Unit 2
Planning
Corporate, Operational, Functional and Proactive Planning
I. Corporate Planning:
The term corporate planning denotes planning activities for the whole enterprise.
The basic focus of corporate planning is to determine the long-term objectives of the organisation as an entire .then to get plans to attain these objectives taking into mind the likely changes within the external environment (macro level). Corporate planning is usually carried out at the top level of management.
“Corporate planning includes the setting of objectives, organising the work, people and systems to enable those objectives to be attained, motivating through the planning process and thru the plans, measuring performance then controlling progress of the plan and developing people through better decision making, clearer objectives, more involvement and awareness of progress.” —David Hussey
Hussey has given a broad definition of corporate planning. It covers various functions of management besides defining planning. Corporate planning is that the total planning activities in the organisation and not the entire management functions.
“Corporate Planning is the continuous process of creating present risk taking decisions systematically and with the greatest knowledge of their futurity; organising systematically the efforts needed to carry out these decisions, and measuring expectations through organised, systematic feedback.” —Peter Drucker
The corporate planning activities are carrying out at the top level. They’re important for the success of the whole organisation. The highest management is liable for the formulation of such plans and is prepared according to the inputs that are given to them either from the environment or the lower levels in the organisational hierarchy. The plans are generally long term and are broad based.
The corporate planning is of two types:
i. Strategic Planning
Ii. Operational Planning
Strategic Planning consists of the method of developing strategies to reach a defined objective. It sets the long-term direction of the organisation during which it wants to proceed in future. According to Anthony it are often defined as the “process of selecting the objectives of the organisation, on changes on these objectives and on the policies that are to control the acquisition, use and disposition of these resources.”
An assessment of available resources is made at the top and then things are planned for a period of time of upto 10 years. It basically deals with the entire assessment of the organisation, strengths capabilities and weaknesses and an objective evaluation of environment is formed for future persuits.
Examples of strategic planning in an organisation may be; planned growth rate in sales, diversification of business into new lines, sort of products to be offered then on. Strategic planning also involves the analysis of various environmental factors specifically with reference to how organisation relates to its environment.
The strategic planning may be carried out serial of steps that include the
1. Specifying Missions and Objectives.
2. Elaborate Environmental Scanning.
3. Strategy Formulation.
4. Strategy Implementation
5. Evaluation and Control
Strategic planning is of prime importance for any organisation as they might specify the other decisions that require to be taken.
II. Operational or Tactical Planning:
Operational planning, is also called tactical or short-term planning, usually, covers one year approximately . Operational planning involves the conversion of strategic plans into detailed and specific action plans. These plans are designed to sustain the organisation in its products Operational planning is done at the middle or lower level of management Operational planning are often defined as follows:
“Operational planning is that the process of deciding, the most effective use of the resources already allocated and to develop an impact mechanism to assure effective implementation of the actions so that organisational objectives are achieved.”
An Operational plan is an annual work plan:
It narrates short term business strategies; it explains how a strategic plan will be put into operation (or what portion of a strategic plan will be put into operation (or what portion of a strategic plan are addressed) during a given operational period (fiscal year).
These plans are to support strategic plans whenever some difficulty is faced in its implementation. Any changes in internal organisation or external environment need to be met through tactical plans.
For examples, there's sudden change in prices of products, difficulty in procuring raw materials, unexpected moves by competitors; tactical plans will help in meeting such unforeseen situations. The success of tactical plan depends upon the speed and adaptability with which management acts to fulfill sudden situation.
Operational planning is concerned with the efficient use of resources already allocated and with the development of a control mechanism to make sure efficient implementation of the action in order that business objectives are attained.
III. Functional Planning:
The planning that's made to make sure smooth working of the organisation taking into account the needs of each and every department. The aim of functional planning is to market standardised management practices for corporate functions within the department’s decentralised corporate management structure.
The following three basic activities need to be carried out in functional planning:
(1) Functional Guidance:
Managers must be told and guided what they must be doing to properly manage corporate functions within the enterprise.
(2) Goal Setting:
Certain quantifiable goals need to be set that would measure the effectiveness of the functional planning. Goals should be meaningful, achievable and measureable.
(3) Functional Assessments:
Functional assessment wraps up the functional planning process. Here the Comparison is formed between the goal setting and therefore the goal achievement. The functional assessment should have the subsequent characteristics:
(i) Substantiation:
Managers who are accountable for corporate functions must explain how resources and activities devoted to their function provide support to the achievement of the corporate priorities and functional targets.
(ii) Measure of Success.
Managers accountable for corporate functions must quantifiably measure the success in meeting goals identified in their functional guidance.
(iii) Foresight:
Managers should be in a position to identify developing gaps and risks faced in their respective functional areas, alongside recommendations to refill those gaps and risks.
Iv. Proactive and Reactive Planning:
Classification of planning into proactive and reactive is based on the organisation’s response to environmental dynamics. Planning is an open system approach and is affected by environmental factors which keep it up changing continuously. However, organisations response to those changes differs. Based on these responses, planning could also be either proactive or reactive.
Proactive Planning:
It is based on the anticipation of the future outcomes and state of affairs that might affect the working of the organisation. Such a planning has got to be broad based, highly flexible and creative by nature.
