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PLANNING & Planning Premises

PLANNING: According to Koontz & O’Donnell, Planning is defined as “ An intellectual

process, a conscious determination of courses of action, the basing of decisions on purpose, facts
& considered estimates. ”

According to George R Terry, Planning is defined as “ the selecting & relating of facts & using
of assumptions regarding the future in the visualization of proposed activities believed
necessary to achieve desired results.”

CHARACTERISTICS OR FEATURES OF PLANNING:

 Planning is all-pervasive: This means that Planning is not confined to any particular
department but applicable to all the levels of the organisation. Planning is important for all
types of organisations as well whether we talk of small or large, non-profit or business
organisations.

 Planning is primary function of management: Planning is the starting point of all the
managerial functions. Without planning, none of the activity can be performed. E.g., If planning
is not done, how many units is to be made, how to order the materials. So planning precedes all
the functions.

 Planning is a continuous process: Planning is not required not only at the initial stages of
business, but also required when any change is to brought like increasing production,
increasing marketing etc. With this, we have to continuously in line with the budget, whether so
if any change is needed in planning, it can be done easily.

 Planning is a conscious activity: Planning aims at achieving basic objectives of the business.
So, planners have to take into consideration all possible consequences of a particular course of
action.

 Planning is flexible: Planners make the plans based on estimates. If the conditions are turned
out to be different, it is necessary to revise the plans and a continuous review of estimates are
necessary to make planning effective.

 Accuracy is essential to Planning: It is true that Planning is based on estimates. But it also
takes into account the overall capabilities of the employees, past performance etc. So a large
amount of accuracy depend on performance of the employees.

 Planning is intellectual process: Planning is preparing an outline of the activities to be done

in future. Since future is uncertain & unknown, planners have to use their insights to make
estimate of the future.

 Planning is a choice of alternatives: Planning is done because there are many alternatives
available. Objective of the planning is to select the best alternative.

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Steps in Planning OR Planning Process:

 Establishing Objectives: Objectives indicate what is to be achieved in future. Once they are
clear, planning can take place. If more than one objective are there, they must be arranged in
order of priority.

 Building the premises: Planning is a programme future action. So premises are to be

established. Premises are the basic assumptions about the future settings in which planning
takes place. E.g., pricing policy, credit policy etc. Planning is to be done based on these
premises.

 Collection, Classification & analysis of data: Planning is effective only when the data related
to the types of premises are collected & classified properly. Only relevant data are collected &
presented in a manner understood by everyone.

 Determining alternative courses: There may be alternative courses to achieve goal. E.g., to
achieve higher profit, one can reduce the selling price & thereby increase the total production &
so the profit. Another way to increase the profit is to increase the price, maintaining sales level
at the same point.

 Evaluating alternatives: After considering all the possible alternatives each one of them is
properly assessed in terms of profitability. For analysis purpose, various mathematical &
statistical methods are available. Recently Operation research also plays important part in
analyzing alternatives.

 Selection of a course of action: After analysis, the best alternative is to be selected. Selection
is made carefully because the future of the company is dependent on the selection of alternative.

 Preparing derivative plans: After formulating main plan, subsidiary plans are to be made
for each department. E.g., once the plan is made for purchasing a new machine, additional
arrangement is to be done for the working capital, raw material, labour etc. Successful
implementation takes place only when all the subsidiary plans are made properly.

 Providing follow-up: Once the plan & sub-plans re made, the plan is to be examined on
experimental basis, the defects, difficulties are to be found out & rectified. Once an actual plan
is implemented, continuous checking is to be done so that any change needed can be
implemented without delay.

