Principles of Management

UEM
 Management – Meaning & Definition
“Management is the art and Science of getting the maximum, possible output from the
least of input, that is, resources, at minimum costs, and in a manner that satisfies all
the stake holders of the organization, that is, shareholders, employees, suppliers
etc… and also contributes to the development of the nation as a whole.”

Management can be defined as an effort for getting things done in order to achieve the
pre-determined goals of the concern through coordination of human and other
elements.

According to Henri Fayol – “To manage is to forecast and plan, to organize, to command,
to coordinate and to control.”
According to F.W.Taylor – Management is the art of knowing what you want to do” and
then seeing that it is done in the best and cheapest way.”

Management as a process “consisting of planning, organizing, directing, and

controlling, performed to determine and accomplish the objectives by the use of
people and resources”.
 Nature of Management

1. Multidisciplinary – it freely draws ideas and concepts from other disciplines like
psychology, sociology, economics, operations research etc. It integrates knowledge.
2. Dynamic nature of principles – they are flexible in nature and change with changes
in the environment.
3. Relative, not Absolute Principles – management principles have different strength in
different conditions.
4. Management: Science or Art – is both science and art.
5. Management as profession – as an emerging profession.
6. Universality of management – it is universal but not its principles which change as
per situation.
 Evolution of Management Thought

• Early Contributions
– Concept of organization and administration existed ” in
Egypt in 1300 BC.
– Confucius’s parables came long before Christ (551-479
B.C.)
– Kautilya offered some principles of state
administration in 320 BC.
– Roman Catholic church gave the concept of staff
personnel.
– The Cameralists, a group of German and Austrian public
administration-16th to 18th centuries.
4
 Historical Background of Management
• Ancient Management
– Egypt (pyramids) and China (Great Wall)
– Venetians (floating warship assembly lines)
• Adam Smith
– Published “The Wealth of Nations” in 1776
• Advocated the division of labor (job specialization) to
increase the productivity of workers
• Industrial Revolution
– Substituted machine power for human labor
– Created large organizations in need of management
Management – An Art, Science or Profession
• Science:
• Any branch of knowledge to be considered a science
(like – physics, chemistry, biology etc.) should fulfill
the following conditions:
– The existence of a systematic body of knowledge
encompassing a wide array of principles;
– The principle must explain a phenomenon by
establishing cause – effect relationship;
• Over the years, thanks to the contributions of many
thinkers and practitioners, management, with its
own principles has emerged as a systematic body of
knowledge.
 Management – An Art, Science or Profession

• Management may be considered as

inexact science because,
– Management involves getting things done
through people
– The behavior of human beings cannot be
accurately predicted
– The output varies – consistency missing
Management – An Art, Science or Profession
• An Art:
• refers to the ‘know-how’ – the ways of doing things to
accomplish a desired result.
• As the saying goes ‘practice makes a man perfect;
constant practice of the theoretical aspects (knowledge
base) contributes for the formation and sharpening of
the theory and practice. Therefore, what is required is
the right blend of the theory and practice.
• Effective practice of any art requires a thorough
understanding of the science underlying it. The
executives who attempt to manage without the
conceptual understanding of management principles and
techniques have to depend on luck or intuition.
Management – An Art, Science or Profession
As a Profession:
• These are the days where we are hearing a
lot about professional managers and their
contribution to the economic development
of the nation.
• Therefore, it is appropriate to know the
other dimension of management – whether
it is a profession.
• Since professionals are getting involved, it
can be referred to as a profession.
 Managerial Functions
• Henri Fayol was the first to describe the four
managerial functions when he was the CEO of a
large mining company in the later 1800’s.
• Fayol noted managers at all levels, operating in a
for profit or not for profit organization, must
perform each of the functions of:
– Planning,
– organizing,
– leading,
– controlling.
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Four Functions of Management
Planning
Choose Goals

Controlling Organizing
Monitor & measure Working together

Leading
Coordinate
 Planning
• Planning is the process used by managers to
identify and select appropriate goals and courses of
action for an organization
• 3 steps to good planning :
1. Which goals should be pursued?
2. How should the goal be attained?
3. How should resources be allocated?
• The planning function determines how effective
and efficient the organization is and determines the
strategy of the organization
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 Organizing
• In organizing, managers create the structure of working
relationships between organizational members that best
allows them to work together and achieve goals.
• Managers will group people into departments according to
the tasks performed.
– Managers will also lay out lines of authority and responsibility for
members.
• An organizational structure is the outcome of organizing. This
structure coordinates and motivates employees so that they
work together to achieve goals.

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 Leading
• In leading, managers determine direction, state a clear vision
for employees to follow, and help employees understand the
role they play in attaining goals.
• Leadership involves a manager using power, influence, vision,
persuasion, and communication skills.
• The outcome of the leading function is a high level of
motivation and commitment from employees to the
organization.

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 Controlling
• In controlling, managers evaluate how well the organization is
achieving its goals and takes corrective action to improve
performance.
• Managers will monitor individuals, departments, and the
organization to determine if desired performance has been
reached.
– Managers will also take action to increase performance as required.
• The outcome of the controlling function is the accurate
measurement of performance and regulation of efficiency and
effectiveness.