The organisation that favours this type of planning often anticipates the future and takes necessary steps before the happening of the events. In India, companies like Reliance Industries, Hindustan Lever etc., have adopted this approach and their rate of growth has been much faster than others.
Reactive Planning:
As the name suggests, this type of planning isn't in the anticipation of the future but becomes active only the matter is confronted or has already occurred. This is merely the corrective action that's taken. This approach of planning is beneficial in an environment which is fairly stable over a long period of time.
v. Formal and Informal Planning:
Formal Planning exists in the formal hierarchy of the organisation and is usually carried out in the stepwise process. It's according to the pre expressed policies and the rules of the organisation. This type of planning is completed at a large scale and relies on the logical thinking. The planning process that's adopted is documented, and regular.
Informal Planning is typically carried out in very small organisations where the formal organisation structure may or might not exist. The planning is typically intuitive in nature and is short termed. Since the environment for smaller organisations isn't complex, they do reasonably well with informal planning process.
Vi. Automated Planning:
Automated planning and scheduling may be a branch of AI that concerns the realisation of strategies or action sequences, typically for execution by intelligent agents, autonomous robots and unmanned vehicles. This sort of designing is generally found within the technologically advanced organisations.
Concept
Strategic planning is a process and thus has inputs, activities, outputs and outcomes. This process, like all processes, has constraints. It may be formal or informal and is typically iterative, with feedback loops throughout the process. Some elements of the process may be continuous and others may be executed as discrete projects with a definitive start and end during a period. Strategic planning provides inputs for strategic thinking, which guides the actual strategy formation. Typical strategic planning efforts include the evaluation of the organization's mission and strategic issues to strengthen current practices and determine the need for new programming. The end result is the organization's strategy, including a diagnosis of the environment and competitive situation, a guiding policy.
Michael Porter wrote in 1980 that formulation of competitive strategy includes consideration of four key elements:
- Company strengths and weaknesses;
- Personal values of the key implementers (i.e., management and the board);
- Industry opportunities and threats; and
- Broader societal expectations.
The first two elements relate to factors internal to the company (i.e., the internal environment), while the latter two relate to factors external to the company (i.e., the external environment).[4] These elements are considered throughout the strategic planning process.
Process
Strategy formulation refers to the process of choosing the most appropriate course of action for the realization of organizational goals and objectives and thereby achieving the organizational vision. The process of strategy formulation basically involves six main steps. Though these steps do not follow a rigid chronological order, however they are very rational and can be easily followed in this order.
- Setting Organizations’ objectives - The key component of any strategy statement is to set the long term objectives of the organization. It is known that strategy is generally a medium for realization of organizational objectives. Objectives stress the state of being there whereas Strategy stresses upon the process of reaching there. Strategy includes both the fixation of objectives as well the medium to be used to realize those objectives. Thus, strategy is a wider term which believes in the manner of deployment of resources so as to achieve the objectives. While fixing the organizational objectives, it is essential that the factors which influence the selection of objectives must be analyzed before the selection of objectives. Once the objectives and the factors influencing strategic decisions have been determined, it is easy to take strategic decisions.
- Evaluating the Organizational Environment - The next step is to evaluate the general economic and industrial environment in which the organization operates. This includes a review of the organizations competitive position. It is essential to conduct a qualitative and quantitative review of an organizations existing product line. The purpose of such a review is to make sure that the factors important for competitive success in the market can be discovered so that the management can identify their own strengths and weaknesses as well as their competitors’ strengths and weaknesses. After identifying its strengths and weaknesses, an organization must keep a track of competitors’ moves and actions so as to discover probable opportunities of threats to its market or supply sources.
- Setting Quantitative Targets - In this step, an organization must practically fix the quantitative target values for some of the organizational objectives. The idea behind this is to compare with long term customers, so as to evaluate the contribution that might be made by various product zones or operating departments.
- Aiming in context with the divisional plans - In this step, the contributions made by each department or division or product category within the organization is identified and accordingly strategic planning is done for each sub-unit. This requires a careful analysis of macroeconomic trends.
- Performance Analysis - Performance analysis includes discovering and analyzing the gap between the planned or desired performance. A critical evaluation of the organizations past performance, present condition and the desired future conditions must be done by the organization. This critical evaluation identifies the degree of gap that persists between the actual reality and the long-term aspirations of the organization. An attempt is made by the organization to estimate its probable future condition if the current trends persist.
- Choice of Strategy - This is the ultimate step in Strategy Formulation. The best course of action is actually chosen after considering organizational goals, organizational strengths, potential and limitations as well as the external opportunities.
Definition
Environment Analysis
Organisations are open system of management that constantly interacts with their environment. Environmental analysis is the study of organizational environment to identify and indicate those environmental factors that can significantly influence organizational operations and managers strategic decision making. It is thinking about the unthinkable, and it is seeing new insights rather than extrapolation. Environmental analysis is the discerning (seeing and understanding well) of those aspects of the environment, which shall have the greatest influence on the organisation’s ability to achieve its objectives. Such a discerning is made within and with the help of a framework provided by the knowledge of the organisation’s goals and the existing strategy of the organisation.
Environment Diagnosis
Environment diagnosis is an exercise attempted to identify the factors of causes in the environment that affect the function of an organisation and use such identification as a base for developing plans or strategic to improve or maximize the dynamism and effectiveness of the organisation. Environment analysis is a tool of environmental diagnosis.
