CHAPTER TWO

THE PLANNING FUNCTION

2.1 Meaning and Definition

Planning is the most fundamental function of management. Planning is the process of

determining the goals of organizations and specific course of action for achieving those goals.
Without planning which results in purposive and coordinated effort, the results are chaos,
confusion, and wastage of resources. Planning is mainly concerned with ends (what is to be
done) and with means (how it is to be done).

Planning answers six basic questions in regard to intended activity. These are the questions of
what (the goals), when (timing), where (the place), who (people performing essential activities),
how (methods of reaching goals) and how much (expenditure of resources). The goals set by
planning may be long-term and short-term goals.

2.2 Importance and Nature of Planning

 Importance of Planning

Without planning, business decisions would become random, ad hoc choices. The following are
among the paramount importance of planning function.

1. Planning minimizes risk and uncertainty: Planning allows managers and organizations
to minimize risk and uncertainty by providing a more rational and fact-based procedure
for making decisions.

2. Planning leads to success: Planning does not guarantee success. But studies show that
companies which plan enjoy more success than the non-planners (the companies which
are not led by plan).

3. Planning focuses attention on organizational goals: Managers through planning will

focus on organizational goals which will make it easier for them to apply and coordinate
the resources of the organization more efficiently. If a manager focuses on the goals, he
or she can outline sequence of steps in advance for their realization.

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 4. Planning facilitate control: The goals and plans become standards or benchmarks
against which performance can be measured. A manager can only exercise controlling if
there are plans.

5. Planning lays ground for other managerial functions: The other managerial functions
are based on planning. Not only controlling, but also organizing, staffing, and leading are
also facilitated by sound planning.

 Nature of Planning

The important characteristics of planning are the following

a. Planning is a primary management function: Planning occurs before organizing,

staffing, leading and controlling. It provides direction and a common sense of purpose for
the organization. Hence, planning sets foundation for all the managerial functions to
follow. For instance, organizing of resources and activities depends on the goals set by
planning. Human resource planning and the entire staffing process if influenced by
planning. Additionally, planning provides the guidelines for directing employees and
controlling activities.

b. Planning is a continuous process: Planning deals with the future and the future by its
nature is uncertain. The uncertain nature of the future makes it difficult for the planner to
establish perfect prediction. The prediction that a planner makes today is more likely to
change tomorrow. This aspect of planning makes it a continuous process. Planning does
not acquire finality.

c. Planning concerns all managers: Every manager is expected to set his goals and
operating plans. Thus, planning as many people think is not the responsibility of top
management or staff planning department only. However, being responsible for a
relatively larger part of the organization, top management devote much of their time to
planning.

d. Plans are arranged in a hierarchy: Plans are first set for the entire organization called
the corporate plan and then corporate plan are converted into divisional, departmental and
sectional goals. The plans of lower component are aggregated into the plans of
successively higher components. This is the hierarchy of plans. Usually, mission

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 statements are at the top of the hierarchy while operational goals are situated at the
bottom of goal hierarchy. Tactical and strategic plans are somewhere between the
mission statement and operational goals.

e. Planning commits the organization into the future: An organization’s objectives,

strategies, policies and operating plans established in earlier years affect the future
activity of entities. Some plans affect the long run while other plans affect the near future.

f. Planning is antithesis of status quo: Planning attains a position for the company that
would not be accomplished otherwise. This means the changes visible in the position of
organization is the result of planning. Planning therefore implies changes in
organizational objectives, policies, products, marketing strategies and so forth.

g. Ability to adjust: Planning allows managers the opportunity to adjust the organization to
the environment rather than to react to it. Can you imagine of a country without a defense
plan? Of a football team without a game plan? The existence of plans provides for the
chance to adapt rather than react.

h. The efficiency and effectiveness of plans: The effectiveness of a plan pertains to the
degree to which it achieves the purpose or objectives. The efficiency of plan, on the other
hand refers to its contribution to the purpose and objectives offset the costs and
expenditures required to formulate and operate.