15
 Why to Study Management Practices?
• The more efficient and effective use of scarce
resources that organizations make of those
resources, the greater the relative well-being
and prosperity of people in that society
• Helps people deal with their bosses and
coworkers
• Opens a path to a well-paying job and a
satisfying career

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 Different types of Managers
• Supervisory or team managers are responsible for
coordinating a subgroup of a particular function or a
team composed of members from different parts of the
organization.
• A second set of managers includes functional, team, and
general managers. Functional managers are responsible
for the efficiency and effectiveness of an area, such as
accounting or marketing.
• Top managers are responsible for developing the
organization’s strategy and being a steward for its vision
and mission.
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 Management Levels
• Organizations often have 3 levels of managers:
– First-line Managers: responsible for day-to-day
operation. They supervise the people performing the
activities required to make the good or service.
– Middle Managers: Supervise first-line managers. They
are also responsible to find the best way to use
departmental resources to achieve goals.
– Top Managers: Responsible for the performance of all
departments and have cross-departmental
responsibility. They establish organizational goals and
monitor middle managers.
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Three Levels of Management

Top
Managers

Middle Managers

First-line Managers

Non-management

19
 Levels of Management
• 1. Top level management:
– Example: Chairman, CEO, MD, GM

• 2. Middle level management:

– Example: Functional managers, Branch Managers
etc , Project Managers.

• 3. First-level management:
– Example: Foreman, supervisor, inspector etc.
 Levels of Management
• We can categorize organizational members in two ways:
– Operatives who work directly on a job or task and have no
responsibility for overseeing the work of others.
– Managers direct the activities of other people in the organization.
Usually classified as top, middle, or first-line, managers supervise
both operative and lower-level managers.
• First-line managers supervise the day-to-day activities of operative
employees.
• Middle managers represent the level of management between first-line
managers and top management. These managers translate the goals of
top management into specific details that lower-level managers can
perform.
• Top managers make decisions about the direction of the organization and
set policies that affect all organizational members.
 Managerial Skills
• Conceptual skills for the top management

• Human skills for the middle management

• Technical skill for the lower management

Skill Type Needed by Manager Level

Top
Managers

Middle
Managers

Line
Managers

Conceptual Human Technical

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 Technical Skills

• “Business skills”
• Using methods and techniques to perform a task
• Keeping up with the latest technology in your job

24
 Human Skills
• “People skills”
• Your relationships with all individuals and groups
• Understanding
• Communicating
• Motivating
• Resolving conflict
• Working as a team member
• “It’s not what you know, it’s who you know.”
• Ethics

.
 Conceptual Skills
• Select alternatives to solve problems
• Take advantage of opportunities
• Be able to conceptualize, diagnose and analyze
• Use math skills
• Manage time

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 Managerial Roles
• Described by Mintzberg.
– A role is a set of specific tasks a person performs
because of the position they hold.
• Roles are directed inside as well as outside the
organization.
• There are 3 broad role categories:
– 1. Interpersonal
– 2. Informational
– 3. Decisional
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 Interpersonal Roles
• Roles managers assume to coordinate and
interact with employees and provide direction
to the organization.
– Figurehead role: symbolizes the organization and
what it is trying to achieve.
– Leader role: train, counsel, mentor and encourage
high employee performance.
– Liaison role: link and coordinate people inside and
outside the organization to help achieve goals.

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 Informational Roles
• Associated with the tasks needed to obtain and
transmit information for management of the
organization.
– Monitor role: analyzes information from both the
internal and external environment.
– Disseminator role: manager transmits information
to influence attitudes and behavior of employees.
– Spokesperson role: use of information to positively
influence the way people in and out of the
organization respond to it.
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 Decisional Roles
• Associated with the methods managers use to plan strategy
and utilize resources to achieve goals.
– Entrepreneur role: deciding upon new projects or programs to initiate
and invest.
– Disturbance handler role: assume responsibility for handling an
unexpected event or crisis.
– Resource allocator role: assign resources between functions and
divisions, set budgets of lower managers.
– Negotiator role: seeks to negotiate solutions between other managers,
unions, customers, or shareholders.

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 Managerial Skills
• There are three skill sets that managers need to
perform effectively.
– 1. Conceptual skills: the ability to analyze and diagnose a
situation and find the cause and effect.
– 2. Human skills: the ability to understand, alter, lead, and
control people’s behavior.
– 3. Technical skills: the job-specific knowledge required to
perform a task. Common examples include marketing,
accounting, and manufacturing.
• All three skills are enhanced through formal training,
reading, and practice.
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 Functions of Management
• Planning
• Organising
• Staffing
• Directing
• Controlling
Management Functions

P - O -S - D - C
 Management Functions
• Planning
– Process of determining the organization’s
objectives and deciding how to accomplish them.
 Management Functions - Organizing
• Organizing –
– Structuring of resources & activities to accomplish
objectives efficiently & effectively.
 Management Functions - Organizing
• Importance:
– Creates synergy
– Establishes lines of authority
– Improves communication
– Improves competitiveness

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Management Functions – Staffing
• Staffing –
– Hiring people (resources) to carry out the work of
the organization.
Management Functions – Staffing
• Importance
– Recruiting
– Determine skills
– Motivate & train
– Compensation levels

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Management Functions – Staffing
• Downsizing
– Elimination of significant numbers of employees
– (rightsizing, trimming the fat)
Management Functions – Directing
• Directing
– Motivating and leading employees to achieve
organizational objectives.
Management Functions – Directing
• Motivation
– Incentives (raise, promotion)
– Employee involvement (cost reduction, customer
service, new products)
– Recognition and appreciation
 Management Functions – Controlling
• Controlling
– Process of evaluating and correcting activities to
keep organization on course.
 Decisional
The Roles of
Management