Importance
Environmental Diagnosis Analysis and Diagnosis
The purpose of environment analysis and diagnosis is to identify the ways in which changes in various organizational factors may directly and indirectly influence the organisation and management. Managers commonly perform environment analysis in order to understand different activities and happenings inside and outside their organisation and thereby increase the chances of framing sound and effective organisations and managerial strategies by coping with the probable demands of the environment.
Environmental analysis is required due to its needs and importance for the following reasons:
1. Environmental factors are primary impact makers on corporate strategy of organisations.
2. Such analysis helps in anticipating opportunities and to plan alternative responses to those opportunities.
3. It helps in determining threats and developing an early warning system to prevent threats to the organisation or to determine the risks that may be faced by organisation in its future operations.
4. It helps to identify those adjustments or adaptations, which are required for greater accomplishment of organizational objectives.
5. It is sort of SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis which helps in deciding about the rights course of action for managerial to successfully negotiate with the prevalent circumstances around the organisation in order to ensure its survival, growth and development.
6. Environmental information strengthens the planning process and strategy formulation Environmental analysis is well accepted and recognized as an essential ingredients of strategic management. It may, however be noted that the behaviour of the environment may be predictable, partially predictable or unpredictable. Further, the predictable or partially predictable behaviour may be controllable, partially controllable or uncontrollable. Moreover the environment may be homogeneous or diversified and stable or changing.
Limitations
Environmental Influences on Organisation and Management
Environmental factors affect an organisation in two ways
(i) they set the limits or constraints over its functioning,
(ii) they provide opportunity and challenges. The factors themselves act as limits, which are sometimes visible and at other moments, invisible. The environment provides opportunities by way of markets for new products, etc and challenges in the form of competitors etc. We daily find in newspaper headlines about government’s new regulations, competitors, new schemes, consumer revolts, anti pollution activities of the community, trade union, strikes and so on. To deal with these groups is an integral part of all manager’s job. Such a job becomes more important the higher a manager rises in managerial hierarchy.
SWOT
Importance of SWOT Analysis - SWOT Analysis is very important if it comes to staring new projects, development, monitoring current state and implementing changes. The tool allows multidimensional analysis of current subject's condition, including internal (usually controllable) and external (usually uncontrollable or difficult to control) factors to maximize the benefits, minimalize negative consequences of certain actions and, the most important, verify whether the objective is attainable. Each proper prepared section can provide clear insight into controllable and uncontrollable factors which requires adequate effort. Sticking to the analysis plan can be helpful due to focus on the significant areas, setting a realistic objective, organize work and creating as detailed strategy as possible, leaving less room for unpredictable aftermath, verifying environment data and information, internal (strengths, weakness) and external (opportunities, threats). SWOT Analysis is one sufficient technique which helps to gain insight into the past and find solutions for sake of current or future blemish, useful for an existing company as well as a new plan. SWOT analysis helps to reduce weaknesses, while maximizing strong sides of the company. SWOT Analysis can also be used when it comes to accomplishing a specific goal in non-profit organizations or private company. The tool may be used to create a reconsideration during the study.
Lmportance of SWOT analysis results from effects which can be obtained by making better and more efficient management decisions. Most important results of SWOT analysis are:
More efficient strategic decisions
Better strategic planning process
Efficient resource utilisation and allocation
Higher revenue growth and profits
Better chance to discover potential opportunities and react to risks
Easy framework to identify strengths (key success factors) and weaknesses (areas to improve)
It is easy methodology widely used, popular and taught in every management school
Techniques
SWOT is an acronym for strengths, weaknesses, opportunities and threats. Business owners can conduct a SWOT analysis as part of planning. This analysis helps you identify vital areas to either emphasize or improve. Simply listing strengths, weaknesses, opportunities and threats does not provide you with a useful analysis. Techniques for addressing each of the four SWOT categories can improve the accuracy of your analysis.
Strengths
The primary technique for identifying your business strengths involves evaluating which operations actually make money. You may be tempted to list a strength such as excellent customer service, but use the technique of assigning a dollar value to that element before you call it a strength. This may be an estimate, but at least you will have numbers to work with. Listing strengths that do not pay can give you a false sense of security about your business.
Weaknesses
Identify weaknesses by finding parts of your operation that cost you money. If you subsidize part of your business with profits from another part, you are spending money unnecessarily. This technique of assigning costs to each part of your business can help you remove tasks that you don’t need, or you can make plans to profit from operations that are costing you.
Opportunities
The technique for identifying opportunities encompasses finding markets, partnerships, products or services that you actually can pursue. Claiming an opportunity overseas that you can’t really pursue does not help you plan for the future. A good rule of thumb for making sure you identify real opportunities is to count only the ones for which you have a phone number. If you know of someone
You could call to pursue a new opportunity, then chances are the opportunity is real.
Threats
Owning a business means facing risk. While anything is possible, not all threats are probable. Use the technique of including only threats that have direct impact currently on your business or that seem as if they will impact you and your business in the next five years. Creating anxiety over such vague ideas as World War III or a tax hike to 80 percent of your business income only serves to make you anxious about unlikely negative events. Your threat-finding technique should center on actual events, trends and economic forces you can clearly identify.
