLANNING AND DECISION MAKING
Planning is a major and primary function of management and a preparatory step for action. It means systematized pre-thinking for determining a course of action in order to achieve some desired result. Planning is essentially a process of deciding in advance what is to be done, when and where it is to be done, how it is to be done, and by whom. To plan is to look ahead and chalk out the future course of operations of an enterprise. Through planning, the manager fixes the objectives of the organization.
According to Koontz and O’Donnell, planning is, “an intellectual process, the conscious determination of courses of action, the basing of decisions on purpose, facts and considered estimates.”
Planning bridges the gap between the present status of the organization and where it wishes to be in future. So in essence, business planning comprises of setting objectives for the organization and developing a plan of action to achieve these objectives.
Nature of Planning
Planning is an integral part of management. The following discussion will explain the nature of planning:
1. Planning is an intellectual process: Planning is intellectual in nature. It is a mental work. A planner must visualize the situations likely to develop in future. A mental exercise is required to foresee the pros and cons of various alternatives. The selection of best alternative from among the ones available will require creative and deep thinking.
2. Primacy of planning: Planning is the first function of the planner. Other functions like organizing, staffing, directing, controlling are followed by planning, and cannot be performed without planning.
3. All managers plan: Every manager in an organization has a planning function to perform. The degree, importance and magnitude of planning depends on the level at which it is performed.
4. Planning is a rational approach: Planning process is a rational approach and helps in taking rational decisions for achieving of organizational goals. An action is rational if it is objectively and intelligently decided. The aim of management is to reach the goals with the application of appropriate resources.
5. Planning leads to efficiency and economy: Planning involves efficient utilization of various resources like capital, labour, machines, materials etc, thus increases efficiency and economy of the organization.
6. Planning should be flexible: Planning process should be flexible to adaptable to the changing business environment. Planning is a dynamic process and it adjusts with the needs and requirements of the situations.
7. Planning is continuous: Planning is a never-ending activity of a manager. All types of situations require continuous planning.
Key Takeaway
The planning function of the management has certain special features. These features throw light on its scope.
(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 neither an exclusive function of top management nor of any IT Company. 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, 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 planning- the first step to management. 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. In other words, thinking for planning must be orderly and based on the analysis of facts and forecasts.
Key Takeaways
Planning is an important function of management. It tells the manager where the organization should be headed. It also helps the organization reduce uncertainty. Let us take a look at some important functions of planning.
1. Planning provides a sense of direction- Planning means coming up with a pre-determined action plan for the organization. It actually states in advance what and how the work is to be done. This helps provide the workers and the managers with a sense of direction and guidance. Without planning their actions would be uncoordinated and unorganized.
2. Planning reduces uncertainty- Planning not only sets objectives but also anticipates any future changes in the industry or the organization. So it allows the managers to prepare for these changes, and allow them to deal with the uncertainties. Planning takes into consideration past events and trends and prepares the managers to deal with any uncertain events.
3. Planning reduces wastefulness- The detailed plans made keep in mind the needs of all the departments. This ensures that all the departments are on the same page about the plan and that all their activities are coordinated. There is clarity in thought which leads to clarity in action. All work is carried out without interruptions or waste of time or resources.
4. Planning invokes innovation- Planning actually involves a lot of innovation on the part of managers. It encourages the manager to broaden their horizons and forces them to think differently. So the managers have to be creative and perceptive.
5. Planning makes decision-making easier- In business planning the goals of the organization have been set, an action plan developed and even predictions have been made for future events. This makes it easier for all managers across all levels to make decisions with some ease. The decision-making process also becomes faster.
6. Establishes Standards- Once the business planning is done, managers now have to set goals and standards. This provides the manager’s standards against which they can measure actual performances. So, planning is a pre-requisite to controlling.
Key Takeaways
Planning is the first step in management. The increasing complexities of business, technological changes, increasing marketing competition, changing consumer preferences have necessitated proper planning. Following are the aims and objectives of planning:
1. To bring certainty in future events: Future is uncertain and full of risks. Planning aims to provide guidance to an organization in bringing certainty in future events, as much as possible, for the achievement of organization goals.
2. To provide specific direction: Planning aims to provide a specific direction for doing various activities in an appropriate manner.
3. Forecasting: Forecasting is the essence of planning. The objective of planning is to predict the future course of events.