2.3 Types of Plan

Plans can be classified based on the following dimensions:

 Repetitiveness

 Time dimension and

 Scope

Classification of Plans Based on Repetitiveness

Based on repetitiveness, plans can be classified into two major divisions:

1. Standing plans

2. Single use plans

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 Standing Plans

Standing plans are those plans that can be used again and again. They are followed each time a
given situation is encountered. Standing plans include mission or purpose, goal or objective,
strategy, policy, procedure, method and rule.

i. Purposes or Missions

The mission or purpose identifies the basic function or task that is performed by the enterprise.
Every kind of organized operation should have a mission if it is to be meaningful for its
existence. For instance, the purpose of the court is interpretation of laws; the purpose of
university is teaching and research; the purpose of business generally is the production and
distribution of goods and services. People sometimes think the mission of a business as well as
objective is to make a profit. But the most basic function of businesses is to survive and to do the
task society has entrusted to it.

ii. Objectives or Goals

Objectives or goals are the ends toward which activity is aimed. They represent not only the end
point of planning, but also the endpoints of organizing, leading, staffing and controlling.
Departments may also have their own objectives as enterprises objectives are the basic plan of
the firm. The main difference between objective and mission is objective is related towards the
ends of specific activity while mission solely refers to the activity itself. The mission of a
business firm may be to produce products, but as an objective the business firm may has the
objective of producing 10,000 units of output in a year.

iii. Strategies

Strategies are ways and means to achieve the established objectives. It is important to notice that
every objective must have at least one strategy. This means that management should at least have
one stated course of action to accomplish every objective. Hence objective mainly answers what
question where as strategy answers the how question.

iv. Policies

Policy is a standing plan that establishes general guidelines for decision making. Policies channel
the thinking of organization members so that the members move consistently with and contribute

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 to an objective. A university for example may have various extracurricular activity policies to
support the objective of academic learning and performance. There are many types of policies.
Examples include policies of hiring university trained only, encouraging employee suggestions,
promoting from within, etc.

v. Procedures

Procedures show the sequence of activities. They are chronological sequences of required
actions. Procedure contains detailed guidelines for handling organizational actions that occur
regularly. Procedures are more numerous at the lower levels because of the necessity for more
careful control and help in the implementation of policies.

vi. Methods

A method is a more detailed description than procedure. Whereas a procedure shows a series of
steps to be taken, a method is only concerned with single operation, with one particular step and
it tells exactly how this particular step is to be performed. How user department prepare material
requisition is a good example of method.

vii. Rules

Rules are usually the simplest type of plan that spells out specific required actions or non-actions
to be taken in a given situation, allowing no discretion. The situation in which a university
student with a grade point average below 2.0 cannot graduate is one example of a rule. People
frequently confuse rules with policies and procedures. Rules are unlike procedures that they
guide action without specifying a time sequence. The purpose of policies is to guide decision
making in which managers can use their discretion. Although rules also serve as guides, they
allow no discretion in their application.

 Single Use Plans

Single use plans are those plans that are not used once the objective is accomplished. They are
used only once and not over and over again. Single use plans include programs, projects and
budgets.

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i. Programs

Programs are complex set 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, ordinarily supported by budgets. Typical example of a program is the expansion program
of hospitals. It holds applicable till the expansion is over and expires after the job of expansion is
complete.

ii. Budgets

A budget is a statement of expected results expressed in numerical terms. It may be referred to as

a numberized Program. It is also often called profit plan. A budget may be expressed in financial
terms, in terms of labor hours, units of production, machine hours or in any other numerically
measurable term.

Budget is a fundamental planning instrument in many companies. It is necessary for control but
it cannot serve as a sensible standard of control unless it reflects plans. Budgets vary
considerably in accuracy, detail and purpose. There are three types of budgets.

 Variable or flexible budget: are budgets that vary according to the organizations level of
output.

 Program budget: identifies goals, develops detailed program to meet the goals and
estimate the cost of each program. Program budget is a kind of budget that a manager
must do through planning.

 Zero base budgets: is a budget for programs that start from a scratch or base of zero.

iii. Project

A project is merely part of a general program that can be planned and fulfilled as a distinct
project itself. Usually a project is handled by itself.