Informational

The Mintzberg
Studies
Interpersonal

` 43
 Managerial Roles
• Described by Mintzberg.
– A role is a set of specific tasks a person performs
because of the position they hold.
• Roles are directed inside as well as outside the
organization.
• There are 3 broad role categories:
– 1. Interpersonal
– 2. Informational
– 3. Decisional
44
 Interpersonal Roles
• Roles managers assume to coordinate and
interact with employees and provide direction
to the organization.
– Figurehead role: symbolizes the organization and
what it is trying to achieve.
– Leader role: train, counsel, mentor and encourage
high employee performance.
– Liaison role: link and coordinate people inside and
outside the organization to help achieve goals.

45
 Informational Roles
• Associated with the tasks needed to obtain and
transmit information for management of the
organization.
– Monitor role: analyzes information from both the
internal and external environment.
– Disseminator role: manager transmits information
to influence attitudes and behavior of employees.
– Spokesperson role: use of information to positively
influence the way people in and out of the
organization respond to it.
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 Decisional Roles
• Associated with the methods managers use to plan
strategy and utilize resources to achieve goals.
– Entrepreneur role: deciding upon new projects or
programs to initiate and invest.
– Disturbance handler role: assume responsibility for
handling an unexpected event or crisis.
– Resource allocator role: assign resources between
functions and divisions, set budgets of lower managers.
– Negotiator role: seeks to negotiate solutions between
other managers, unions, customers, or shareholders.

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 APPROACHES TO MANAGEMENT

1) Decision Theory Approach

2) Mathematical Approach
3) Systems Approach
4) McKinsey’s 7-S Approach
 DECISION THEORY APPROACH
• Manager – Decision maker
• Organisation – Decision making unit.
• Features
– Management is decision making.
– Members of Organisation - decision makers and problem
solvers.
– Decision making - control point in management
– Increasing efficiency - the quality of decision
– MIS, process & techniques of decision making are the subject
matter of study.
 DECISION THEORY APPROACH

• Contributors
– Simon, Forrester, etc.
• Uses
– Tools for making suitable decisions in organisations.
• Limitation
– Does not take the total view of management
– Decision making - one aspect of management
 MATHEMATICAL APPROACH

• Management- logical entity

• Actions- Mathematical symbols, Relationships and
measurable data.
• Features
1. Problem Solving mechanism with the help of mathematical
tools and techniques.
2. Problems Expressed in mathematical symbols.
3. Variables in management – quantified.
4. Scope - Decision making, system analysis & some aspect of
human behaviour.
5. Tools - Operations research ,simulation etc.
 MATHEMATICAL APPROACH Cont..

• Contributors
– Newman, Charles Hitch, etc.
• Uses
– Provided Exactness in management discipline.
• Limitations
– Not a separate school
– Technique in decision making.
 SYSTEMS APPROACH

• An enterprise - Man-Made system

• Internal parts
– Achieve established goals
• External parts
– Achieve interplay with its environment
• Manager integrates his available facilities with goal
achievement.
• Uses
– Quick Perception
– Better Planning
• Limitations
– Complicated
– Expensive
 System
• A set of interconnected elements to
achieve a common objective
• Elements are interrelated and
interdependent
• Composed of sub-systems, which in turn
may be made up of other subsystems
• The set of elements may be: Input(s),
Process(es), or output(s)

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• Cybernetic systems – self-regulating, self-
monitoring (feedback and control elements
attached)
• A system cannot exist in vacuum
• It exists and functions in an environment,
separated by its boundary
• Several systems may share the same environment
• Some systems may be connected by a shared
boundary
• Open system: interacts with its environment,
exchanges inputs and outputs
• Closed systems: do not interact, or exchange any
inputs or outputs with its environment

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System Approach Theory of Management

Features of System Approach:

1. System approach considers the organisation
as a dynamic and inter-related set of parts.
Each part represents a department or a sub-
system. Each department has its sub-system.
Continuous and effective interaction of sub-
systems helps to attain goals of the larger
system.
System Approach Theory of Management

2. It considers the impact of both near and

distant future on organisational activities.
Organisations constantly respond to changes
in the internal and external environmental
conditions.
System Approach Theory of Management

3. System approach integrates goals of different

parts of the organisation (sub-systems or
departments) with the organisation as a
whole. It also integrates goals of the
organisation with goals of the environment or
society in which it operates. Integration of
goals maintains equilibrium or balance and
enables organisations to grow in the dynamic
environment.
System Approach Theory of Management

4. It synthesizes knowledge of different fields of

study such as biology, sociology, psychology,
information systems, economics etc. As
business organisation deals with different
components of society, it makes best use of
different fields of study to improve interaction
with its counterparts.
System Approach Theory of Management