4. To bring economy in managerial operations: Bringing economy in managerial operations is an important objective of planning. Planning guides an organization in this regard so that organizations can easily utilize all available resources in the best and cheapest way.
5. To attain pre-determined goals: It is the aim of planning to ensure the achievement of predetermined goals of the organization.
6. To get victory over competitions: Planning provides proper guidance to an organization to get victory over competitors.
Key Takeaways
As planning is an activity, there are certain reasonable measures for every manager to follow. The steps in planning process are enumerated below:
1. Setting Objectives: The planning process begins with the setting of objectives. Objectives are end results which the management wants to achieve by its operations. Objectives are set for the organisation as a whole for all departments, and then departments set their own objectives within the framework of organisational goals.
2. Developing Planning Premises: Planning is essentially focused on the future, and there are certain events which are expected to affect the policy formulation. Such events are external in nature and adversely affect planning, if ignored. Their understanding and fair assessment are necessary for effective planning. Such events are the assumptions on the basis of which plans are drawn. These are known as planning premises.
3. Identifying Alternative Courses of Action: There may be many different ways to act and achieve objectives. All the alternative courses of action should be identified and analyzed.
4. Evaluating Alternative Course of Action: In this step, the positive and negative aspects of each alternative are to be evaluated in the light of pre determined objectives.
5. Selecting One Best Alternative: The best and the most profitable plan, with minimum negative effects, is adopted and implemented. In such cases, the manager’s experience and judgement plays an important role in selecting the best alternative.
6. Implementing the Plan: In this step, managers communicate the plan to the employees clearly in order to convert the plans into action. This step involves allocating the resources, organizing labour and purchasing machinery.
7. Follow-up Action: Monitoring the plan constantly and taking feedback at regular intervals is called follow-up. Monitoring the plans is very important to ensure that plans are being implemented according to the schedule.
Key Takeaways
A decision can be defined as a course of action purposely chosen from a set of alternatives to achieve organizational or managerial objectives or goals. Decision making process is continuous and indispensable component of managing any organization or business activities. Decisions are made to sustain the activities of all business activities and organizational functioning. Decisions are made at every level of management to ensure organizational or business goals are achieved. Further, the decisions make up one of core functional values that every organization adopts and implements to ensure optimum growth and drivability in terms of services and or products offered.
According to Trewatha & Newport, “Decision-making involves the selection of a course of action from among two or more possible alternatives in order to arrive at a solution for a given problem”.
Since it is an ongoing activity, decision making process plays vital importance in the functioning of an organization. Since intellectual minds are involved in the process of decision making, it requires solid scientific knowledge coupled with skills and experience in addition to mental maturity.
Further, decision making process can be regarded as check and balance system that keeps the organisation growing both in vertical and linear directions. It means that decision making process seeks a goal.
Decision-making as key step in planning
1. Facilitates innovation: Proper directions facilitate innovation in the Organization. Due to effective directions, employees may be motivated to come up with innovative ideas, plans and policies.
2. Corporate image: Proper directions help to improve corporate image. Due to effective directions, there can be better performance of the employees. The better performance of the employees can help to develop goodwill in the market.
3. Team work: Directing develops team spirit in the Organization. It is the team work that brings success to the Organization. Due to effective directions of the superior, the subordinates work as a team.
4. Optimum use of resources: Directing facilitates optimum use of resources. Through effective directions, the manager can make optimum use of resources such as:
5. Motivation: Directing facilitates motivation of employees in the Organization. The manager can motivate the subordinates to perform effectively through effective communication and leading. The manager may enhance the motivational level of the subordinates by providing them monetary and non-monetary incentives.
6. Reduce absenteeism: Proper directing helps to reduce absenteeism. For e.g. if a lecturer gives proper directions to the students, then the absenteeism on the part of the students may be reduced considerably.
7. Reduction in wastages: Effective directions help to reduce wastages of resources. The subordinates would make every possible effort to minimize or avoid wastages of resources, wherever possible.
8. Higher efficiency: Proper directing can facilitate higher efficiency in the Organization. Efficiency is the ratio of returns to cost. Due to effective directions, there can be higher returns at reduced costs.
9. Initiates Action: Directing function is a point from where the action starts, subordinates understand their jobs and do according to the instructions given. Whatever plans are made can be implanted only when the actual work starts, the direction becomes beneficial.
Key Takeaway
Decision making is a daily activity for any human being. There is no exception about that. When it comes to business organizations, decision making is a habit and a process as well. In the decision making process, we choose one course of action from a few possible alternatives making use of many tools, techniques and perceptions. Following are the important steps of the decision making process.