Classification of Plans Based on Time

We can classify plans into three based on time as:

a. Long-range

b. Intermediate range and c. Short-range

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 Long-range Planning

Long-range planning has longer time horizon. It is not concerned with immediate future, but with
distant future. Long-range plans are mainly concerned with future direction of the organization
and may usually range form 5-10 years.

 Short-range Planning

Short-range plans are complementary of long-range plans and are not prepared separately. In
other words, they constitute the steps toward the implementation of long-range plans. The period
covered by short-range plans is generally 1 year; sometimes it can go up to 2 years.

 Intermediate range Planning

This level of planning obviously ranges between long and short range planning.

Note that what plan is long range and short range cannot be generally defined. In most cases it
depends on the size of the organization and type of business of the organization.

Classification of Plans Based on Scope or Breadth

Based on their scope or breadth, plans can be classified in to three categories.

1) Strategic Planning

2) Tactical Planning

3) Operational Planning

Strategic Planning

In strategic planning, organization’s missions, objective, major courses of action or strategy is

analyzed and decided. The result of strategic planning is strategic plans that are designed to meet
organization’s broad objectives. It is usually done by the top level managers by taking into
account environmental threats and opportunities and internal weaknesses and strengths. Strategic
plans are mostly long-range in their time frame. Additionally, strategic plan provides general
direction to the organization and there by affects a wide range of organizational activities.

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Tactical Planning

Tactical planning refers to the process of developing action plans through which strategies are
executed. Departmental managers are often involved in tactical planning. Typical examples of
tactical plan include annual budget for each department, specific means of implementing
strategic plans.

Operational Planning

Operational planning is the most specific and is concerned with the day to day, week to week
activities of the organization. Operational plans are mainly of short-range and more specific.
They have a narrow and more limited scope. Examples are: production schedules, sales plans,
lesson plans.

2.4 The Planning Process

The process of planning indicates the major steps that are undertaken in planning. Generally,
there are ten steps in the process.

a) Understanding of the existing situation: Understanding the existing situation has a

great importance in being aware of the external environment in terms of its opportunities
and threats. At the foremost of planning process, the organization should analyze the
economic situation (competition, prices, demand, supply etc), political situation
(government policies, taxation, peace and stability), socio-cultural (culture of the society,
direction in change of the culture, attitude of the society towards company’s product) and
other environmental situations. Through this manager will have a look at possible
opportunities? After this, managers will know where they stand in light of their strengths
and weaknesses. Setting realistic objectives depends on this awareness. Therefore, by
understanding the internal and external environment, planning process will be enhanced.

b) Forecasting: In order to decide where one wants to go it is necessary to answer the

question ‘what will the future look like?’ Planning is deciding what is to be done in the
future. The manager can only plan against the estimated future facts. Thus, although the
future is full of uncertainties the manager must make some certain assumptions.

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c) Establishing Objectives: The next step in planning is to establish objectives for the
entire enterprise. Objectives specify the expected results and indicate the end points of
what is to be done by the network of strategies, policies procedures, rules, budgets and
programs. This is done for long-term as well as for the short range. Enterprise’s objective
will give direction to the major plans of department objectives and department objectives
in turn control the objectives of subordinate departments.

d) Determining Alternative Courses of Action: The fourth step in planning is to construct

a list of possible courses of action that will lead to the goals specified in the third step of
planning. Finding alternatives usually is not a tough task. The planner in this aspect
should examine to discover the most promising possibilities.

e) Evaluating the Alternative Courses of Action: After determining the possible courses
of action and examining their strong and weak points, the next step is to evaluate the
alternatives by weighing them in the light of organizational goals. Here, planners will
consider the advantages and disadvantages of each possible courses of action. Some
alternatives are more profitable with a higher risk while some are less profitable with a
lower risk. Managers should consider all the merits and demerits of a given alternative
course of action.

f) Selecting a Course of Action: This is the point at which the course of action that has the
most advantages and fewest disadvantages is selected. In this step, the actual plan is
adopted.

g) Formulating Derivative Plans: When decision as to which alternative is made, planning

is seldom complete. Plans that support the basic plan should be formulated.