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Importance of Planning OR Advantages of Planning:
 All activities become purposeful & orderly: When a definite & clear goal is established, all
efforts are aimed towards achieving them with shortest possible time.
 It helps in economizing by reducing wastage: Every activity is examined carefully before
implemented so there is no chance of wastage. So, maximum possible output is achieved & thus
possible to reduce the cost of production.
 Useful to a large extent in facing future changes & uncertainties: Planning takes into
contingencies which may arise in future so enough provision is made in advance, which make
things easier.
 Focuses on attention on objectives: Planning attempts to realize the objectives defined. The
manager of each department knows what he has to achieve & so always keen to them.
 Planning imparts accuracy: Under planning, all the facts are accumulated, systematically
classified & then decisions are made. So decisions are tend to be more rational & realistic.
 Planning helps in other functions of management: Planning helps other departments to
form their own plans. E.g., Once the plan is made for purchasing a new machine, other
departments will formulate their policy of arranging labour, raw materials etc.
 Planning facilitates control: Planning does not end by making plan. It compares the actual
results with the expected & if any deviation is found, it is corrected. So no space for the
wastage, failure.

LIMITATIONS OF PLANNING:

 Uncertainty : Planning is concerned with future & future is always uncertain. It is prepared
on the basis of certain hypothesis about future events. If the real thing comes out to be different
than assumed then planning will be not at all useful.
 Long & expensive process: Planning is very expensive because experts are called to collect,
classify & analyzing the data & make decisions on the basis of it. With this, it requires very long
time in preparing alternative & subsidiary plans. If future is different than what estimated, the
expense incurred & time spent will be just wasted.
 Planning makes management rigid: Planning defines rules, regulations, policies &
procedures. They are so tightly fixed that no employee can alter them according to
circumstances. Planning should be flexible in the sense that if employees find any fault in it, a
change should be made in the plan. A defective plan yields nothing.
 Inflexibility of external forces: external forces are beyond the control of the management.
These external forces may be political situation, Government policies, technological change,
international environment etc. These all factors planning useless.
 Inaccurate & Inadequate data: The information collected is not reliable, the results are also
not going to be reliable. The planners have to take great care in collecting, classifying &
analyzing data.
 Planning reduces the freedom of employees: Planning means deciding everything in
advance. So employees have no freedom of action & initiative. They can not use their discretion.
They lose interest in the job.

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 Use of defective methods: There are various statistical & mathematical techniques are
available for analyzing business situations. But no technique is used in all circumstances. So a
great care is to be taken while choosing any method.
 Planning is unnecessary: Some people are of the opinion that planning is unnecessary. If
plans are rigid, based on future which is uncertain, reduces the freedom of employees, it is not
useful. It will lead to business failure, as morale of employees will not be so good.

PLANNING PREMISES :

According to George R Terry, Planning premises are assumptions providing a background

against which estimated events affecting the planning will take place.

Types:

o Internal Premises: Internal premises lie within the business enterprise. They are
controllable premises as they are formed by the managers. E.g., Forecasts about the business
issues such as sales forecast, marketing budget forecast etc.
o External Premises: External premises lie outside the business enterprise & therefore they
are uncontrollable. E.g., the Government policy.

Koontz & O’Donnell classify them in 3 groups: (A) General Business Environment (B) Product
Market (C) Factor Market:

(A) General Business Environment :

 Political stability : Political stability has a greater impact on business than the Government
control. If Government is stable for a long time, then long run planning is much easier. But
when the Government is not stable, planning is difficult as different political parties have
different viewpoints & their viewpoints may be favourable, may not be favourable.

 Government controls : Government controls must be considered as a very important

premise of planning. If Government adopts the greater number of controls, it becomes a very
significant premise for the company. Not only present policy, but future policy of Government
is also very important.

 Government fiscal policy: Government fiscal policy has a considerable impact on business.
Since taxes take away a large part of company’s income, any changes in it will affect the
company significantly. For business units, Government’s monetary policy is also as important
as its fiscal policy. If Government imposes strict controls on bank lending demand for a large
number of products tends to decline considerably. The management should not ignore
possibilities of changes in monetary policy of the Government.