Step 1: Identification of the purpose of the decision
In this step, the problem is thoroughly analysed. There are a couple of questions one should ask when it comes to identifying the purpose of the decision.
• What exactly is the problem?
• Why the problem should be solved?
• Who are the affected parties of the problem?
• Does the problem have a deadline or a specific time-line?
Step 2: Information gathering
A problem of an organization will have many stakeholders. In addition, there can be dozens of factors involved and affected by the problem. In the process of solving the problem, we will have to gather as much as information related to the factors and stakeholders involved in the problem. For the process of information gathering, tools such as 'Check Sheets' can be effectively used.
Step 3: Principles for judging the alternatives
In this step, the baseline criteria for judging the alternatives should be set up. When it comes to defining the criteria, organizational goals as well as the corporate culture should be taken into consideration.
Step 4: Brainstorm and analyse the different choices
For this step, brainstorming to list down all the ideas is the best option. Before the idea generation step, it is vital to understand the causes of the problem and prioritization of causes. Then, one can move on generating all possible solutions (alternatives) for the problem in hand.
Step 5: Evaluation of alternatives
We should use our judgement principles and decision-making criteria to evaluate each alternative. In this step, experience and effectiveness of the judgement principles come into play. We need to compare each alternative for their positives and negatives.
Step 6: Select the best alternative
Selection of the best alternative is an informal decision since we have already followed a methodology to derive and select the best alternative.
Step 7: Execute the decision
In this step the decision is converted into a plan or a sequence of activities. The plan is to be executed by oneself or with the help of subordinates.
Step 8: Evaluate the results
Now is the time to evaluate the outcome of our decision. We should see whether there is anything to learn and then we should correct it in future decision making. This is one of the best practices that will improve our decision-making skills.
When it comes to making decisions, one should always weigh the positive and negative business consequences and should favor the positive outcomes. This helps to avoid the possible losses to the organization and keeps the company running with a sustained growth.
Key Takeaways
Different business units use different techniques in decision-making. Some of the most popular techniques are explained below:
1. Marginal Analysis: This technique is used in decision-making to figure out how much extra output will result if one more variable (e.g. raw material, machine, and worker) is added. In his book, ‘Economics’, Paul Samuelson defines marginal analysis as the extra output that will result by adding one extra unit of any input variable, other factors being held constant. Marginal analysis is particularly useful for evaluating alternatives in the decision-making process.
2. Financial Analysis: This decision-making tool is used to estimate the profitability of an investment, to calculate the payback period (the period taken for the cash benefits to account for the original cost of an investment), and to analyse cash inflows and cash outflows. Investment alternatives can be evaluated by discounting the cash inflows and cash outflows (discounting is the process of determining the present value of a future amount, assuming that the decision-maker has an opportunity to earn a certain return on his money).
3. Break-Even Analysis: This tool enables a decision-maker to evaluate the available alternatives based on price, fixed cost and variable cost per unit. Break-even analysis is a measure by which the level of sales necessary to cover all fixed costs can be determined. Using this technique, the decision-maker can determine the break-even point for the company as a whole, or for any of its products. At the break-even point, total revenue equals total cost and the profit is nil.
4. Ratio Analysis: It is an accounting tool for interpreting accounting information. Ratios define the relationship between two variables. The basic financial ratios compare costs and revenue for a particular period. The purpose of conducting a ratio analysis is to interpret financial statements to determine the strengths and weaknesses of a firm, as well as its historical performance and current financial condition.
5. Operations Research Techniques: One of the most significant sets of tools available for decision-makers is operations research. An operation research (OR) involves the practical application of quantitative methods in the process of decision-making. When using these techniques, the decision-maker makes use of scientific, logical or mathematical means to achieve realistic solutions to problems. Several OR techniques have been developed over the years.
6. Linear Programming: Linear programming is a quantitative technique used in decision-making. It involves making an optimum allocation of scarce or limited resources of an organization to achieve a particular objective. The word ‘linear’ implies that the relationship among different variables is proportionate.
The term ‘programming’ implies developing a specific mathematical model to optimize outputs when the resources are scarce. In order to apply this technique, the situation must involve two or more activities competing for limited resources and all relationships in the situation must be linear.