h) Numbering Plans by Budgeting: After decisions are made and plans are set, to give
them a meaning, they should be numberized by converting them in to budgets. Each
strategy and program to be implemented should be backed by budgets that specify the
finance and labor requirement.

i) Implementing the Plan: It is determining who will be involved, what resources will be
assigned, how the will the reporting procedure should be. After the optimum alternative
has been selected, the manager needs to develop an action plan to implement it. This step

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 also includes specifications as to how the plan will be evaluated? What type and degree
of authority should be granted?

j) Controlling and Evaluating the Results: Once the plan is implemented, the manager
must monitor the progress that is being made; evaluate reported results and make any
modifications necessary. Through this step, the management will make sure that the plan
is going according to expectations.

2.5 Principles of Effective Planning

The following points help the manager to plan effectively:

1. Develop Accurate Forecasts: Forecasting or predicting is one major part of planning

process. Better forecasts lead to better plans. Quite often mangers fail to understand the
forecasting techniques properly. One unfortunate result of this misunderstanding is the
failure to fit the forecasting methods to changing situations. Thus it is advisable to take
situations into account while forecasting the future of something in concern.

2. Gain Acceptance for the Plan: It is necessary to secure acceptance and commitment
from other people for the plan. One way to increase commitment and acceptance by
promoting subordinates’ participation in the planning process.

3. Be Objective: Managers should always be careful not to be swallowed by what they want
to see and overestimate the chances of success. Instead, they should not hesitate to verify
the truth behind the reality.

4. Set up Monitoring System: Plans should be subjected to continuous appraisal and

review. This helps to ascertain how the plan is being effective

5. Revise your Plan on a Constant Basis: Changes in the dynamic environments of

economic, technical, political and social pose a serious threat to the continuance of plans
adopted earlier. This makes it necessary to revise plans adopted earlier and make
appropriate changes when needed. Therefore, the management should review all the
items of plans in accordance to external threats and opportunities along with the
progresses made externally.

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 6. Fit the Plan to the Situation: To cope up with changing environments, situational plans
must develop. A change in any part of the environment must be sensed and appropriate
strategy for coping with changes shall be determined.

2.6 Planning Techniques

Skills required in planning are Forecasting &

Decision Making

i. Forecasting: is the attempt to predict outcomes and future trends that can serve as basis for
planning, by inferences from known facts. By relating the past and present information or
data, management should be able to anticipate the future environment.

In developing premises, the kind of markets, volume of sales, prices, products technical
developments, costs, tax rates, policies, policies related to dividends, the social and political
environment, long-term trends, etc of the future should be predicted with help of forecasting.

Effective planning is made with help of forecasting because planning itself is a future
oriented course of action. Accordingly we have to assess the dynamism of both the internal
and external environment. When managers assess the alternatives, they try to forecast how
events both within and outside. The organization will affect each alternative and what the
outcome of each will be;

We can use both qualitative and quantitative forecasting to predict future economic and sales
information.

Qualitative Forecasting:

It is judgment based forecasting technique used when hard data are scarce or difficult to use. It is
appropriate when hard data are scarce or difficult to use. It thus involves the use of subjective
judgments and rating schemes to transform qualitative information into quantitative estimates.
Example includes the jury of executive opinion, market research and the survey of expert
opinion.

Quantitative Forecasting:

It is used when there is sufficient “hard” or statistical data to specify relationships between key
variables.
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Extrapolation forecasting, such as time-series analysis, uses past or current trends to project
future events. Sales records of the past several years, for example, could be used to extend the
sales pattern into the coming year. It disregards political considerations, action of competitors,
technological changes; it merely depends on the past and current trends.

Quantitative forecasting can be used if information exists about the past and the present, if this
information can be specified numerically and if it can be assumed that the pattern of the past will
continue. To the contrary, imputs to qualitative forecasts are mainly the result of intuitive
thinking, judgment and accumulated knowledge. However, it is believed that quantitative
techniques are generally more accurate than qualitative ones. To conclude, our forecasting
should be accurate, up to date, applicable and costly as much as possible.

