UNIT 3: PLANNING

The necessity for planning arises because of the fact that business organisations have to operate,
survive and progress in a highly dynamic economy where change is the rule, not the exception. The
change may be sudden and extensive, or it may be slow and almost imperceptible. Some of the
important forces of change may be: changes in technology, changes in population and income
distribution, changes in the tastes of consumers, changes in competition, changes in government
policies etc. These changes often give rise to innumerable problems and throw countless challenges.
Most of these changes are thrust on managers thus, managers are forced to adjust their activities in
order to take full advantage of favourable developments or to minimise the adverse effects of
unfavourable ones

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 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.

Importance 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.
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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.

Types of Plans

1. Operational plans: The specific results expected from departments, work groups, and individuals
are the operational goals. These goals are precise and measurable. Thus an operational plan is one
that a manager uses to accomplish his or her job responsibilities. Supervisors, team leaders, and
facilitators develop operational plans to support tactical plans. Operational plans can be a single-use
plan or an on-going plan.

(a) Single-use plans: These plans apply to activities that do not recur or repeat. A onetime
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.

Example: A budget: Because it predicts sources and amounts of income and how much they are used for
a specific project.

(b) Continuing or on-going plans: These are usually made once and retain their value over a period
of years while undergoing periodic revisions and updates.

Example: A policy: Because it provides a broad guideline for managers to follow when dealing with
important areas of decision making.

A procedure: Because it explains how activities or tasks are to be carried out.

A rule: Because it tells an employee what he or she can and cannot do.

2. 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. Tactical plans are concerned with shorter time frames and
narrower scopes than are strategic plans. These plans usually span one year or less because they are
considered short-term goals. Long-term goals, on the other hand, can take several years or more to
accomplish. Normally, it is the middle manager’s responsibility to take the broad strategic plan and
identify specific tactical actions.

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3. Strategic plans: A strategic plan is an outline of steps designed with the goals of the entire
organisation as a whole in mind, rather than with the goals of specific divisions or departments.
Strategic planning begins with an organisation’s mission. Strategic plans look ahead over the next two,
three, five, or even more years to move the organisation from where it currently is to where it wants
to be. Requiring multilevel involvement, these plans demand harmony among all levels of
management within the organisation. Top-level management develops the directional objectives for
the entire organisation, while lower levels of management develop compatible objectives and plans to
achieve them. Top management’s strategic plan for the entire organisation becomes the framework
and sets dimensions for the lower level planning.

4. Contingency plans: Intelligent and successful management depends upon a constant pursuit of
adaptation, flexibility, and mastery of changing conditions. Strong management requires a “keeping all
options open” approach at all times - that’s where contingency planning comes in.

Contingency planning involves identifying alternative courses of action that can be implemented if
and when the original plan proves inadequate because of changing circumstances.

Steps in the Planning Process

Planning is a vital managerial function. It is intellectually demanding. It requires a lot of time and
effort on the part of planners. They must adopt a systematic approach so as to avoid pitfalls, errors
and costly mistakes which may upset the whole business later on. Such a systematic approach may
consist of the following steps:

1. Establishing objectives: The first step in the planning process is to identify the goals of the
organisation. The internal as well as external conditions affecting the organisation must be thoroughly
examined before setting objectives. The objectives so derived must clearly indicate what is to be
achieved, where action should take place, who is to perform it, how it is to be undertaken and when is
it to be accomplished. In other words, managers must provide clear guidelines for organisational
efforts, so that activities can be kept on the right track.

2. Developing premises: After setting objectives, it is necessary to outline planning premises.

Premises are assumptions about the environment in which plans are made and implemented. Thus,
assumptions about the likely impact of important environmental factors such as market demand for
goods, cost of raw materials, technology to be used, population growth, government policy, etc. on the
future plans are made. The demand for fuel efficient vehicles in the late 1980s has compelled virtually
all automobile manufacturers in India to go in search of collaborative agreements with foreign
manufacturers from Japan, Germany, USA, etc. Plans should be formulated by the management,
keeping the constraints imposed by internal as well as external conditions in mind.

3. Evaluating alternatives and selection: After establishing the objectives and planning premises,
the alternative courses of action have to be considered. Liberalisation of imports television sets,
electronic sets, electronic equipment videos, computers, fuel efficient vehicles, etc. Thus, changes in
government policy, technology, competition, etc. pose several alternatives before manufacturers, from
time to time, regarding the product they should manufacture. Such alternatives have to be carefully
evaluated against factors like costs, associated risks involved, benefits likely to arise, availability of
spare capacity, etc. The pros and cons as well as the consequences of each alternative course of action
must be examined thoroughly before a choice is made.

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4. Formulating derivative plans: After selecting the best course of action, the management has to
formulate the secondary plans to support the basic plan. The plans derived for various departments,
units, activities, etc., in a detailed manner are known as ‘derivative plans’. For example, the basic
production plan requires a number of things such as availability of plant and machinery, training of
employees, provision of adequate finance, etc. To ensure the success of a basic plan, the derivative
plans must indicate the time schedule and sequence of performing various tasks.

