Planning

Prepared by: Louie B. Alejandro Loren Camelo B. Aberonia

Introduction
Planning has been defined as any activity concerned with choosing the best means to achieve a given goal. it is also defined as decision making about the future and it involves identifying and weighing alternative courses of action before the time for commitment or action has come. under this definition, the opposite of planned action is action taken at the spur of the moment.

Rationale for Planning

People generally plan because they want their action to be both effective and efficient. An activity is effective if it achieves its objectives. And an activity is considered efficient if it is undertaken with the expenditure of the least amount of resources. Planning tends to result in more effective and efficient action because the best methods for doing something are identified and because possible problems or difficulties in pursuing a course of action are anticipated. Generally, the more complex the activity is, the greater are the potential benefits to be derived from planning.

Planning and the Management Process

Planning is the basic managerial function whereby the objectives of an enterprise and its subunits, and the means for achieving them, are set. Planning logically precedes the other managerial functions of organizing, staffing, directing, and control. The control function, in particular, is highly dependent for its effectiveness on the outputs of the planning function. Objectives and targets, which are outputs of the planning process, are the starting point of the control function (as shown in Chart 4-1)

Chart 4 1 PLANNING AND CONTROL

Planning

Targets and Standards Corrective Action

Measurement of Performance Causes of Deviation

Comparison with Targets and Standards Identification of Deviations

MAJOR CONCERNS OF PLANNING IN BUSINESS Planning and the Business Environment Planning is a continuing activity in a business firm. A major reason for this is the dynamism of the firms environment. As we emphasized in the preceding chapter, managers operate in a changing and increasingly difficult environment. They must meet social, ethical, political, and other external requirements. Another factor in the environment which is outside the control of a business firm is minimum wage legislation. An upward adjustment in the minimum wage will decrease profits if the firm is unable to market its products at higher prices. An alternative for management in this case is to mechanize operations in order to reduce labor costs. The policies adopted by government and private pressure groups with respect to pollution, noise, energy conservation and waste disposal also impinge on the operations of a firm, e.g., choice of location or production processes. Planning and Corporate Missions and Goals It is through planning should do and define its mission or goals. A primary goal of all organizations is survival to be able t stay in business in spite of adverse developments in the environment. In the Philippines, some companies did not survive the economic crisis in 1983 which was triggered by sudden departure of a Chinese businessman who left about P500M in unpaid debts to various Philippine banks. Thereafter, towards the end of Marcos regime, more companies closed because of the continued deterioration of general economic conditions. To help ensure their long run survival and growth, Peter Drucker proposes that business organizations should have well defined goals in the areas of market standing, innovation, productivity. physical and financial resources, profitability, manager performance and development, worker performance and attitude, and public responsibility.

TABLE 4 1 GOAL CATEGORIES DEPARTMENT STORES

Marketing Standing

Increase sales by 10% each year in the next five years

Innovation

Increase product lines or services to include supermarket, boutiques (for middle income group), sports products, and jewelry items.

Productivity

Install efficiency measures like computer systems to facilitate inventory control and faster service at the cashiers area

Physical and Financial

Construct car park to accommodate more shoppers. Resources from higher or upper middle income group; construction of building facilities for boutiques, etc., in order to expand product mix; borrow funds.

Profitability

Decide on the measure of profitability, e.g., provide 20% ROI (Return on Investment) to stockholders annually for the next 5 years.

Manager Performance

Upgrade managers skills by conducting in-house training programs or on-the-job training.

Worker Performance

Maintenance of positive attitudes on the part of employees by giving bonuses based on sales performance.

Public Responsibility

Undertake projects or programs to improve image in community such as scholarship grants in universities and donations to calamity victims.

Planning and Resource Requirements

In the pursuit of organizational goals, the organization must appraise its resources and competence and match these with the opportunities and risks. The planning process will answer the following questions: How much funds are required to acquire the additional facilities and to fund the additional working capital requirements? How will the firm provide the additional personnel needed? Train present personnel or hire from outside? Will the firm borrow or will stockholders invest additional funds? If the firm will borrow funds, will it be short-term or long-term? The process of identifying resources is the first step to determine the feasibility of the goals or mission formulated by management. It also

facilitates the choice of the least costly alternative in the acquisition of these resources.