5. System approach enables organisations to

frame policies that promote business
objectives and social objectives. Business
operates in the social system and social
values, culture, beliefs and ethics are
important constituents of business operations.
 Limitations of Systems Theory
• Critics of this theory claim this as a theoretical
approach to management. The way an organisation
actually works and solves problems (by applying
different techniques and methods) has no appeal in
the theory.
• Relationship amongst parts of the organisation is
emphasised upon but the exact nature of inter-
dependence is not defined.
• Exact relationship between internal and external
environment of the organisation is also not defined.
 Limitations of Systems Theory
• System approach fails to provide uniform approach to
management. Management principles change with
changes in its environmental vairables. No standard
set of principles apply to all types of organisations.
• It fails to provide concepts that apply to all types of
organisations. The small organisations are less
adaptive to environmental variables than large
organisations. The theory assumes that most of the
organisations are big, complex and open systems. It,
thus, fails to provide a unified theory.
The Systems Model of Management
 Components of Systems Theory of
Management
The components are:
1. Sub-System
2. Synergy
3. Open and Closed Systems
4. System Boundary
5. Flow
6. Feedback.
 Planning: Meaning
• Planning is deciding in advance
– what to do,
– how to do it,
– when to do it and
– who should do it.
– It involves anticipating the future and consciously choosing the future
course of action.

• “According to Haimann, Planning is the function that

determines in advance what should be done.”
– When a manager plans, he projects a course of action for further
attempting to achieve a consistent co-ordinate structure of operations
aimed at the desired results.
 Nature of Planning
• Planning is goal-oriented
• Planning is a primary function
• Planning is all-pervasive
• Planning is a continuous process
• Planning is forward-looking
• Planning involves choice
• Planning is directed towards efficiency
 Importance of Planning
• Focuses attention on objectives and result
• Reduces uncertainty and risk
• Provides sense of direction
• Encourages innovation and creativity
• Helps in co-ordination
• Guides decision-making
• Provide efficiency in operation
 Planning Premises
• These are the conditions under which planning activities will be
undertaken
• Planning premises are planning activities – the expected
environmental and internal conditions
• External premises include total factors in task environment like
political, social, technological, competitor’s plan and actions,
government policies, etc.
• Internal premises include organization’s policies, resources of various
types, and the ability of the organization to withstand the
environmental pressure
• Forecasting plays a major role in planning premises
• At the top level, it is mostly externally focused and it becomes more
internally focused at the lower management
68
 Types of Plans
• On the basis of Approach adopted
– Proactive, Reactive
• On the basis of Importance
– Strategic, Tactical, Operational
• On the basis of Time
– Long term, Intermediate, Short term
• On the basis of Use
– Single, Standing
 Proactive Plan
• It involves designing suitable course of action in
anticipation of likely changes in relevant environment.

• Needs of planning are forecasted.

• It is operational an depends on the will of the

management.

• Involves broad planning wide environmental scanning,

decentralized control.
 Reactive Plan
• It is a plan made as a response to the environmental
needs or changes.

• It is enforced due to change in technology /

environment.

• It is not optional and has to be implemented when

required.

• Becomes invalid when not done at suitable time.

 Strategic plan
• Strategic plans define the framework of the organization’s vision and
how the organization intends to make its vision a reality.

• Strategic plan is the plan which is formulated by the top level

management for a long period of time of five years or more.

• They decide the major goals and policies to achieve the goals.

• It takes in a note of all the external factors and risks involved and makes
a long-term policy of the organization.

• It involves the determination of strengths and weaknesses, external

risks, mission, and control system to implement plans.
 Tactical Plan

• Tactical plans describe the tactics that the managers plan to

adopt to achieve the objectives set in the strategic plan.

• Tactical plan is the plan which is concerned with the integration

of various organizational units and ensures implementation of
strategic plans on day to day basis.
•
• It involves how the resources of an organization should be used
in order to achieve the strategic goals.

• The tactical plan is also known as coordinative or functional

plan.
 Operational Plan
• Operational plans are the plans which are formulated by the lower level
management for short term period of up to one year to create specific action steps
that support the strategic and tactical plans.

• It is concerned with the day to day operations of the organization.

• It is detailed and specific and usually based on past experiences.

• It usually covers functional aspects such as production, finance, Human Resources

etc.

• Operational plans can be:

– Standing plans − Drawn to cover issues that managers face repeatedly, e.g. policies,
procedures, rules.
– Ongoing plans − Prepared for single or exceptional situations or problems and are normally
discarded or replaced after one use, e.g. programs, projects, and budgets.
 Long-term plan
• Involves plans typically for 3-5 years.

• Long-term plan is the long-term process that business owners

use to reach their business mission and vision.

• It determines the path for business owners to reach their

goals.

• It also reinforces and makes corrections to the goals as the

plan progresses.
 Short-term plan
• Short-term plan involves plans for a few weeks or at
most a year.

• It allocates resources for the day-to-day business

development and management within the strategic
plan.

• Short-term plans outline objectives necessary to

meet intermediate plans and the strategic planning
process.
 Single Plan
• These plans are connected with some special
problems.

• These plans end the moment of the problems to be

solved.

• They are not used, once after their use.

• They are further re-created whenever required.

 Standing Plan
• These plans are formulated once and they are
repeatedly used.

• These plans continuously guide the managers.

That is why it is said that a standing plan is a
standing guide to solving the problems.

• These plans include mission, policies, objective,

rules and strategy.
 Planning Limitations/Barriers
• Lack of accurate information
• Time and cost
• Resistance to change
• Lack of ability to plans
• False sense of security
• Environmental constraints
Steps in planning 15
Being aware of opportunity

Setting objectives or goals

Considering planning premises

Identifying alternatives

Comparing alternatives with goals

Choosing an alternative

Formulating support plans

Quantifying plans by making budgets

 1. Being aware of opportunities

 Analysis of external environment – real

starting point for planning

 Setting realistic objectives depends on the

awareness of external environment or
opportunities.