BCG Matrix
The Product portfolio matrix of the famous consulting firm, Boston Consulting Group is the BCG matrix. It is designed in a way that helps the users to create a long-term strategic plan, help a business grown by reviewing its product portfolio and further decide where to invest, and even decided on whether to develop or discontinue a product. BCG matrix is also known as Share Matrix or Growth matrix.In the year 1968, Bruce Henderson, who is the founder of Boston Consulting Group created the BCG matrix of growth-share. This matrix was published in Perspective, which was a proactive and short essay on BCG. It is a framework of portfolio management. With the help of the matrix, businesses can decide which business out of all, should they prioritize the most.
BCG matrix is based on the analysis of relative market share and growth of the market, the BCG matrix, or the Boston Consulting Group matrix can be divided into four different quadrants. These 4-quadrant as an individual has a distinctive symbol that signifies a certain level of profitability. The four symbols are cash cows, stars, question marks, and dogs. It is through these categorizations, an executive decides on which resources should they focus and which capital can be more profitable, and what are the areas where the losses could be cut.There are many BCG matrix template which can be found online. The commonly used template includes a BCG matrix star, BCG matrix cash cow, BCG matrix dog, and BCG matrix question mark.
The BCG Matrix Benefits
- Managers find the BCG matrix to be very useful as it gets easier for the managers for evaluating the firm’s current portfolio balance based on dogs, stars, question marks, and cash cows.
- It is easy and simple to understand this matrix.
- The future actions to manage a business can be decided with the help of this matrix.
- It becomes easier to identify the future opportunities of a firm.
- The business areas which are weak and no more profitable can be removed with the help of this model.
Competitor analysis
Analyzing your competition plays a vital role in shaping your company’s strategies. It determines your strength and shortcomings within the market. It gives your business a distinct advantage from traditional and non-traditional competition. While analyzing the competition, you can exploit any weakness that belongs to your competition.
However, it becomes difficult to compete from a new competition if you fail to understand a broader competitive space, where a non-traditional brand constantly fight to capture consumer’s mind and space.
Competitive analysis in marketing and strategic management is an assessment of the strengths and weaknesses of current and potential competitors. This analysis provides both an offensive and defensive strategic context to identify opportunities and threats. Profiling combines all of the relevant sources of competitor analysis into one framework in the support of efficient and effective strategy formulation, implementation, monitoring and adjustment.
Competitive analysis is an essential component of corporate strategy. It is argued that most firms do not conduct this type of analysis systematically enough. Instead, many enterprises operate on what is called "informal impressions, conjectures, and intuition gained through the tidbits of information about competitors every manager continually receives." As a result, traditional environmental scanning places many firms at risk of dangerous competitive blindspots due to a lack of robust competitor analysis. It is important to conduct the competitor analysis at various business stages to provide the best possible product or service for customers.
A competitor analysis is important because:
It will help you recognise how you can enhance your own business strategy.
It will tell you how you can out-do your competitors in these areas to keep your customer attention.
Resulting in a competitive edge over others in your sector.
The importance of comparing yourself to your competitors
Before you can start you need to understand who your competitors are. But how do you do this? The best way to determine if another business is a key competitor you need to ask yourself:
What service are they providing?
Are you targeting similar target audiences?
Are they operating closing to you?
There are 3 main types of competitors:
Direct competitors:
“A direct competitor offers the same products and services aimed at the same target market and customer base, with the same goal of profit and market share growth. This means that your direct competitors are targeting the same audience as you, selling the same products as you, in a similar distribution model as you.”
Indirect competitors:
"An indirect competitor is another company that offers the same products and services, much like direct competitors; however, the end goals are different.”
Substitute competitors:
“Another company offering a product or service to your customers that you also provide.”
Once what sort of competitors you would like to be compared against has been considered, it is important to understand how you stand out. That’s the next part of the analysis.
Questions you need to be Asking in your Competitor Analysis
The Product
Are their products the same as yours?
What is their pricing positioning like?
Do their products have any unique selling points (USPs) over yours?
What keywords are they using to describe their products?
The Brand
Does their brand target the same audience as yours?
Who do competitors target?
Are there a lot of mentions of their brand on Google?
Marketing
What channels do they use to market these products?
Do they use social media? If so, then how are they using it? Look at content, followers, activity and engagement.
Do they have marketing materials like a podcast, webinar, blogs, eBooks or anything else?
What campaigns are they running? (both online and offline)
What kind of content are they writing? Is this something you can replicate or do better?
What tone of voice do they use?
Technology
What is their website made with (you can use the tool Built With to identify this)
Is their website easy to use?
What is their website page speed like?
What other sites are linking back to your competitor's site, but not yours?
Customers
Do customers engage with them? How do they communicate?
What sort of content do they respond well to?
What platforms are they using to engage?
Then, add anything else that you think would be useful in formulating your strategy. Now you can begin to identify what your competitive advantage is (if you have one), where you need to improve and how you can act on this information.
How Often Should I Conduct a Competitor Analysis?
To stay ahead you will need to continue to understand your customer requirements while keeping up with the latest industry trends.
Whilst this can differ depending on the industry, we recommend conducting a competitor analysis anytime from once a quarter to once a year. This gives you time to react to your discoveries and benchmark your progress.
Concluding Remarks
In an ever-changing industry, there are always new innovative ways to expand your strategy to stay ahead of your competitors as well as keeping the attention of your customers.