Planning and Optimizing the Use of Resources

Managers generally utilize the resources of the firm in activities that will most likely enable the firm to accomplish its organizational goals or mission. These resources are often limited and costly. Consequently, planning allocates these resources with the ultimate objectives of minimizing returns. The following are the decision areas relative to the financial resources available to the firm: Physical Facilities decision on floor space area, how many storey are needed and when to construct each storey, i.e., one floor each year or al floors at one time. Products / Services decision on what products / services to be offered by the department store and by the lessors to balance the product mix. Sublet Store Areas decide on the portion of the developed area to be leased to third parties to generate additional funds from lease income. Financing decide on the amount to be invested and the amount to be borrowed and terms of loan (short-term or long-term; interest rates; collateral)

THE PLANNING PROCESS IN BUSINESS

Identifying Opportunities and Threats The planning activity primarily involves collecting and analyzing relevant external information which defines opportunities or threats to firms business. Examples of perceived opportunities in the external environment are as follows:

 Demand for low-cost housing and construction materials Low interest rates available financing from the government via the Government Housing Loan Programs will increase the demand for low-cost housing and, consequently, construction materials. Demand for smaller cars Gasoline shortage and higher prices of gasoline create the demand for gasoline-efficient cars. In the Philippines, the deterioration of the peso which increase gasoline prices, may also contribute to the increase in demand for smaller cars. Demand for import substitutes Scarcity of foreign exchange and government imposition of controls on imports in a country could present opportunities to firms that could duplicate imported goods in terms of quality and price. Chart 4 2 PLANNING PROCESS
Identification of Opportunities and Threats

Evaluation of Present Situation

Goal Setting

Strategic Plan
Determination of Premises
Matching Process: (Evaluation of Alternatives and Selection of Course of Action)

Programming

Operating Planning
Budgeting

The analysis of threats to the survival of a firm is as important as the evaluation of opportunities. Some examples of perceived threats to a firm are: Increased Competition New entrants to the industry could force a firm to reconsider its product lines.

Price Control The imposition of price ceiling on the product that a firm manufactures limits the profit margin of the firm. The company is constrained either to cut costs or increase sales volume and consequently, increase production capacity to improve profitability.

Competition from Imported products The import liberalization policy of Aquino government has threatened some local manufacturing firms whose products are more expensive than imported goods in the market. These local manufacturing firms cannot compete in terms of price due to production inefficiencies.

Evaluation of Present Situation After determining the opportunities available to the firm and the threats that challenge its existing business, the next step in the planning process is for management to evaluate its present situation in order to determine the gap between its target and its present levels of performance. The consideration of both external and internal factors is sometimes referred to as the Matching process, i.e., matching the firms internal resources (e.g. financial, human, physical facilities, etc.) with the opportunities and threats that it faces. In the matching process, values of management and stockholders are also considered. The opportunity should be compatible with the attitudes or values of the owners / and management. For example, stockholders may oppose the inclusion of cigarettes in the firms product lines because this particular product is regarded as a health hazard.

Chart 4 3 SITUATION EVALUATION DEPARTMENT STORE Potential revenue line (with expansion) GAP Momentum revenue line (without expansion) 5 years Goal Setting The formulation of company goals may be done in three stages: First Stage is the statement of purpose or the basic goal of the organization Second Stage is the statement of the specific path or direction to take to achieve the purpose. Third Stage is the statement of objectives clarifies that the firm will take to fulfill its purpose. Table 4 2 GOAL FORMULATION DEPARTMENT STORE Purpose : Mission : Objectives : Earn profit for owners Offer a full range of consumer products Maintain leadership in sales in the retail trade industry - Maintain harmonious relation with employees and suppliers. Determining Planning Premises Planning premises are assumptions about the future which form the basis of the detailed plans of the firm. The premises which underlie business planning usually concern external and internal variables which are expected to have a major impact on the firms future performance Examples of planning premises are shown below:

P 400M P 200M P 100M 0

External Variables the expected rate of growth of the economy and/or the industry the expected rate of growth of the economy and/or the industry The continuance or discontinuance of certain government policies which have a favorable or an unfavorable impact on the operations of the firm. The expected market strategies of key competitors. Internal Variables the level of internally generated funds to support investments the level of labor productivity in the companys factories the companys total staffing level The continuance of certain operating policies, e.g., rate of dividend, choice of production technology, supply sources, etc. Planning premises usually represent managements best judgment as to future state of key planning variables. In large organizations with formalized planning processes, such premises are usually disseminated throughout the organization to ensure consistency among the different unit plans. Evaluation of Alternatives The process of evaluating alternatives requires the matching analysis of the following: Premises Present and Future Resources Barriers or Constraints Opportunities Values / Experiences of Management and Owners. This stage of the Planning process eliminates alternatives or opportunities that will not contribute to goals set due to lack of resources required or due to negative attitudes of management/owners. From the