 Planning requires a realistic diagnosis of

opportunity situation
2. Establishing objectives
 Objectives – specify the expected
results and indicate the end
points of what is to be done.
 Enterprise/ Company’s objective
give direction to major plans
 3. Developing premises
 Premises – assumptions about the
environment in which plan is to be carried out.

Principle of planning premises – the more

thoroughly individuals charged with planning
understand and agree to utilize the consistent
planning premises, the more coordinated
enterprise planning will be.
 4. Determining alternative courses

 It is to search for and examine alternative

course of action

 Number of alternative that can be thoroughly

examined

 The planner must usually make a preliminary

analysis to find out best alternative.
 5. Evaluating alternative
courses
 After examining the strong and weak points of
alternatives

 Evaluate the alternatives by weighing them as

compared with goals or objectives of a firm.

 One course may appear to be most profitable –

but high risk and not match firm’s or company’s
goal
 6. Selecting a course of action
 Real point of decision making

 Alternative course of action – one or more

advisable

 Manager decide to follow several courses

rather than one but course
 7. Formulating derivative plans

Derivative plans/supporting
plans – invariably required
to support the basic plan
 8. Quantifying – Budgeting plans

 To quantify them by converting them into budgets

 The overall budget of a firm/an enterprise

represents the sum total of income and expenses

 Budgets become a means of adding the various

plan and set important standards against which
planning process can be measured
 Objectives
 Objectives were defined as important
ends towards which organizational and
individual activities are directed

 The emphasis is on verifiable

objectives
– means at the end of the period –
whether or not objective has been
achieved
 Nature of objectives 25

• Objectives state end result and overall

objectives need to be supported by sub-
objectives

• Objectives forms a hierarchy as well as

network
Hierarchy of objectives
 Objectives form a hierarchy, ranging from the broad
aim to specific individual objectives

 Zenith of hierarchy – mission/purpose

 General objectives and strategies, such as

designing, producing and marketing reliable, low
cost, fuel efficient automobiles

 KRA – Key result area – These are the areas in

which performance is essential for the success of
the enterprise.
Illustration of Hierarchy
of Objectives
1.
Purpose Board of
directors
2. Mission

3. Strategic
objectives Top
Management
4. Overall Objectives

5. Divisional objectives Middle

Management
6. Department and unit Objectives
Operational
Individual objectives level
managers
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Setting Objectives and Organizational hierarchy

•Managers at different levels in the organizational hierarchy

• are concerned with different kinds of objectives

1. Board of Directors and top level managers – involved in determining the

purpose, the mission and overall objectives of firm.

2. Middle level managers – Vice president or marketing/production

division objectives and department objectives

3. Low level managers – setting the objectives of departments and units as

well as their sub-ordinates
Setting of objectives –approaches

1. Top down approach

2. Bottom up approach
 Multiplicity of approaches
 Objectives – normally multiple

 The objectives should be verifiable

and all the objectives are realistic,
attainable and precise.
 How to set objectives
Examples of non verifiable objectives:

1. To make a reasonable profit

2. To improve communication

3. To improve productivity of the

production department

Contd…
Examples of Verifiable objectives:
1. To achieve a return on investment of 12% at the
end of the current fiscal year

2. To issue a two page monthly newsletter beginning

July 1 2005, involving not more than 40 working
hours of preparation time.

3. To increase production output by 5% by December

31, 2005 without additional costs while maintaining
the current quality level

The management, people or a group of individual

can’t work without clear aim.
Quantitative and Qualitative objectives

 Quantitative objectives – are verifiable objectives

can be measured in terms of numerical values
(e.g.) financial reports; profits and loss, cash flow

 Qualitative objectives – are difficult to verify

objectives - can be measured in terms of
attributes or characteristics (e.g.) quality of
products
 Guidelines for setting objectives
 There are certain guidelines for setting the
objectives of an enterprise or firm. It is indeed a
difficult task

 It requires intelligent coaching by the superior

and
extensive practice by the sub-ordinate

1. List of objectives should not be too long, yet cover

main features

2. Objectives should be verifiable and state what is to

be accomplished
Contd…
3. Objectives should present a challenge, indicate priorities

4. Objectives should be consistent throughout the

organization

5. Objectives should be precise and identifiable

6. Objectives should cover on the area of resources and

authority

The above mentioned are some of the important

guidelines for establishing objectives
 The Strategic Planning Process
• In today's highly competitive business environment, budget-oriented planning or forecast-based
planning methods are insufficient for a large corporation to survive and prosper. The firm must
engage in strategic planning that clearly defines objectives and assesses both the internal and
external situation to formulate strategy, implement the strategy, evaluate the progress, and make
adjustments as necessary to stay on track.
• A simplified view of the strategic planning process is shown by the following diagram:

Mission and objectives

Environmental
Scanning

Strategy Formulation

Strategy
Implementation

Evaluation and Control

 Mission and Objectives
• The mission statement describes the company's
business vision, including the unchanging values
and purpose of the firm and forward-looking
visionary goals that guide the pursuit of future
opportunities.
• Guided by the business vision, the firm's leaders
can define measurable financial and strategic
objectives. Financial objectives involve
measures such as sales targets and earnings
growth. Strategic objectives are related to the
firm's business position, and may include
measures such as market share and reputation.
 Environmental Scan
The environmental scan includes the following components:
– Internal analysis of the firm
– Analysis of the firm's industry (task environment)
– External macro environment (PEST analysis)

