Chapter 4 Planning & Decision Making
4.1 What is planning?
Planning involves selecting missions and objectives and deciding on the actions to achieve them; it requires decision making,that is, choosing a course of action from among alternatives ➢ Planning is deciding in advance what is to be done in the future.
➢ Planning bridges the gap from where we are to where we want to go.
➢ It is also important to point out that planning and controlling are inseparable—the twins of management.
➢ Plans furnish the standards of control.
4.2 Types of Plans
Plans can be classified as
(1) missions or purposes,
(2) objectives or goals,
(7) programs, and
1. The mission: The mission identifies the basic purpose or function or tasks of an enterprise or agency function or tasks of an or any part of it.
➢ The purpose of the courts is the interpretation of laws and their application.
➢ The purpose of a university is teaching, research, and providing services to the community.
The mission of Du Pont has been expressed as 'better things through chemistry'.
2. Objectives: Object are the ends toward which activity is aimed.
3. Strategies: Strategy is defined as the determination of the basic long-term objectives of an enterprise and the adoption of courses of action and allocation of resources necessary to achieve these goals. Strategy is being adopted to gain the competitive advantages by the company.
4. Policies: Policies also are plans in that they are general statements or understandings that guide in decision making. Not all policies are understandings that "statements; they are often merely implied from the actions of managers.
The practice of promoting from within the organization. The practice may be interpreted as policy and carefully followed by subordinates.
5. Procedures: Procedures are plans that establish a required method of handling future activities. They are chronological sequences of required actions. They are guides to action rather than to thinking, and they detail the exact manner in which certain activities must be accomplished.
6. Rules: Rules spell out specific required actions or nonactions, allowing no discretion. "No smoking" is a rule. The essence of a rule is that it reflects a managerial decision that a certain action must— or must not—be taken.
7. Programs: Program is a single-use plan for a large set of activities. Programs are a complex of goals, policies, procedures, rules, task assignments, steps to be taken, resources to be employed, and other elements necessary to carry out a given course of action.
For example, a program may be formulated by a single supervisor to improve the morale of workers in the parts manufacturing department of a farm machinery company.
8. Budgets: A budget is statement of expected results expressed in numerical terms. It may be called a "quantified' plan. A budget may be expressed in financial terms; in terms of laborhours, units of product, or machine-hours; or in any other numerically measurable term.
➢ It may deal with operation, as the expense budget does
➢ It may reflect capital outlays, as the capital expenditure budget does; ➢ It may show cash flow, as the cash budget does.
4.3 Steps in Planning
Step 1: Being Aware of Opportunities
All managers should take a preliminary look at possible future opportunities and see them clearly and completely, know where their company stands in light of its strengths and weakness, understand what problems it has to solve and why, and know what it can expect to gain. Setting realistic objectives depends on this awareness. Planning requires a realistic diagnosis of the opportunity situation.
Step 2: Establishing Objectives
The second step in planning is to establish objectives for the entire enterprise and then for each subordinate work unit. This is to be done for the long term as well as for the short range. Objectives specify the expected results and indicate the end points of what is to be done.
Step 3: Developing Premises
Premises are assumptions about the environment in which the plan is to be carried out. Forecasting is important in premising: What kinds of markets will there be? What volume of- sales? What prices? What products? What costs? What wage rates? What tax rates and policies? What are the long-term trends?
Step 4: Determining Alternative Courses
The fourth step in planning is to search for and examine alternative courses of action, especially those not immediately apparent. There is seldom a plan for which reasonable alternatives do not exist, and quite often an alternative that is not obvious proves to be the best. The planner must usually make a preliminary examination to discover the most fruitful possibilities.
Step 5: Evaluating Alternative Courses
After seeking out alternative courses and examining their strong and weak points, the next step is to evaluate the alternatives by weighing them in light of premises and goals.
➢ One course may appear to be the most profitable but may require a large cash outlay and have a slow payback;
➢ another may look less profitable but may involve less risk;
➢ Still another may better suit the company's long-range objectives.
Step 6: Selecting a Course
This is the point at which the plan is adopted—the real point of decision making. Occasionally, an analysis and evaluation of alternative courses will disclose that two or more are advisable, and the manager may decide to follow several courses rather than the one best course.
Step 7: Formulating Derivative Plans
When a decision is made, planning is seldom complete, and a seventh step is indicated. Derivative plans are almost invariably required to support the basic plan.
Step 8: Quantifying Plans by Budgeting
After decisions are made and plans are set, the final step in giving them meaning, is to quantify them by converting them into budgets. The overall budget of an enterprise represents the sum total of income and expenses, with resultant profit or surplus, and the budgets of major balance sheet items such as cash and capital expenditure.