various alternatives, a decision must be made on which course of action is to be taken. The decision comes from the Board at the recommendation of the President or the Chief Operating Officer. Programming Programming translates broad plans to be undertaken by an enterprise to specific activities that extends over a period of several years essentially structured by product lines or other program classification. The Programming process involves: 1. the preparation and analysis of proposals for new products and making decisions on these proposals, 2. the evaluation of on-going product lines with the objective of improving their profitability, and 3. The coordination of the separate programs for the optimum profits of the enterprise. The output of Programming integrated plan composed of the following parts: Marketing plan for each product line consisting of pricing policies, product development, promotional efforts, distribution channels and personnel requirements. Production plan for each product line including plant capacity and utilization, inventory levels, personnel requirements, and other production activities e.g., subcontracting some aspects of production processes. Capital expenditures plans for product line and company-wide purchases of machineries or equipment; construction of buildings; long-term leases. Staff plan describing the nature and size of staff units e.g., increase in computer personnel by Controllership Division Manager. Budget Preparation

Budgeting is the translation of Programs to financial and other quantitative data. The budget is stated in monetary terms supplemented by no monetary amounts like units sold or produced. The budget period usually covers one year. Types of Operating Budget: 1. revenue budgets and 2. Expense budgets. The Revenue Budget consists of units sales projections multiplied by expected selling prices. The expense budget consists of cost of goods sold and other operating expenses at the expected level of operations. TYPES OF PLANS The plans in business firm may be classified in different ways. We briefly describes below some of the most commonly used categories for classifying plans in business. Strategic Plans Strategic plans may be characterized as those which pertain to the future position of the entire business or firm in its environment. Such plans are usually long term in nature, e.g. 3-5 years, are based on the explicit assessments of the competitive strengths and weaknesses of the firm and business, and define the direction and growth of the enterprise. Strategic plans are usually prepared in the upper levels of management and serves as the basis for the operating plans. An example of a strategic plan is one which calls for the diversification of a single-product manufacturing business into other related products over say, a five-year time period. The first five steps shown in Chart 4-2, i.e., identifying opportunities and threats, evaluation of the present situation, f\goal setting, determination of premises, and the matching process, when applied to the enterprise as a whole(rather than its sub-units), represents the strategic planning process. The outputs of the strategic planning include the statement of the companys goals, purposes and missions, the types of business it will pursue, and whether the company will broaden or shrink its existing business (es).

 Operating Plans Operating plans usually pertain to activities in specific departments of a business firm. They are generally shorter in time frame (e.g. one year), and usually involve the middle and lower level managers. Although coordinated with each other, operational plans are prepared separately by the managers of the functional sub-units of a firm. Operations planning is concerned with the day to day activities of the business and focuses on timetables, target quantities (e.g., units sold, units produced, units purchased), and specifies the persons responsible for the tasks. Steps 6 and 7 in Chart 4-2, i.e., programming and budgeting, are operations planning activities.

Programs and Projects A project is a plan which pertains to a discrete activity unit which has a specific starting and ending point. Projects may also be distinguished for other operating plans in that they involve non-repetitive activities, e.g. constructing the factory building, conducting a market survey for a specific product, or moving the office to another location. Programs usually refer to larger activity units. Programs often refer to a collection of related plans or projects. For example, affirm may speak of an expansion program which consists of all of the following related activities: building a new factory, recruitment and training of new factory workers, opening new market outlets, increase in the sales force, borrowing money to finance the expansion, etc.

POLICIES, PROCEDURES AND RULES Other types of plans that are prepared by management to help achieve company objectives or goals are: 1. policies and: 2. rules or procedures. 3. POLICIES: Policies are general statements or understandings that guide company personnel in making decisions. Policies are, at time expressions of the company culture and practices that evolved over time.

Examples of policies are: Customer Policies Merchandise can be returned by customers within one week from the date of purchase. Promote from within starting from a specific level.

Personnel Policy

New hires should not be first-degree relatives of present employees. Pricing Policy Minimum Cash Balance Policy Fixed-Price Policy All funds in excess of a specified minimum cash balance should be invested in marketable securities.

Policies are usually contained in memos or, more frequently, in company manuals.