The importance of a competitor analysis cannot be over-estimated. Analysing your competitors is a simple, yet effective marketing tactic to make sure you are keeping up and matching the efforts of others in the industry.
This prevents you from getting ‘lost in the noise’ of your competitor’s efforts, so you can implement a marketing strategy that will strengthen your online position and expand your online footprint.
Techniques
One common and useful technique is constructing a competitor array. The steps may include:
Define the industry – scope and nature of the industry.
Determine who the competitors are.
Determine who the customers are and what benefits they expect.
Determine the key strengths – for example price, service, convenience, inventory, etc.
Rank the key success factors by giving each one a weighting – The sum of all the weightings must add up to one.
Rate each competitor on each of the key success factors.
Multiply each cell in the matrix by the factor weighting.
Two additional columns can be added. In one column, a company can be rated on each of the key success factors (try to be objective and honest). In another column, benchmarks can be listed. They are the ideal standards of comparisons on each of the factors. They reflect the workings of a company using all the industry's best practices.
The purpose of a competitor analysis is to understand your competitors’ strengths and weaknesses in comparison to your own and to find a gap in the market.
Concept
Business establishes, grows or operates and dies in environment. It exchanges resources in environment. It collects inputs i.e. Man money, materials, machines etc. And provides output i.e. Goods and services in the environment. Environment means surrounding. Business environment defines as a force that affects on organizational performance. It includes internal an eternal factors. It provides opportunities and threats. Several internal and external factors directly or indirectly influence business operations. While some of these are within the business’s control, most of these are not; and the business has to adapt itself to avoid being affected by changes in such factors. Both of them combined forms the business environment. Today’s fast-paced business world witnesses a trend of a rather dynamic business environment – that is, it’s never stable. Hence, keeping track of these changing trends, demands, strategies, and policies is crucial in the business world.
A business environment is a combination of internal and external factors and forces that significantly influence the operations of a business.
The business environment comprises an internal and external environment that directly or indirectly affects business operations.
Internal Environment: It includes all the factors that are well within the control of a company. These factors are relatively predictable and can be worked on by the company to eliminate forces that negatively impact its operations.
External Environment: It includes factors that exist outside the company’s control. They tend to be unpredictable as a company cannot possibly control or predict a change in them. Their unpredictable nature has the potential to abruptly hinder or even boost a company’s functioning.
Components Of Business Environment
The business environment can be categorized into two types based on the factors within the control or outside the control of a business.
Internal Environment
The internal business environment constitutes several internal forces or elements within the control of a business that influences its operations. These include:
Value System: It is the ethical belief that guides the business towards achieving its mission and objective. The value system includes all components that form a business’s regulatory framework – organisational culture, climate, work processes, management practices and organisational norms.
Vision, Mission, and Objectives: The vision, mission, and objective of a business relate to what it wants to achieve or accomplish in future. It is the reason why the business exists.
Organisational Structure: It outlines how the activities are directed within the organisation to achieve its goals. It includes the rules, roles, and responsibilities, along with how tasks are delegated and how the information flows among the organisation’s levels.
Corporate Culture: It is a powerful system of shared norms and attitudes that works as a homogenising factor for an organisation’s employees and gets appropriated by them.
Human Resources: Human resources form all the employees and other personnel associated with the business. It forms the most valuable asset of the organisation as success or failure depends on it.
Physical Resources and Technological Capabilities: It includes tangible assets and the technical know-how that play an essential role in ascertaining the business’s competitive capability and future growth prospects.
External Environment
External components are those factors that a business cannot control. These exist beyond a business’ jurisdiction and supervision limit. External components influencing a business environment are further classified into two categories:
- Micro Environment
- Macro Environment
- Micro Environment
Micro environment is the business’s immediate external environment that influences its performance as it has a direct bearing on the firm’s regular business operations. It includes factors outside of the business’s control but can be analyzed and worked upon by managing the business to prevent any business losses.
Micro factors include:
- Customers comprise the target group of the business.
- Competitors are other market players who target a similar target group and provide similar offerings.
- Media is the channel the business use to market its offering to the customer.
- Suppliers include all the parties that provide the business with the resources it needs to perform its operations.
- Intermediaries comprise the parties involved in delivering the offering to the final customers.
- Partners are all external entities like advertising agencies, market research organisations, consultants, etc., who conduct business with the organisation and satisfy customer needs.
- Public includes any group with actual or potential interest in the business’s operations or a group that affects its ability to serve its customers.
- Macro Environment: PESTLE
The macro environment includes remote environmental factors that influence an organisation. The extent of influence a macro element can have on a business is significant as they usually affect the industry as a whole. These factors are classified under PESTLE: P – Political, E – Environmental, S – Social, T – Technological, L – Legal, E – Economical.
Pestle Analysis Business Environment
Political Factors comprise government policies, political stability, corruption in the system, tax policies, labour laws, and trade restrictions that affect the business or the industry.
Economical Factors relate to the economy of the country. They include economic growth, exchange rate, interest and inflation rates, etc.
Social Factors comprise the demographics of the country. They include population growth rate, age distribution, career attitudes, health consciousness, etc.
Technological Factors pertain to innovation in technology that affects the operations of the business. This refers to automation, research and development activities, technological awareness, etc.
Legal Factors are laws that affect business operations. They include business-specific, industry-specific, and even state-specific laws.