The internal analysis can identify the firm's strengths and weaknesses
and the external analysis reveals opportunities and threats. A profile
of the strengths, weaknesses, opportunities, and threats is
generated by means of a SWOT analysis
An industry analysis can be performed using a framework developed
by Michael Porter known as Porter's five forces. This framework
evaluates entry barriers, suppliers, customers, substitute products,
and industry rivalry.
 Strategy Formulation
• Given the information from the environmental
scan, the firm should match its strengths to the
opportunities that it has identified, while
addressing its weaknesses and external threats.
• To attain superior profitability, the firm seeks to
develop a competitive advantage over its rivals.
A competitive advantage can be based on cost
or differentiation. Michael Porter identified
three industry-independent generic strategies
from which the firm can choose.
 Strategy
The selected Implementation
strategy is implemented by means of
programs, budgets, and procedures. Implementation
involves organization of the firm's resources and
motivation of the staff to achieve objectives.
The way in which the strategy is implemented can have
a significant impact on whether it will be successful. In a
large company, those who implement the strategy likely
will be different people from those who formulated it. For
this reason, care must be taken to communicate the
strategy and the reasoning behind it. Otherwise, the
implementation might not succeed if the strategy is
misunderstood or if lower-level managers resist its
implementation because they do not understand why the
particular strategy was selected.
 Evaluation & Control
The implementation of the strategy must be
monitored and adjustments made as needed.
Evaluation and control consists of the following
steps:
1. Define parameters to be measured
2. Define target values for those parameters
3. Perform measurements
4. Compare measured results to the pre-defined
standard
5. Make necessary changes
 Hierarchical Levels of Strategy
Strategy can be formulated on three different levels:
1. corporate level
2. business unit level
3. functional or departmental level.

While strategy may be about competing and surviving as a

firm, one can argue that products, not corporations
compete, and products are developed by business
units. The role of the corporation then is to manage its
business units and products so that each is competitive
and so that each contributes to corporate purposes.
 Corporate Level Strategy
Corporate level strategy fundamentally is concerned with the selection of businesses in
which the company should compete and with the development and coordination of
that portfolio of businesses.
Corporate level strategy is concerned with:
Reach - defining the issues that are corporate responsibilities; these might include
identifying the overall goals of the corporation, the types of businesses in which the
corporation should be involved, and the way in which businesses will be integrated
and managed.
Competitive Contact - defining where in the corporation competition is to be
localized. Take the case of insurance: In the mid-1990's, Aetna as a corporation was
clearly identified with its commercial and property casualty insurance products. The
conglomerate Textron was not. For Textron, competition in the insurance markets
took place specifically at the business unit level, through its subsidiary, Paul Revere.
(Textron divested itself of The Paul Revere Corporation in 1997.)
Managing Activities and Business Interrelationships - Corporate strategy seeks to
develop synergies by sharing and coordinating staff and other resources across
business units, investing financial resources across business units, and using
business units to complement other corporate business activities. Igor Ansoff
introduced the concept of synergy to corporate strategy.
Management Practices - Corporations decide how business units are to be
governed: through direct corporate intervention (centralization) or through more or
less autonomous government (decentralization) that relies on persuasion and
rewards.
Corporations are responsible for creating value through their businesses. They do
so by managing their portfolio of businesses, ensuring that the businesses are
successful over the long-term, developing business units, and sometimes ensuring
that each business is compatible with others in the portfolio
 Business Unit Level Strategy
A strategic business unit may be a division, product line, or other profit
center that can be planned independently from the other business
units of the firm.
At the business unit level, the strategic issues are less about the
coordination of operating units and more about developing and
sustaining a competitive advantage for the goods and services that
are produced. At the business level, the strategy formulation
phase deals with:
positioning the business against rivals
anticipating changes in demand and technologies and adjusting the
strategy to accommodate them
Influencing the nature of competition through strategic actions such
as vertical integration and through political actions such as
lobbying.
Michael Porter identified three generic strategies (cost leadership,
differentiation, and focus) that can be implemented at the business
unit level to create a competitive advantage and defend against the
adverse effects of the five forces.
 Functional Level Strategy
The functional level of the organization is the level of the
operating divisions and departments. The strategic
issues at the functional level are related to business
processes and the value chain. Functional level
strategies in marketing, finance, operations, human
resources, and R&D involve the development and
coordination of resources through which business unit
level strategies can be executed efficiently and
effectively.
Functional units of an organization are involved in higher
level strategies by providing input into the business unit
level and corporate level strategy, such as providing
information on resources and capabilities on which the
higher level strategies can be based. Once the higher-
level strategy is developed, the functional units translate
it into discrete action-plans that each department or
division must accomplish for the strategy to succeed.
 PEST Analysis
A scan of the external macro-environment in which
the firm operates can be expressed in terms of
the following factors:
Political
Economic
Social
Technological
The acronym PEST (or sometimes rearranged as
"STEP") is used to describe a framework for the
analysis of these macro environmental factors
 Political Factors

Political factors include government regulations

and legal issues and define both formal and
informal rules under which the firm must
operate. Some examples include:
– tax policy
– employment laws
– environmental regulations
– trade restrictions and tariffs
– political stability
 Economic Factors