4.4 Kinds of Organizational Plans
➢ Strategic Plans: Strategic plans are the plans developed to achieve strategic goals. More precisely, a strategic plan is a general plan outlining decisions of resource allocation, priorities, and action steps necessary to reach strategic goals. These plans are set by the board of directors and top management, generally have an extended time horizon.
➢ Tactical Plans: A tactical plan, aimed at achieving tactical goals, is developed to implement specific parts of a strategic plan. Tactical plans typically involve upper and middle management and, compared with strategic plans, have a somewhat shorter time horizon and a more specific and concrete focus.
➢ Operational Plans: An operational plan focuses on carrying out tactical plans to achieve operational goals. Developed by middle and lower-level managers, operational plans have a short-term focus and are relatively narrow in scope. Each one deals with a fairly small set of activities.
4.5 Time Frames for Planning
• Long-Range Plans: A plan that covers many years, perhaps even decades; common long-range plans are for five years or more.
• Intermediate Plans: A plan that generally covers from one to five years.
• Short-Range Plans: A plan that generally covers a span of one year or less
4.6 Contingency Planning
Contingency planning refers to the determination of alternative courses of action to be taken if an intended plan of action is unexpectedly disrupted or rendered inappropriate. Contingency planning is a useful technique for helping managers cope with uncertainty and change.
Contingency planning is becoming increasingly important for most organizations, especially for those operating in particularly complex or dynamic environments. Few managers have such an accurate view of the future that they can anticipate and plan for everything.
4.7 Decision Making
Decision making is defined as the selection of a course of action from, among alternatives; it is at the core of planning.
Managers sometimes see decision making as their central job because they must constantly choose
➢ what is to be done,
➢ who is to do it, and
➢ when, where, and occasionally even how it will be done.
The decision-making process includes recognizing and defining the nature of a decision situation, identifying alternatives, choosing the “best” alternative, and putting it into practice will be done.
➢ The word best, of course, implies effectiveness.
➢ We should also note that managers make decisions about both problems and opportunities.
➢ Of course, it may take a long time before a manager can know if the right decision was made.
➢ It is also part of everyone's daily life.
4.8 Types of Decisions
a. Programmed decision
A programmed decision is one that is relatively structured or recurs with some frequency (or both).
Example of a programmed decision is the reordering of standard inventory items. ➢ This kind of decision is used for routine and repetitive work; ➢ It relies primarily on previously established criteria.
➢ It is, in effect, decision making by precedent.
b. Non-programmed decision
Non-programmed decisions, on the other hand, are relatively unstructured and occur much less often.
Example – Taking decision to develop a new product.
➢ Non-programmed decisions are used for unstructured, novel, and ill-defined situations of a nonrecurring nature.
➢ Intuition and experience are major factors in non-programmed decisions.
➢ Most of the decisions made by top managers involving strategy and organization design are non-programmed.
4.9 The nature of problems and decision making in the organization
Most decisions are neither completely programmed nor completely non-programmed; they are a combination of both.
As the Figure indicates, most non-programmed decisions are made by upper-level managers; this is because upper-level managers have to deal with unstructured problems.
Problems at lower levels of the organization are often routine and well structured, requiring less decision discretion by managers.
4.10 Steps in Rational Decision Making
1. Recognizing and defining the decision situation: Some stimulus indicates that a decision must be made. The stimulus may be positive or negative. For example, a plant manager sees that employee turnover has increased by 5 percent.
2. Identifying alternatives: Both obvious and creative alternatives are desired. In general, the more important the decision, the more alternatives should be generated. For example, the plant manager can increase wages, increase benefits, or change hiring standards.
3. Evaluating alternatives: Each alternative is evaluated to determine its feasibility, its satisfactoriness, and its consequences. Increasing benefits may not be feasible. For example, increasing wages and changing hiring standards may satisfy all conditions.
4. Selecting the best alternative: Consider all situational factors and choose the alternative that best fits the manager’s situation. Changing hiring standards will take an extended period of time to cut turnover, so increase wages.
5. Implementing the chosen alternative: The chosen alternative is implemented into the organizational system. The plant manager may need permission from corporate headquarters. The human resource department establishes a new wage structure.
6. Following up and evaluating the results: At some time in the future, the manager should ascertain the extent to which the alternative chosen in step 4 and implemented in step 5 has worked. The plant manager notes that, six months later, turnover dropped to its previous level.
4.11 Management by Objectives (MBO) (Peter Drucker, 1954)
• MBO is a process by which managers and subordinates work together in identifying goals and setting up objectives and making plan together in order to achieve these objectives.
• It is a management model that aims to improve performance of an organization by clearly defining objectives that are agreed to by both management and employees.
• It is a systematic and organized approach that allows management to focus on achievable goals and attain the best possible results from available resources.
4.12 Advantages of MBO
Improves employee motivation
Improves communication in the organisation
Improves overall performance and efficiency
Attainment of goals can lead to the satisfaction of employees