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 Population Trends : A study of population trends is highly used for projecting market
demand. The size of population and its age structure both are relevant and hence are to be
observed keenly by the management. The estimates of population trends covering 10 to 20
years, though difficult and comparatively less reliable, can also serve as useful premises in
long run planning. As against this, projections about population in the next five years period
can be comparatively fairly accurate. On the basis of the estimate growth of population, it is
possible to predict the future trend of demand for the industry as a whole.

 Employment, Productivity and National Income : The Government and semi-Government

institutions publish reliable data on these variables. On the basis of the information about
population growth and Government economic policies, it is possible to estimate the level of
employment and output in the economy in future. On the basis of this estimate, the
management should try to estimate the probable effect on market demand for their
product.

 Price Level: The business manager must premise future price level and its influence
on market demand for his product, it is possible to obtain reasonably accurate estimates of
price level in the next three to five years on the basis of the magnitude of deficit financing
earmarked in the five year plan. But for periods beyond a few years, the course of price level
is not so clear. It is not incorrect to say that prices rise over a long period. There may be
intermittent periods of price fall but the average tendency of prices is to move up
continuously.

 Technological Change : Since the pace of technological changes is fast at present and
since new products and processes are being invented very fast, it is necessary for business
managers to take a close look at the technological environment. Most of the co mpanies
maintain a permanent research staff, which is supposed to be constantly in touch with
technologic changes and to make forecasts of their effects on business. Even some
companies take care to keep in contact with their customers and suppliers so that they can be
able to forecast future changes in business technology.

 International Political Situation : The political changes at international level

influence the market demand for our products. E.g., outbreak of war between two or more
nations, the stopping of war, sudden death of an important political leader in an influential
country etc. are the happenings which affect the market demand for products and
availability of raw materials and other resources as well. Though forecasting such
happenings is a difficult job, an attempt at this direction can be made on the basis of the
current situation.

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 Social Revolution : Business is affected by social changes also. Such events as trade
unions’ agitations, students' agitations etc. create serious upheavals in the society and these
upheavals can have deep influence in business also. Similarly, some social institutions are
set up to bring about favourable changes in the customs and habits of the people and these
change can also bring about a large change in the pattern of consumption. Consequently,
there can be considerable variations in the market demand for products.

 Trade Cycles : Regular ups and downs in business activities are known as trade cycles.
Business managers have to make a systematic study of cycles to forecast the business
conditions better. All trade cycles are not perfectly alike, nor is there any regularity of
stages in trade cycles, so accurate estimates of future changes in business conditions are not so
easy. Besides, any error in forecasting can damage the business. Hence business managers
must make such forecasts with utmost care.
(B) Product Market :

 Industry Demand : A number of factors affects the demand of the whole industry.
Hence, a careful estimate has to be made about the extent to w hich each factor will affect
the industry demand. For most industries, statistics on production, national income,
employment and price level are available through such sources as Government and semi-
Government sources. These statistics furnish a good basis for forecasting industry demand.
E.g., Industry demand for comforts would increase if there is an increase in the incomes of
the middle class people. Industry demand for luxuries would increase following an increase
in the incomes of the upper class people. While dealing with industry demand, a study of the
inter-industry relationships will also be quite helpful.

 Individual Firm Demand : Individual firm demand should be estimated in the context
of industry demand. The price elasticity of demand for the product is not same for all firms,
because price elasticity of demand for the product of any individual firm depends on its own
policy, on the policy of the rival firms, consumers' preference etc. Hence a survey of consumer
behaviour would be necessary in forecasting individual firm demand. As assessment of the
potential customers, their status would be of much relevance. The premises about individual
firm demand may be based on the survey conducted by the firm itself or on the data available
through external sources or on the strategy adopted by the rival firms in the market.

(C) Factor Market :

Factor market deals with the factors of production (such as labour, capital and raw
materials). How they can be obtained when required is an important consideration in
business planning.