2.7 Managerial Decision Making

2.7.1 Meaning of Decision Making

Decision making is defined as a rational choice among alternatives. Options are the necessary
conditions for decision making. If there are no options to choose from, decision is not needed. In
making decisions, a manager makes a judgment to reach at a conclusion of selection from a list
of known alternatives.

A manager makes decisions constantly while performing the functions of planning, organizing,
staffing, leading and controlling. This is one of the reasons why decision making is
recommended as a universal process. The other reason why decision making is universal is that
managers at all levels of the organization are engaged in decision making. Top, middle and first
level management all make decisions. Decision making is indeed universal.

2.7.2 Decision Making Process

The decision making process has seven steps. They are logical and simple in themselves, but
they are all essential to the process:

 Define the Problem: finding a solution to the problem will be greatly aided by properly
identifying it. The accurate definition of a problem affects all the steps to follow. If a
problem is inaccurately defined, every other step in the decision-making process will be
based on that incorrect point.

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  Identifying the limiting or critical factors: once the problem is defined, the manager
needs to develop the limiting or critical factors of the problem. Limiting factors are those
constraints that rule out certain alternative solutions. Time, resources, personnel, money,
facilities and equipment are common limiting factors.

 Develop Potential Alternatives: at this point, it is necessary to look for, develop and list
as many possible alternatives as you can. These alternatives should eliminate, correct or
neutralize the problem.

 Analyze the Alternatives: the purpose of this step is to decide the relative merits of each
of the alternatives. What are the positives and negatives of each alternative?

 Select the Best Alternative or Combination of best Alternatives: In trying to select the
best alternative, it is necessary to find the solution that appears to offer the fewest serious
disadvantages and the most advantages. Sometimes, the optimal solution is a combination
of the alternatives.

 Implement the Solution: The solution selected needs to be effectively implemented to

yield the desired results. Everyone involved in the decision must know what he or she
must do, how to do it, why and when. Finally, programs, procedures, rules, or policies
must be thoughtfully put into effect.

 Establish a control and Evaluation System: ongoing actions need to be monitored. The
system should provide feedback on how well the decision was implemented, what the
results are and what adjustments are necessary to get the results that were wanted when
the solution was chosen.

2.7.3 Types of Decisions

Several authors believe that there are two types of decision situations. These are programmed
and non programmed decisions.

 Programmed Decisions

Programmed decisions are the decisions managers make in response to repetitive and routine
situations. If a particular situation occurs too often, managers will develop a routine procedure

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 for handling it. Managers in this case have a repetitive and routine solution. Routine situations
are handled by using rules, standard operating procedures, and specific policies.

 Non-programmed Decisions

Non-programmed decisions are decisions for novel and unstructured problems. When a
recognized problem has not happened in exactly the same manner before and is not to the
experience of managers, it may require a non-programmed decision. Non-programmed decisions
require more time and effort and involve more uncertainty than programmed decisions.
Government and business organizations constantly make non-programmed decisions, but
unfortunately, modern management techniques for such type of decisions are much less
developed than for programmed decisions. Non-programmed decisions are usually handled by
general problem solving process, judgment, intuition and creativity.

2.7.4 The Decision Making Environment

There are many factors in the environment that affect the process and the decision maker. In
other words, the degrees of certainty at which managers make decisions differ. In some
situations, the manager has perfect knowledge of what to do and what the consequences of the
action will be. In other situations, the manager has no such knowledge. Generally, decisions are
made under the conditions of certainty, risk and uncertainty.

1. Decision making under conditions of certainty: Under such condition, the manager has
what is known as perfect knowledge. The manager had these decisions to make before, i.e., the
alternatives are known, and the consequences of each alternative are fully understood.

2. Decision making under conditions of risk: This one is a more difficult decision making
environment than the previous one. In this situation, the manager knows what the problem is,
knows what the alternatives are, but does not know how each alternative will work out even if he
or she knows the probabilities of possible outcomes.

3. Decision making under conditions of uncertainty: This is the most difficult decision
making environment for a manager. In this situation, the manager is not able to determine the
exact odds (probabilities) of the potential alternatives available. It is like being a pioneer or
perhaps there are too many unknown facts.

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