Some of the areas of managerial decision-making where linear programming technique can be applied are:
i. Product mix decisions
ii. Determining the optimal scale of operations
iii. Inventory management problems
iv. Allocation of scarce resources under conditions of uncertain demand
v. Scheduling production facilities and maintenance.
7. Game Theory: This is a systematic and sophisticated technique that enables competitors to select rational strategies for attainment of goals. Game theory provides many useful insights into situations involving competition. This decision-making technique involves selecting the best strategy, taking into consideration one’s own actions and those of one’s competitors.
The primary aim of game theory is to develop rational criteria for selecting a strategy. It is based on the assumption that every player (a competitor) in the game (decision situation) is perfectly rational and seeks to win the game.
In other words, the theory assumes that the opponent will carefully consider what the decision-maker may do before he selects his own strategy. Minimizing the maximum loss (minimax) and maximizing the minimum gain (maximin) are the two concepts used in game theory.
8. Simulation: This technique involves building a model that represents a real or an existing system. Simulation is useful for solving complex problems that cannot be readily solved by other techniques. In recent years, computers have been used extensively for simulation. The different variables and their interrelationships are put into the model.
When the model is programmed through the computer, a set of outputs is obtained. Simulation techniques are useful in evaluating various alternatives and selecting the best one. Simulation can be used to develop price strategies, distribution strategies, determining resource allocation, logistics, etc.
9. Trial and error: Decision making based on trial and error sounds chaotic but it has an established place in business strategy. When using the trial and error method to make decisions, it is important to acknowledge that any failure as a result of decisions made is low risk. It is also vital to reflect deeply on the results in order to understand the causes of the failure and further remove the risks and challenges on the next iteration of the trial and error process. Going in circles is not progression. Heading upwards in a spiral is.
10. Decision Tree: This is an interesting technique used for analysis of a decision. A decision tree is a sophisticated mathematical tool that enables a decision-maker to consider various alternative courses of action and select the best alternative. A decision tree is a graphical representation of alternative courses of action and the possible outcomes and risks associated with each action.
In this technique, the decision-maker traces the optimum path through the tree diagram. In the tree diagram the base, known as the ‘decision point,’ is represented by a square. Two or more chance events follow from the decision point. A chance event is represented by a circle and constitutes a branch of the decision tree. Every chance event produces two or more possible outcomes leading to subsequent decision points.
If a firm expects an increase in the demand for its products, it can consider two alternative courses of action to meet the increased demand:
(a) Installing new machines,
(b) Introducing a double shift.
There are two possibilities for each alternative, i.e. output may increase (positive state) or fall (negative state). The probabilities associated with each state are taken as 0.6 and 0.4 respectively. This information can be presented in a tabular form, known as a pay-off matrix.
Additional machines= (Rs. 3,00,000 × 0.6) + (Rs. 2,00,000 × 0.4)= Rs. 2,60,000
Double shift= (Rs. 2,80,000 × 0.6) + (Rs. 2,40,000 × 0.4)= Rs. 2,64,000
Since the pay-off from introducing a double shift is higher, it may be selected. Though, the decision tree does not provide a solution to the decision-maker, it helps in decision-making by showing the alternatives available and their probabilities.
The decision tree allows the decision-maker to see the application of most of the steps in the decision-making process in one single diagram. The effectiveness of this decision-making technique depends on the assumptions and the probability estimates made by the decision-maker.
Key Takeaway
Following the generation of a vision and mission statement, and the subsequent operations that will allow these to be achieved, smaller facets of the planning process begin to come into play. According to time dimension, planning period is divided into long-range and short-range.
Short-range plans: Short-range plans generally apply to a specific time frame in which a specific series of operations will be carried out, assessed, and measured. The standard short-range plan will represent annual or semi-annual operations with a short-term deliverable. These short-term plans cover the specifics of each day-to-day operation.
Long-range plans: Long-range planning can be defined as the processes used to implement an organization's strategic plan. It's about aligning the business' long-term goals and developing action plans in line with the strategic plan.
Depending upon the type of business, the time scale for long-range plans can vary from three years through to one or two decades. This is particularly the case for organizations such as utilities, large-scale high-tech manufacturers, chemical plants and research companies where the time and costs associated with investments is such that plants take years to build and returns are measured over long periods.
Long-range plans are arguably the most crucial to the continued success of a business, ultimately highlighting the way in which operations interact to achieve long-term profitability and returns on investment. As corporations grow in size and complexity, so do the long-range plans that constitute the interaction of individual processes. Long-range plans are those most closely related to the overall strategic-planning process.