5. Securing cooperation and participation: The successful implementation of a plan depends, to a

large extent, on the whole-hearted cooperation of the employees. In view of this, management should
involve operations people in the planning activities. Suggestions, complaints and criticisms from
operating personnel help management rectify the defects in plans and set things right in the beginning
itself. Involvement of subordinates in planning has the unique advantage of getting a practical view of
those closer to the scene of operations. According to Koontz, ‘plans have to be set in an atmosphere of
close participation and a high degree of concurrence’. Participation enables employees to give their
best to plans. They are also motivated to carry out the plan to the best of their ability.

6. Providing for follow-up: Plans have to be reviewed continually to ensure their relevance and
effectiveness. In the course of implementing plans, certain facts may come to light that were not even
thought of earlier. In the light of these changed conditions, plans have to be revised. Without such a
regular follow-up, plans may become out-of-date and useless. Moreover, such a step ensures the
implementation plans along right lines. Management can notice shortcomings in time and initiate
suitable remedial steps. A continuous evaluation of plans also helps to develop sound plans in future,
avoiding mistakes that have surfaced while implementing the previous plans.

Business Forecasting:

Forecasting is the process of estimation in unknown situations. Business forecasting is a systematic

attempt to probe into the future, so as to identify the threats and opportunities and achieve goals
successfully by making and implementing well designed plans of action. Business forecasting helps in
analysing the economic, political and market information to reduce the risks involved in making
business decisions and long-range plans. Forecasts make management think ahead and give
singularity of purpose to planning by concentrating attention on the future. Business forecasting
involves a 'look ahead' approach in business.

Business forecasting involves a wide range of tools, including simple electronic spread sheets,
Enterprise Resource Planning (ERP) and Electronic Data Interchange (EDI) networks, advanced
supply chain management systems, and other Web-enabled technologies.

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Essential Components in Business Forecasting

Redfield, in a famous article in Harvard Business Review, identified the following essential elements in
business forecasting:

1. Developing the groundwork: The known and available information regarding the growth of the
company, the industry in which the company is positioned, the growth of the product lines of the
company, etc., is put to investigation in the first stage. The basic purpose is to prepare a ground work
on which future predictions can be based.

2. Estimating future business: Against the backdrop of the information collected, an estimate of
future prospects of business is made by management. The trends are projected by management after a
step-by-step procedure where the information is put to close scrutiny and analysis. These probable
trends should not be taken as absolute guides to executive action, they can be taken as intelligent
guesses at this stage.

3. Comparing the actual with estimated results: To ward off dangers arising from wrong
anticipation, a periodic comparison of actuals with estimated results is made at this stage. The
forecast provides the measurement apparatus and helps in tracking down reasons for major
differences resulting in unanticipated gains/losses.

4. Refining the forecast process: The above three-step process helps executives in gaining
proficiency in constructing dependable forecasts. As time progresses they are able to refine, sharpen
and adjust the forecasting techniques to meet the changing needs of business.

MANAGEMENT BY OBJECTIVES (MBO)

MBO was first popularized by Peter Drucker in 1954 in his book 'The practice of Management‘. It is a
process of agreeing within an organization so that management and employees buy into the objectives
and understand what they are. It has a precise and written description objectives ahead, timelines for
their motoring and achievement. The employees and manager agree to what the employee will
attempt to achieve in a period ahead and the employee will accept and buy into the objectives.

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.

4. MBO focuses attention on appropriate goals and plans.

5. MBO facilitates control through the periodic development and subsequent evaluation of individual
goals and plans.
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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.

The managers of the various units or sub-units, or sections of an organization should know not only
the objectives of their unit but should also actively participate in setting these objectives and make
responsibility for them. Management by Objective (MBO) systems, objectives are written down for
each level of the organization, and individuals are given specific aims and targets.

Managers need to identify and set objectives both for themselves, their units, and their organizations.

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. An overall, top-level action plan that depicts how each strategic goal will
be reached is developed by the top level management. The format of the action plan depends on the
objective of the organization.

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. Abilities are personal
characteristics used in performing a job and usually do not fluctuate widely over short periods of time.
Role perception refers to the direction, in which employees believe they should channel their efforts
on their jobs, and they are defined by the activities and behaviours they believe are necessary.

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. Appraisals can also provide input for determining both
individual and organizational training and development needs. Performance appraisals encourage
performance improvement. Feedback on behavior, attitude, skill or knowledge clarifies for employees
the job expectations their managers hold for them. In order to be effective, performance appraisals
must be supported by documentation and management commitment.

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 – Frequent reviews and interactions between superiors and
subordinates help to maintain harmonious relationships within the organization and also to solve
many problems.
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• 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

There are several limitations to the assumptive base underlying the impact of managing by objectives,
including:

• 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.

• Companies evaluated their employees by comparing them with the "ideal" employee. Trait appraisal
only looks at what employees should be, not at what they should do.

When this approach is not properly set, agreed and managed by organizations, self-centered
employees might be prone to distort results, falsely representing achievement of targets that were set
in a short-term, narrow fashion. In this case, managing by objectives would be counterproductive.