Environmental Factors comprise of all those that influence or are determined by the environment a business operates in. It includes the weather, climate, environmental policies, and even pressure from NGOs to care for the environment.
Concept
More than everything else, the capacity to make sound, convenient choices separates a fruitful director from a non-effective. It is the obligation of chiefs to settle on excellent choices that are acknowledged and executed in an ideal style. By all accounts the choices should be firm, guessed, unforeseen, adaptable, improved, affecting, intuitional, non-critical, objective, operational one. One of the main elements of a director is to take choices. Whatever an administrator does, he does through management.
Decision Making Process
Identify the decision: The initial phase in creation the correct choice is perceiving the issue or opportunity and choosing to address it. Decide why this choice will have any kind of effect to your clients or individual representatives.
Gather information: Next, it's an ideal opportunity to accumulate data so you can settle on a choice dependent on realities and information. This requires making a worth judgment, figuring out what data is applicable to the current choice, alongside how you can get it
Identify Alternatives: Once you have an away from of the issue, it's an ideal opportunity to distinguish the different arrangements available to you. All things considered, you have various alternatives with regards to settling on your choice, so it is essential to concoct a scope of choices.
Weight of evidence: In this progression, you should assess for attainability, agreeableness and allure to realize which option is ideal. It very well might be useful to search out a confided in second feeling to increase another viewpoint on the current issue.
Choose among alternatives: When it's an ideal opportunity to settle on your choice, be certain that you comprehend the dangers associated with your picked course. You may likewise pick a mix of options since you completely handle all significant data and expected dangers.
Take action: Next, you should make an arrangement for execution. This includes recognizing what assets are required and picking up help from workers and partners.
Review decision: A frequently ignored yet significant advance in the decision making cycle is assessing your choice for adequacy. Ask yourself what you progressed admirably and what can be improved next time.
Techniques
Decision-making is a step-wise process. There are certain highly effective as well as systematic approaches that can help us in taking the right decisions with great consistency. While there is nothing that can guarantee error-free decision-making, some decision-making methods can reduce the likelihood of making poor decisions.
Command method
In this method, decision-making is an executive power, and the decisions are taken by a central authority. This is an authoritative or dictatorial method as it doesn’t necessarily involve the opinion of other stakeholders. One of the major drawbacks of this method is ignorance about alternate options or opinions.
At the same time, this is also the fastest and clearest decision-making process as it doesn’t involve conflicts and discussions with other people. This decision-making technique is beneficial in emergencies when there is not enough time to hold discussions or undertake lengthy analysis or review processes.
Consultation
Consultation is the commonest among all the decision-making techniques for taking long-term decisions. Under this technique, the decision-maker seeks inputs from others and considers them diligently, but the eventual power of decision remains with her.
It usually takes longer when you apply this technique compared to the time the command decision-making methods as it involves taking the opinions of multiple people and in-depth evaluation and discussions. This process makes others feel valuable as it takes into account their opinions. It can do wonders for employees’ satisfaction and loyalty as they would feel involved with the decision-making process even though the final decision is not taken by them.
Voting
Voting is considered one of the most democratic techniques of decision-making in management. During this process the available options are brought to the notice of all group members and each action is deliberated upon. Once the discussions are complete, the present members vote in favor of the option they find most suitable. The option selected by the majority of the voters is regarded as the final decision.
Voting is the preferred decision-making method among committees, boards of directors, or senior company executives. Voting techniques of decision-making in management are time-bound which ensures that the process does not drag for too long.
Brainstorming
Brainstorming is among the various techniques of decision-making that proves beneficial when there are no clear options in sight. Under this technique, all group members get together to find options through discussion and debate.
Decisions related to strategy, policy-making, laying down of rules and procedures and operations usually involve a lot of brainstorming. This is one of the lengthier processes of decision-making as there are usually a lot of ideas and differences of opinions that have to be overcome before a final decision is taken.
Multi-point analysis
This is easily among the best decision-making methods while going for an acquisition or a major purchase. Under this technique, businesses undertake a systematic evaluation of all options available to them. Factors such as cost, return on investment, quality, performance, and skill required, among other relevant points, get evaluated.
Suppose a company needs to buy a fleet of vehicles for transporting its employees safely. Various vehicle makers will submit their proposals which will then be evaluated on factors such as comfort, mileage, safety, number of passengers, and driving ease.
Consensus
Among all the decision-making techniques, the consensus method is the most difficult and time-consuming. In this process, the group holds several rounds of discussions until everyone unanimously agrees upon a decision.
Since this is one of those decision-making methods that requires everyone to overcome their differences and decide in favor of one option, it often drags on endlessly without any result.
Barring scenarios where the decision affects all members of the group directly and they are all equal stakeholders in the decision, this is among the techniques of decision-making in management that should be rarely used.
Importance
According to Peter Drucker these are the 5 elements of an effective decision making process.
1. The Problem Rationalization.
The clear rationalization that the problem was generic and could only be solved through a decision that establishes a rule or a principle. Know the problem you are solving.
2. The Boundary Conditions.
The definition of the specifications that the answer to the problem has to satisfy, that is, of the “boundary conditions.” Know your range of options that will still count as success.
Putting decisions into place usually requires compromises along the way or dealing with unforeseen events.
If your decision depends on everything going perfectly well, you’re in trouble. If you don’t know the minimum your decision needs to accomplish, then you can end up taking compromises too far.