 Business Location : The choice of location of a business unit is affected by several

factors like availability of raw materials and skilled labour, transportation, local environment,
existence of auxiliary industries, availability of capital etc.

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 Labour Availability : Availability of skilled labour plays at important role in

determining business location. The quality of labour available for production & stability varies
between regions and between areas in a region. Labour unrest is more pronounced and
common in some states than in other. West Bengal is very common in case.
Even price of labour, i.e. wage rate is significant for business planning. Although
wage differentials in different industries & in different regions have been reduced to a large
extent due to the growth of trade unionism, yet wage differences that exist at present should
be given due consideration in business planning.

 Sources of Materials and Parts : If transportation costs constitute a large portion in total
costs of production, sources of materials and parts become an important consideration in
deciding the location of business unit.

 Availability of Capital : A firm, in general, has several sources of finance open to it. But in
all industries capital cannot be obtained with equal easiness. Particularly small units and
medium units find it more difficult to raise capital beyond a certain limit. In addition, there
are various other limits to the availability of capital depending on the size of the firm and
the receptiveness of the market to new financing at any given time.

INTERNAL PREMISES

Of all internal premises of business planning, the major one is sales fore cast. Though sales
forecast itself is a basic planning document, it sets the framework on which most internal plans
are constructed.

 Sales Forecast: It is a projection of future sales by product and price fo r a number of

months or years. Accurate estimates of profit and cash flow ca n be made on the basis of the
sales forecast over a long enough period in which management has some confidence.
Usually, revenue side is more difficult to forecasts as debtors can not be predicted easily.
But once revenue side is estimated, cost side can be easily predicted, as it is within the control
of management to a large extent. In any case, sales forecast cannot be ignored because it is a
key element in internal planning. Even the companies, which usually receive large orders fo r
their products need to evolve some arrangement for sales forecast. Smaller companies often
make the mistake of believing that sales forecasts are too expensive. The information, which
the salesman, production manager and purchase agent etc. possesses can make an
acceptable forecast, if it is gathered together systematically. Moreover, the wide range of
information available from the Government and industry sources is neither expensive nor
difficult to obtain.

 Forecasting : Methods used for sales forecasting may divided into two categories :
Statistical methods and other methods.

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 Capital Investment: It is difficult to recover investment made in fixed assets in a short
time. Hence attempt should be made to recover it through best possible use of these assets.
It necessary that business managers frame the plans to ensure best use of the fixed assets. They
should make a comparative evaluation of various alternative schemes of investment. They
should also examine whether capital would be available in required amount. The sources of
capital and terms on which capital would be available should be taken into consideration.

 Basic Policies : Some business policies cannot be readily change. E.g., Once profit sharing
scheme is introduced by a firm, it is difficult to stop it later. If a policy of keeping the existing
customers pleased even at the cost of profitability is decided upon, it is not possible to
ignore existing customers and look for new ones just to raise the profitability.

 Supply of Materials and Parts : These may also be regarded as internal premises,
because these sources are to some extent within the control of the firm. The business
managers have to decide whether materials and parts would be produced internally or must
be bought from outside. Often a company decides to persuade some firm to act as a supply
of materials or parts. Sometimes it makes purchases from more than one firm.

 Development of Unit : The planning must also take into account the probability of
development of business unit. A business unit started on small scale, will develop in future, if
properly managed. This calculation will give an idea about problem that may arise due to
expansion and necessary steps may be taken.

 Ability of Employees : Employees’ contribution is a very important factor in

implementing the plan. They have to work for achieving the target laid down. Sometimes,
employees may oppose some of the plans. In such case, their suggestions must be invited at the
time of preparing plans and must be taken into consideration, if found useful.

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Methods of Sales Forecasting :

There are two types of sales forecasting methods. In one group are the methods under
which managers make use of their talent and experience to estimate future sales. In the other
group are the methods which are highly technical knowledge of mathematics.