RULES OR PROCEDURES: Rules or procedures are specific instructions or definite actions to be taken or not to be taken with respect to a task or situation. A rule is more limiting than a policy hardly any discretion is allowed by rules. Examples of rules are:

Customers Refund

No refund will be given for returned merchandise if, invoice is not returned by the customer. (This rule can be part of a company policy of accepting merchandise returned by customers.) Employees not in uniform will not be allowed to render service during the

Uniform Rule Gate Pass

day. Equipment brought out of company premises must be accompanied by a gate pass.

TOOLS FOR PLANNING AND DECISION MAKING

Forecasting

Forecasting is the process of developing assumptions about the future that are relevant to the predicted level of variables, e.g., sales. A sales forecast is a prediction of expected sales, by product and price, for a specific time frame, e.g., month, quarter or year. Preparing a sales forecast facilitates planning by addressing the following questions:

What product mix should the company have t\next year? At what prices should the products be sold? Should the company advertise to be able to sell at those prices? Should the company sell on credit? What is the credit period? What is the expected sales volume for each product? Should the company expand production facilities to meet the expected sales volume?

Linear Programming

Linear Programming (LP) is a quantitative tool for calculating the optimal combination of resources and activities. It can be used for production scheduling, allocation of marketing personnel to territories or allocation of production inputs to produce an item at minimum cost. Linear Programming as a control tool is discussed in Chapter 12.

Breakeven Analysis

The computation of the companys break-even point is as useful technique could be used in analyzing the effect on profits of different alternatives in incurring costs. In breakeven analysis, cost behavior with respect to volume is either fixed or variable (although in real life situation, some costs are semi-variable). Companies with higher fixed costs than another firm, given that other variables (variable costs and selling prices) are the same will have a higher break-even point level. When the company is operating at the break-even point, its total revenues equal total costs and at that point, profits are zero. Operating above the break-even point, the company makes a profit; below that point, the firm incurs a loss.

In the determination of the break-even point, the first step is the classification of costs according to their behavior. Accordingly, costs are classified as either fixed or variable. Fixed costs will remain the same in total at whatever volume the company will operate within a relevant range. Total variable costs change in direct proportion to changes in volume. In Chart 4-4, the vertical distance between the total cost line and the fixed-cost line is the total variable costs. The revenue line is simply the selling price multiplied by the total number of units sold.

The break-even point is vital to planning. As a planning tool, it helps management decide on selling prices, product mixes and in the selection of alternatives. The classification of costs as to variable or fixed is also useful for budgeting.

Stimulation Models

Simulation is useful in complex situations such as predicting product demand considering the effects of changes in the pricing policies of competitors, or the effect of a change in foreign exchange rate on company profits considering changes in minimum wage and inflation rates.

MANAGEMENT BY OBJECTIVES

In Management by Objectives (MBO), the manager and the subordinates discuss together the goals set for the subordinate with the understanding that the extent to which the goals are attained will be a major factor in evaluating and rewarding the subordinates performance. The purpose of MBO is to get the participation of the subordinates in goal setting and in the process get those to commit accomplish the goals set. The goals set for the subordinates should facilitate the attainment of the organizations goals. The MBO process involves the following steps.

Participation

Agreement

Feedback
1. Superiors communicate to subordinates organizational goals and expected subordinates goals. Superiors discuss with subordinates a) subordinates goals and both parties should agree on a set of objectives. (The objectives should be verifiable or measurable and should be accomplished within a time frame.) b) resources required to attain goals.

2.

3.

Periodic reviews should be conducted to monitor performance and to discuss reasons for deviations of actual performance from targets. Manager or superior discusses evaluation of subordinate the reward given (promotion or salary adjustment) or punishment (no pay increase or no promotion).

4.

MBO is a useful technique in clarifying organizational goals and the roles of subordinates in the attainment of these goals. However, if the subordinates goals are not acceptable and are for rewarding or punishing personnel, it could be dysfunctional. The key to the success of an MBO program is in the setting and acceptance of subordinates goals.

SUMMARY

Planning is deciding on the future state of an enterprise. Its importance is primarily a result of the changing environment in which the firm operates and the need to formulate solutions to problems that might arise in the daily activities. A major concern in planning is considering some environmental factors that affect the functioning of the firm. These are: 1) 2) 3) 4) technological political economical; and social factors. Another concern is the formulation of goals/missions for the firm subject to the resources of the firm. The planning process involves the following activities:

1) 2) 3) 4) 5) 6) 7)

identification of opportunities and threats evaluation of present situation goal setting determination of premises evaluation of alternatives and selection of course of action programming and, budgeting. The types of plans, discussed in this chapter include:

1) 2) 3) 4)

strategic plans operating plans programs and projects policies, procedures and rules.