Economic factors affect the purchasing

power of potential customers and the
firm's cost of capital. The following are
examples of factors in the macro
economy:
– economic growth
– interest rates
– exchange rates
– inflation rate
 Social Factors
Social factors include the demographic and
cultural aspects of the external macro
environment. These factors affect customer
needs and the size of potential markets. Some
social factors include:
– health consciousness
– population growth rate
– age distribution
– career attitudes
– emphasis on safety
 Technological Factors
Technological factors can lower barriers to
entry, reduce minimum efficient production
levels, and influence outsourcing
decisions. Some technological factors
include:
– R&D activity
– automation
– technology incentives
– rate of technological change
 SWOT Analysis
• A scan of the internal and external environment is an
important part of the strategic planning process.
• Environmental factors internal to the firm usually can be
• classified as strengths (S) or weaknesses (W), and those
external to the firm can be classified as opportunities (O) or
threats (T). Such an analysis of the strategic environment is
referred to as a SWOT analysis.
• The SWOT analysis provides information that is helpful in
matching the firm's resources and capabilities to the
competitive environment in which it operates. As such, it is
instrumental in strategy formulation and selection
 Strengths
A firm's strengths are its resources and capabilities
that can be used as a basis for developing a
competitive advantage. Examples of such
strengths include:
– patents
– strong brand names
– good reputation among customers
– cost advantages from proprietary know-how
– exclusive access to high grade natural resources
– favorable access to distribution networks
 Weaknesses
The absence of certain strengths may be viewed as a weakness. For
example, each of the following may be considered weaknesses:
lack of patent protection
a weak brand name
poor reputation among customers
high cost structure
lack of access to the best natural
resources
lack
In some of access
cases, to key distribution
a weakness may be the flip side of strength. Take the
case in which a firm has a large amount of manufacturing capacity.
channels
While this capacity may be considered a strength that competitors
do not share, it also may be a considered a weakness if the large
investment in manufacturing capacity prevents the firm from
reacting quickly to changes in the strategic environment.
 Opportunities
The external environmental analysis may
reveal certain new opportunities for profit
and growth. Some examples of such
opportunities include:
– an unfulfilled customer need
– arrival of new technologies
– loosening of regulations
– removal of international trade barriers
 Threats
Changes in the external environmental also
may present threats to the firm. Some
examples of such threats include:
– shifts in consumer tastes away from the firm's
products
– emergence of substitute products
– new regulations
– increased trade barriers
 The SWOT
• Matrix
A firm should not necessarily pursue the more
lucrative opportunities. Rather, it may have a
better chance at developing a competitive
advantage by identifying a fit between the firm's
strengths and upcoming opportunities. In
some cases, the firm can overcome a
weakness in order to prepare itself to pursue a
compelling opportunity.
• To develop strategies that take into account the
SWOT profile, a matrix of these factors can be
constructed.
 SWOT Matrix
The SWOT matrix (also known as a TOWS Matrix)
is shown below:

Strengths Weaknesses

S-O strategies W-O strategies

Opportunities

S-T strategies W-T strategies

Threats
 Competitive Advantage
When a firm sustains profits that exceed the average for its industry,
the firm is said to possess a competitive advantage over its rivals.
The goal of much of business strategy is to achieve a sustainable
competitive advantage.
Michael Porter identified two basic types of competitive advantage:
cost advantage
differentiation advantage
A competitive advantage exists when the firm is able to deliver the
same benefits as competitors but at a lower cost (cost advantage),
or deliver benefits that exceed those of competing products
(differentiation advantage). Thus, a competitive advantage enables
the firm to create superior value for its customers and superior
profits for itself.
Cost and differentiation advantages are known as positional
advantages since they describe the firm's position in the industry as
a leader in either cost or differentiation.
 Value Creation
• The firm creates value by performing a series of activities
that Porter identified as the value chain. In addition to the
firm's own value-creating activities, the firm operates in a
value system of vertical activities including those of
upstream suppliers and downstream channel members.
• To achieve a competitive advantage, the firm must
perform one or more value creating activities in a way that
creates more overall value than do competitors.
• Superior value is created through lower costs or superior
benefits to the consumer (differentiation).
 Business Portfolio Matrix

Product Portfolio Management Tools

 BCG Matrix
 GE Matrix
The BCG Matrix
 Growth share matrix is a portfolio planning method that
evaluates a company’s products in terms of their market
growth rate and relative share.

• Products are classified as: Stars, Cash Cows, Question

marks and Dogs

• Marketing efforts, or investments, will change, depending on

the product’s classification
The BCG Matrix
BCG example
The BCG Matrix
Stars are high-growth, high-share businesses or products
requiring heavy investment to finance rapid growth.
They will eventually turn into cash cows.
Cash cows are low-growth, high-share businesses or
products that are established; require less investment to
maintain market share in a stable market.
Question marks are low-share business units in high-growth
markets requiring a lot of cash to hold their share.
Dogs are low-growth, low-share businesses and products
that may generate enough cash to maintain themselves
but do not promise to be large sources of cash. Not
worth much investment.
The BCG Matrix

Problems with Matrix Approaches

• Difficulty in defining SBUs and measuring market
share and growth
• Time consuming
• Expensive
• Focus on current businesses, not future planning
GE Matrix
 A more advanced model developed by General Electric:
measuring market attractiveness and business strength
• Market attractiveness is a composite measure of the
potential for sales and profits in a particular market segment
• Business strength is the strength of our offering relative to
other companies’ products