(1) Jury-of-Executive Opinion Method : No difficult calculations are needed in this

method. Sales forecasts are made on the basis of the opinion of the top managers or experts
in the respective areas. The success of this method depends on the degree of information
possessed by top managers. Even salesmen's estimates are used for sales forecasting. Since
salesmen are more in personal contact with the customers, their opinions and estimates
can be more reliable.

This method has the advantage of ease and simplicity. It allows for pooling of experience and
judgement. But top manager’s opinions are influenced by their knowledge of the market.
Their opinions cannot be of much use if their knowledge is limited. If salesmen’s opinions
are used for sales forecasting, they do feel that their importance is accepted by the
management but salesmen & even sales executives are poor in forecasting.

(2) Survey of Buyers’ Intentions : Sometimes this method is recomme nded for sales
forecasting. The General Motors Company of the U.S.A. has opted this method. As Joel Dean
remarks, “ The most direct method of estimating sales in the near future is to ask customers
what they are planning buy ”. When the sales engineers of the General Motors Company go
for regular service, they personally contact the customers and collect information about their
purchase intentions. For a big Company, however, to contact a large number of buyers,
scattered all over the market is a costly affair. Hence it may prefer to use the data about
buyer's plans published by outside agencies.

(3) Trend Projection Method : Generally, established companies obtain a record of their
past performance. These companies use the data about the sales in the past to prepare a

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time series showing the volume of sales different point of times. By plotting this data on a
graph a trend line can be observed.

In addition, Exponential Smoothing method is also be used for sales forecasting. This
method is simple and inexpensive. It is based on the assumption that the trend observed in
the past would continue in future also. This assumption may be true in normal
circumstances, but not in case of sudden turning of a trade cycle plunging the economy in
severe depression or lifting it on to a prosperity stage, Though the effects of seasonal
changes in market can cancelled out while drawing a long term trend of sales, sudden
turning point of trade cycle can upset the sales forecasts. Despite this, this method has
gives surprisingly accurate result in cases.

(4) Correlation Analysis Method : If two variables are correlated in a definite manner, the
behaviour of one of them can be predicted on the basis of the data about the other variable.
E.g., if demand for radio sets is found to vary directly with money supply in the economy, the
manufacturers can estimate the future demand for radio sets on the basis of their information
about future monetary policy of the Government. The statistical method can be used to assess
the degree of correlation between them. Thus, if any two variables are correlated and if
reliable data about one of them is available, the value of the other variable can be predicted
with accuracy. Of course, the correlation must be logical. To establish a relation between the
rain in China and grain in India may be possible, but it is ridiculous to do so.

The main drawback of this method is that it depends too much on the past events. But
business conditions are changing so rapidly that correlation between any variables suddenly
ceases to exist or the degree of correlation is reduced to such an extent that it becomes
meaningless.

(5) Economic Indicators Method : Some economic indicators point to the possible
behaviour of sales. E.g., an increase in the number of registration of motor cars indicate that
demand for petrol and spare parts will, increase in future. Similarly, if there is an increase in
the incomes of agriculturalists, the demand for tractors and fertilizers can be expected to
rise. The statistical data about these economic indicators are usually published by the
Government and other bodies. These data can be used for sales foretasting by the business
managers.

(6) Controlled Experiments : This is a novel method of forecasting. Under this method, an
attempt is made to examine the effect on demand of each of the variables by changing them

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one by one. E.g., initially only advertisement expenditure may be changed to examine its
effect on demand. Then only price may be changed. Similarly, the effect of change in
packing and design of the product may be observed individually. On the basis of this
information, it is possible to forecast the effect of a possible change in any determinant on
future sales of the product.