3. The Right Thing to Do.
Before you decide what’s feasible, first figure out what the right thing to do is. Only then the right decision can be made.
4. Action.
Mere taking of decisions is not enough. We have to turn decisions into actions. So, decisions should be such that they are possible of turning into action.
5. Feedback.
Get feedback on what’s working and what’s not. Without knowing how a decision is working, its effectiveness cannot be measured.
We make decision every day. Some decisions are more important than others.
What’s important is that when it comes to making better decisions that you figure out a process that works for you, and helps you make better decisions, more consistently, and in a variety of scenarios, whether for work or in your personal life.
Impact of Technology on decision making
Technology is ubiquitous in all phases of the decision-making process. At the data collection stage, people use technology to access information—from Google, Wikipedia, or other sources, and this information influences the decision maker in the following decision steps. Technology helps people filter, analyze, and process information as well as formulate alternatives and evaluate them, whether consciously or unconsciously. In his book Predictably Irrational, Ariely (2010) showed the way products and their prices are displayed on a website can induce people to buy them. Any information, even covert, affects the subconscious. For example, coloring a shopping button orange encourages people to click and buy much more than other colors (Ariely, 2010).
1. The extent of technology's involvement in the decision-making process
Before analyzing the factors that affect the decision-making process, we examine the degree of integration (and intervention) of the technology in this process. A technology that is minimally involved in the decision-making process will have minimal impact on the process, and a technology that is significantly involved in the decision-making process will have a major impact on the process. Performing this analysis allows us to estimate the magnitude of the technological effect of the factors that are discussed below.
2. The amount of information and its reliability
Technology enable people to access a large amount of digitally stored information from all over the world. Meehl (2013) was the first researcher to argue that decisions can be simplified to a linear formula, leading to better decisions. Edwards (1954) showed that by focusing on a small number of variables (on average, about three) rather than performing complex calculations, people can make better decisions. Large amounts of information can cause “information overload” (Chan, 2001; Hurwitz et al., 2020), which interferes with the decision process by increasing cognitive load, and other negative influences such as increasing heart rate (Nowak et al., 2018).
Reducing the amount of information is not sufficient to increase decision quality per se. The reliability of the information also plays a role. A study of 460 sites in 113 countries showed that about 35% of medical websites and about 75% of financial sites provided poor and unreliable information (Messaris & Humphreys, 2006, pp. 145). This does not prevent users from thinking that the information on these sites is reliable and accurate and acting on it. Regarding personal health, for example, people have been shown to seek medical information online before they even talk to their doctors, many times resulting in panic and unnecessary medication (Hesse et al., 2005).
Large amounts of information and unreliable information impair almost every decision-making stage, from filtering data to weighing alternatives, as it is very difficult to filter and process large amounts of data, and it is difficult to draw proper and reliable conclusions. Therefore, technology should provide reliable information at the precise time of relevance for a specific decision.
3. Frequent exposure to information
In addition to the amount of information and its credibility, frequent exposure to information can also affect a person's decision making. Studies of “fake news” dissemination in democratic elections have shown that social networks may bias the election. The researchers assumed that frequent exposure to information could make people believe in the information. The more frequent the exposure, the more likely it is that a person will be inclined to believe that the information is, more evidence based, or more reliable (even if it is false; Allcott & Gentzkow, 2017; Bossetta, 2018). This assumption is based on a bias called the availability heuristic, a mental shortcut for making decisions on the basis of what is most dominant or accessible in memory (Tversky & Kahneman, 1974). Similarly, web users tend to assign higher credibility to websites that are rank higher in a search engine (Pan et al., 2007).
Biased decisions as a result of frequent exposure to information is often reflected in the data collection phase and causes biases in filtering, analysis, and information processing, as well as in the alternative-weighing phase. Therefore, it is preferable to maintain balanced information exposure for all alternatives, so as not to bias and favor one alternative over another only because of the amount of exposure.
Many technologies do not allow this to be monitored, although Facebook has begun to take an active part in this field. In addition to fighting fake news, for political advertisements they now also make sure that their users are equally exposed to every candidate in a contest (but still within each candidate's budget limit; e.g., Sanz & Thorbecke, 2020).
4. Digital amnesia
Digital amnesia (or the “Google effect”) is the tendency for people to forget information they can find quickly by using online search engines (Sparrow et al., 2011). A side effect of this phenomenon is that people might believe they are smarter than they really are, since they think information is easily accessible to them. In addition, there is a high correlation between the development of information-intensive technologies (big data) or smart devices and an increase in this phenomenon (Dirin et al., 2019). Digital amnesia impairs the data collection phase, as people may forget the data they have compiled. People should therefore be made aware that without documentation of the data collected, it is very difficult to overcome this bias.
5. Defaults
Using defaults in partial automation technology can streamline and shorten decision time but on the other hand can cause one of the strongest biases in the human decision process. When people make decisions with a preselected (default) option, they are more likely to choose this option, as it is easy to implement (Thaler & Sunstein, 2008). In the experiment by Skitka et al. (1999) described above, part of the problem was that the default was the solution proposed to the pilots by the flight computer, resulting in the pilots accepting the proposed solution even when it contradicted their training and other indications.