• GE Matrix is an expansion of the BCG matrix. The

dimensions are more comprehensive and detailed.
 GE Matrix
GE Matrix
Market Attractiveness
• Growth
• Diversity
• Competitive
Structure Change
• Technology Change
• Social Environment

Business Strength
• Size of Market & Share
• Company Growth Rate
• Profit
• Margins
• Technology Platform
• Image
• People
GE MATRIX
 Decision Making
• Decisions
– Choices from two or more alternatives

– All organizational members make decisions

• Decision-Making Process
– Step 1 - Identifying a Problem

• problem - discrepancy between an existing and

a desired state of affairs
 Decision Making
• Decision-Making Process (continued)
– Step 2 - Identifying Decision Criteria
• decision criteria - what’s relevant in making a decision
– Step 3 - Allocating Weights to the Criteria
• must weight the criteria to give them appropriate
priority in the decision
– Step 4 - Developing Alternatives
• list the viable alternatives that could resolve the
problem without evaluating them
 Decision Making
• Decision-Making Process (continued)
– Step 5 - Analyzing Alternatives
• each alternative is evaluated against the criteria
– Step 6 - Selecting an Alternative
• choosing the best alternative from among those
considered
– Step 7 - Implementing the Decision
• implementation - conveying the decision to those
affected by it and getting their commitment to it
– Step 8 - Evaluating Decision Effectiveness
• determine whether the problem is resolved
 Decision Making
• Rational Decision Making
– Decisions are consistent, value-maximizing choices
within specified constraints
– Managers assumed to make rational decisions
– Assumptions of Rationality - decision maker would:
– be objective and logical
– carefully define a problem
– have a clear and specific goal
– select the alternative that maximizes the likelihood of
achieving the goal
– make decision in the firm’s best economic interests
• Managerial decision making seldom meets all the tests
 Decision Making
• Bounded Rationality
– Behave rationally within the parameters of a
simplified decision-making process that is limited
by an individual’s ability to process information
– Accept solutions that are “good enough”
– Escalation of commitment - increased
commitment to a previous decision despite
evidence that it may have been wrong
 Decision Making
• Role of Intuition
– Intuitive decision making - subconscious
process of making decisions on the basis of
experience and accumulated judgment
• does not rely on a systematic or thorough
analysis of the problem
• generally complements a rational analysis
 Decision Making
Significance of Decision-Making:
i. Managers who use a rational, intelligent, and systematic approach
are more likely to come up with high quality solutions to the
problems they face than the ones who do not use this approach.
ii. Rational decision-makers have a clear understanding of
alternative courses of action to accomplish a goal under a
particular set of circumstances.
iii. Rational decision-making is based on the information available
with the decision-makers and their ability to evaluate alternatives.
iv. Rational decision-making aims at deciding the best solution by
selecting the alternative that most effectively facilitates goal
achievement
 Decision Making
Limitations of Decision-Making:

i. It is very difficult for managers to be completely rational in

their decision-making since decisions are taken keeping the
future in mind, and the future is very uncertain.
ii. It is very difficult to determine all the alternative courses of
action that might be followed to accomplish a goal.
iii. Rational decision-making becomes almost an impossible
task when one has to explore areas which have never been
ventured into before.
 Decision Making
Limitations of Decision-Making:
iv. In most cases, all possible alternatives generated
cannot be thoroughly analyzed, even with
sophisticated analytical techniques and computers.
v. Even though the decision-maker strives to be
completely rational, sometimes limitations of
information, time and certainty, curb rationality.
vi. Sometimes, managers allow their risk-avoiding
tendency to disrupt their rational decision­-making
process.
 Decision Making
Identify Limiting Factors
In order to choose the best alternative and make a
decision every manager needs to have the ideal
resources − information, time, personnel,
equipment, and supplies. But this is an ideal
situation and may not always be possible.

A limiting factor is something that stands in the

way of accomplishing a desired objective.
 Decision Making
Developing Potential Alternatives
Recognizing the limiting factor in a given situation makes it possible to
narrow down the search for alternatives and make the best decision
possible with the information, resources, and time available.

Some methods for developing alternatives are −

• Brainstorming, where a group works together to generate ideas and
alternative solutions.
• Nominal group technique is a method that involves the use of a highly
structured meeting, complete with an agenda, and restricts discussion
or interpersonal communication during the decision-making process.
• Delphi technique where the participants do not meet, but a group
leader uses written questionnaires to conduct the decision making.
 Decision Making
Analysis of the Alternatives
This is an important stage in the decision-making process and
perhaps the toughest. Managers must identify the merits and
demerits of each alternative and weigh them in light of various
situations before making a final decision.

Evaluating the alternatives can be done in numerous ways. Here are

a few possibilities −

Qualitative and quantitative measurements

Perform a cost‐effectiveness analysis for each alternative
Marginal analysis
 Decision Making
Selecting Alternatives
Once the alternatives are analyzed and evaluated, the
manager has to choose the best one. The manager
needs to choose the alternative that gives the most
advantage while meeting all the required criteria.
Sometimes the choice is simple with obvious benefits,
at times the optimal solution is a combination of
several alternatives. At times when the best alternative
may not be obvious, the manager uses probability
estimates, research and analysis aided by his
experience and judgment.