(7) Econometric Model Method : It is the most modern method of forecasting. It uses the
mathematical model in the form of an equation or a set of equations. If complete past records
are available with a company, an equation can be established showing the relationship
between different variables affecting the sale for which forecasts are to be made.
E.g., Demand for electric fans = A and Advertising expenditure = B, the relation between
them can be represented in the form of an equation as follows :
A = 1000 + 0. 5 B.
Now, if the Company decides to spend Rs. 10,000 on publicity, sales can be estimated as
under : A= 1,000 + 0.5 (10,000) = 1,000 + 5,000 = 6,000 electric fans.

In practice, equations are more complicated because the variables affecting sales are large in
number. It is difficult to build equations incorporating so many variables in it. If any error is
committed in the calculation of relationship between variables, the model will lead to wrong
results.

Combination of Methods : In practice it is not advisable to depend exclusively on one or the

other method. To obtain good results, more than one method should be adopted
simultaneously. Of course, in such cases, the forecasters feel secured only when different
methods lead them to similar results. If the results are not identical, they serve as a warning
that a single approach may have overlooked an essential factor. For example, in the SKF
Industries, three sets of sales forecasts are prepared - one by specialists in the sales department,
another set by the commercial research department and still another by the salesmen in the
field. These sets are submitted to the sales manager who reconciles the differences and
presents these sets to the sales vice-president. The latter, in turn, modifies forecast and
prepares his approved forecast.

IMPORTANCE OF PREMISES :

Premises make decisions more realistic. If the planner makes premises and a plan based on
facts arrived at on the basis of such premises, planning will become effective. Reliable data
for the purpose of preparing plans are made available due to planning premises.

1. For Effective Planning : The premises are of great importance in visualizing difficulties
that may arise in future. Instead of making assumptions, it would be better for the success
of planning to base planning on data made available by premising. It gives us an idea of

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so many uncertainties lying in future, which a business may have to face. E.g., The fiscal
policy of the Government and the savings and purchasing power of the people have
considerable influence on business. If intelligent estimates are made in these respects, it
will be able to reduce uncertainties and risks.

2. For Reducing Risk and Uncertainties : An effective estimate of future will help us
to know many uncertainties of future. This helps us in reducing risks of such
uncertainties. These estimates must be based on past experience, no guesswork and
calculations.

3. Changes in Planning : Only intelligent estimates of future will enable us to judge when
the changes in planning will have to be made, so we can adjust our planning to new
developing circumstances. Even the length of plan period will be determined on this
basis.

4. Co-ordination : While making premise, so many factors are taken

into consideration like proportion of increase in sales, increase in expenses and
change in net profit etc. The planner is able to visualize the interconnections among various
activities and bring it to the notice of all managers concerned. This helps in co-ordinating
activities of all sections of a business unit.

PROCEDURE FOR DETERMINING PREMISES

1. Developing the Groundwork : It is essential to carry out investigation

into the progress of the products, the Company and the industry separately and
in relation to each other. The aim here is to collect that information on which
future estimates can be based. E.g., what has been the nature of relationship between the
progress of the company and that of the industry it belongs to; what has been the nature
of relationship between the population growth & National income on the one hand and
demand for the company's product on the other.

2. Estimating Future Demand : Now the stage is set for preparing projections. For this,
officials of the company are given the task of preparing estimates. Then they prepare
final estimates after mutual consultation and deliberation. Since every key official is
directly involved in the preparation of premises, he is constantly aware of his
responsibility and accepts his personal responsibility for deviations of actual from
estimated results as may occur.

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3. Comparing Actual with Estimated Results : From time to time, actual performance
of the company is compared against its estimated performance. If any major
differences are observed, main causes of this discrepancy are identified. The
estimates prepared in this manner serve as norms against which unanticipated gains or
losses can be measured and causes thereof can be examined.
4. Modifying the Forecast Process : Experience with this procedure of forecasting can be
helpful in finding out its drawbacks. The mistakes in the past should not become the
target of criticism. Rather, an effort should be made to improve the procedure by
ensuring that these mistakes would not be repeated in future.

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