Defaults may be significantly stronger in some areas (e.g., consumption decisions; see Thaler & Sunstein, 2008) and less effective in others (e.g., decisions concerning the environment). Also, defaults are more effective when they operate through endorsement (defaults that are seen as conveying what the choice architect thinks the decision maker should do) or endowment (defaults that are seen as reflecting the status quo; Jachimowicz et al., 2019). Defaults act as a stressor on the alternative-weighing stage and can thus have a very strong influence on the decision maker.
6. Automation
As we mentioned above, we are interested in partially automated technologies, in which a person can decide to accept an action, reject it, or choose an alternative. Such a choice architecture is usually aimed at simplifying the decision process but is prone to biases. Kahneman (2003a) described two types of thinking procedures. System 1 is more intuitive and implosive and processes information almost automatically through recovery and inclusion, aided by imagination and emotion. System 2 is slower but rational and systematic. System 1 solves problems quickly and with minimal effort but is therefore prone to decision biases. Therefore, a technology that simplifies the decision process, making it more automatic, is prioritizing System 1 over System 2 to perform its operations. This, on the one hand, reduces the decision time, but on the other hand it exposes the decision maker to many mistakes.
Computer monitors and decision aids are increasingly common additions to critical decision-making contexts such as intensive care units, nuclear power plants, and aircraft cockpits. These accessories are aimed at reducing human error. Skitka et al. (1999) tested their effect on pilots. The researchers compared error rates in a mock flight task with and without a computer that supervised the pilot and recommended real-time decisions. The pilots tended to accept the computer recommendation even when it contradicted their training and the indications of other instruments. The authors explained that the high error rate was related to the pilots being used to accepting computer recommendations in real flights. In other studies, automation has been shown to increase complacency for both experts and naive users (Parasuraman & Manzey, 2010).
Automation can impair data analysis and processing, formulating alternatives, and weighing alternatives in the decision-making process. People should strive to use technology that is not too systematic, something that reduces complacency.
7. User experience
Some have argued that research on the interface through which content is presented is as important as research on the content itself (Brasel & Gips, 2014; Jansson-Boyd, 2011). Surprising? The normative approach to decision making argues that importance should only be attributed to the content itself. However, many studies have proved that interfaces can subconsciously influence decision making (Jansson-Boyd, 2011; Kim, 2016; Robins et al., 2010; Robins & Holmes, 2008). These studies showed that platforms that require touch (such as a touch screen) increased a phenomenon called the endowment effect (Thaler, 1980), an emotional bias that causes individuals to value an owned object higher, often irrationally. Brasel and Gips (2014) showed that increasing the endowment effect in a mobile interface increased the confirmation bias (the tendency to interpret, favor, and remember information in a way that confirms beliefs and hypotheses while giving disproportionately less attention to information that supports alternative options).
Studies also showed that holding a product before buying it increased the likelihood of doing so; people also reported a great deal of satisfaction with mobile browsing, and advertising on mobile platforms far outperformed advertisements on mobile platforms (Brasel & Gips, 2014; Jansson-Boyd, 2011). Concentrating on designing a user-friendly interface ensures quick and accurate interpretation but on the other hand opens up a lot of biases.
Accepting technology as a source of authoritative information can also affect the perception of reliability derived from information accessed with that technology. Studies have shown a link between a website's reputation, its graphic design, and the degree of people's trust in the content found on the site (Robins et al., 2010).
These biases can impair decision making in the information analysis phase and in the alternative-weighing phase. Therefore, a convenient user interface helps prevent many distractions, but care should be taken to reduce resulting biases. Convenient user interfaces can increase the confirmation bias and may cause unreliable information to appear reliable.
8. Emotions and technology
Technologies are capable of conveying and mediating many emotions, and they can generate positive or negative emotions (Loderer et al., 2020). On the other hand, there are emotions that technologies cannot properly convey. Technologies were found to suppress a person's empathy, a very negative by-product, since empathy helps people make better decisions for society (Shank, 2014).
Affective computing is the research and development of systems and devices that can identify, interpret, process, and even respond to a person's emotional state. Affective computing can be very useful in many areas. Many software programs appear to save lives by identifying users' emotional state and providing assistance, for example by recommending relevant links. Other software can help students learn online while providing affective feedback on their work (Brigham, 2017). Some technology developers may take advantage of affective computing. Ariely (2016) showed that internet marketing is more effective through mobile devices. He explained that consumers are influenced by time pressure, and mobile advertisements increase the sense of time pressure, leading to impulse purchase decisions.
Emotions play an important role in decision making and are widely discussed in the literature (Andrade & Ariely, 2009; Israel et al., 2019; Lahav et al., 2019; Naqvi et al., 2006; Shavit et al., 2016). Emotions can help a person make better decisions. But when emotions are manipulated or when a person's experiential system does not properly represent their emotions, emotions can disrupt decision making at the alternative-weighing stage of the process. We suggest, therefore, that technology should not suppress or manipulate people's emotions but can help people with emotional decision making while maintaining neutrality in the process.
Key Takeaways:
- One of the main elements of a director is to take choices. Whatever an administrator does, he does through management.
- Decision-making is a step-wise process. There are certain highly effective as well as systematic approaches that can help us in taking the right decisions with great consistency.
References-
- Principles & Practices of Management: L. M. Prasad
- Principles of Management: P. C. Tripathy & P.N. Reddy