The History of Long-Range Planning
During the 1950s and 1960s, the economy was stable and growing. Organizations experienced substantial growth, and planners started using numerical theory to extrapolate growth predictions. However, the landscape changed in the ‘70s, and the economy suffered an upheaval due to the US's inability to maintain the gold standard. Static long-range strategies of the time could not cope with these upheavals, and many but not all businesses abandoned long-term planning for some time.
Subsequently, a number of events caused further economic instability, including the 1973 oil crisis, the 2008 housing bubble and banking crisis, and more recently, the impact of trade wars. Despite this, savvy organizations adopted long-range planning strategies intended to cushion the business from unpredictable upheaval through techniques, such as the SWOT analysis (Strengths, Weaknesses, Opportunities and Threats), and planned accordingly.
The Relationship between Strategic Planning and the Long-Range Plan
Strategic planning is a structured process, usually carried out by the executive, which determines long-term organizational goals. During this process, executives analyze the organization's current business and determine though various processes a strategic view of what they believe the organization should become.
The final strategic plan will usually consist of a number of statements and goals of what the organization should focus on, how they believe it should look, what markets they should be in and anticipated financial performance.
None of those goals are directly actionable, and this is where the long-range plan comes in, as it contains the steps and actions needed to achieve strategic plan goals.
Techniques for Focusing Long-Range Thinking
Most companies are good at short-term planning and often have excellent strategic plans but fail in the implementation. According to an article in the Harvard Business Review on long-term success, it's because they don't adequately focus on how to bring those new ideas and technologies onboard. Here are four techniques that help focus long-range thinking.
Key Takeaways
A strategy is a broad plan for bringing the organization from the present position to the desired position in future.
Strategies mean preparing one’s own plans, by keeping the competitors in view, so that the objectives of the institution may be achieved, by sustaining the competition. In the words, when plans are prepared to meet the challenges of competitors in view, it is called strategies. Strategy is that behavior of the officers, which aim at achieving success in objectives of oneself or the organization and whose basis, actual or possible functions of others.
According to Alfred D. Chandler, “Strategy is the determination of basic long-term goals and objectives of an enterprise, the adoption of course of action and the allocation of resources necessary for carrying out these goals.”
In the words of Edmund P. Learned, “Strategy is the pattern of objectives, purposes or goals stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be.”
Thus, strategies consist of general programme of action to be pursued for achieving organizational goals. Strategies are formulated by the top management and lower level management is only expected to execute them.
Steps in Strategy Formulation
The following process is followed in strategy formulation:
1. Clarifying Business Objectives and Values: Business strategies are linked to the mission and values followed by a company. All managerial decisions will be formulated to achieve them.
2. Appraisal of External Environment: The external environment consists of economic technological, marketing, political and social factors prevailing at that time. Management should establish a system of forecasting, monitoring and evaluating external environment so that timely strategies may be formed for converting threats into opportunities.
3. Appraisal of Internal Environment: An appraisal of internal environment will help in knowing the strengths and weaknesses of the organization. Unless a detailed review of various activities is undertaken, it will not be possible to frame proper strategies.
4. Examining Alternative Strategies: There may be a gap between the desired results and the actual performance. In order to fill this gap some alternative strategies are required. The pros and cons of alternative strategies should be assessed so that these may be employed in times of need.
5. Choice of Strategy: Various alternative strategies are analysed and their strength in achieving organizational goals are assessed. While making choice of a strategy, the factors such as degree of risk acceptable to the management, results achieved from past strategy, response of owners, values and preferences of top management and timing of the strategy should be taken into account. Selection of a wrong strategy can create problems for the company.
Policies
Policies are general statements or understandings which provide guidance in decision-making to various managers. These are standing plans, which provide guidance to management in the conduct of managerial operations. Policies define boundaries within which decisions can be made and decisions are directed towards the achievement of objectives. Policies also help in deciding issues before they become problems and making it unnecessary to analyse the same situation every time it comes up. Managers can delegate authority within the given parameters and can still retain control over what their subordinates do.
The principles guiding the decisions are called policies. Policies mean those general particulars and guiding principles, which specify the general limitations and line of direction, meaning thereby that while the objectives specify what to do, the policies specify how these are to be achieved. Policies are mainly those which guide the idea in taking decisions. Policies should be clear. These should be in accordance with the objectives.
Key Takeaways
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