UNIT II

PLANNING

According to Koontz O'Donnel - "Planning is an intellectual process, the conscious determination of courses
of action, the basing of decisions on purpose, acts and considered estimates".

Nature of Planning
1. Planning is goal-oriented: Every plan must contribute in some positive way towards the accomplishment
of group objectives. Planning has no meaning without being related to goals.
2. Primacy of Planning: Planning is the first of the managerial functions. It precedes all other management
functions.
3. Pervasiveness of Planning: Planning is found at all levels of management. Top management looks after
strategic planning. Middle management is in charge of administrative planning. Lower management has to
concentrate on operational planning.
4. Efficiency, Economy and Accuracy: Efficiency of plan is measured by its contribution to the objectives as
economically as possible. Planning also focuses on accurate forecasts.
5. Co-ordination: co-ordinates the what, who, how, where and why of planning. Without co-ordination of all
activities, we cannot have united efforts.
6. Limiting Factors: A planner must recognize the limiting factors (money, manpower etc) and formulate
plans in the light of these critical factors.
7. Flexibility: The process of planning should be adaptable to changing environmental conditions.
8. Planning is an intellectual process: The quality of planning will vary according to the quality of the mind
of the manager.

Purpose of Planning
1. To manage by objectives: All the activities of an organization are designed to achieve certain specified
objectives. However, planning makes the objectives more concrete by focusing attention on them.
2. To offset uncertainty and change: Future is always full of uncertainties and changes. It foresees the
future & makes necessary provisions for it.
3. To secure economy in operation: The selection of most profitable course of action that would lead to the
best result at the minimum costs.
4. To help in co-ordination: Co-ordination is, indeed, the essence of management, the planning is the base
of it. Without planning it is not possible to co-ordinate the different activities of an organization.
5. To make control effective: The controlling function of management relates to the comparison of the
planned performance with the actual performance. In the absence of plans, a management will have no
standards for controlling other's performance.
6. To increase organizational effectiveness: Mere efficiency in the organization is not important; it should
also lead to productivity and effectiveness. Planning enables the manager to measure the organizational
effectiveness in the context of the stated objectives and take further actions in this direction.

Features of Planning
• It is primary function of management. • It is a continuous process
• It is an intellectual process • It is a pervasive function
• Focuses on determining the objectives
• Involves choice and decision making

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CLASSIFICATION OF PLANNING
On the basis of content
Strategic Planning Tactical Planning
It is process of deciding on Long-term It involves conversion of detailed and specific plans into detailed
objectives of firm and specific action plans.
It encompasses all the functional areas of It is the blue print for current action and it supports the strategic
business plans.
On the basis of time period
Long term planning Intermediate term planning Short term planning
Time frame beyond five years Time frame between two and Time frame of one year
It specifies what the organization wants to five years or less
become in long run It is designed to implement long It provide basis for day to
It involves great deal of uncertainty. term plans day operations

PLANNING PROCESS
a) Perception of Opportunities: Is not strictly a planning process. However, this awareness is very important
for planning process be-cause it leads to formulation of plans by providing clue whether opportunities exist
for taking up particular plans. From this point of view, it can be considered are the beginning of planning
process. Perception of opportunities includes a preliminary look at possible opportunities and the ability to see
them clearly and completely, knowledge of where the organization stands in the light of its strengths and
weaknesses, an understanding of why the organization wants to solve uncertainties, and a vision of what it
expects to gain.

b) Establishing Objectives: The first and primary step in planning process is the establishment of planning
objectives or goals. Definite objectives, in fact, speak categorically about what is to be done, where to place
the initial emphasis and the things to be accomplished by the network of policies, procedures, budgets and
programmes, the lack of which would invariably result in either faulty or ineffective planning.

c) Considering the Planning Premises: Planning premises are assumptions about the future understanding of
the expected situations. These are the conditions under which planning activities are to be undertaken. These
premises may be internal or external. Internal premises are internal variables that affect the planning. These
include organizational polices, various resources and the ability of the organization to withstand the
environmental pressure. External premises include all factors in task environment like political, social
technological, competitors’ plans and actions, government policies, market conditions. Both internal factors
should be considered in formulating plans. At the top level mainly external premises are considered. As one
moves downward, internal premises gain importance.

d) Identification of alternatives: Once the organizational objectives have been clearly stated and the
planning premises have been developed, the manager should list as many available alternatives as possible for
reaching those objectives. For instance, to achieve the objectives of securing desired profits, necessary plant
and machinery should be established in the organization. The machinery can be of different types like:
Manual plant, Semi automatic plant, complete automatic plant. While developing the alternatives,
organizational frame work like constraint of capital, manpower and philosophies may be taken into account.

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e) Evaluation of alternatives: At this stage, an attempt is made to evaluate how each alternative contributes
to the organizational objectives in the light of its resources and constraints. This presents a problem because
each alternative may have certain positive points on one aspect but negative on others. For example, one
alternative may be most profitable but requires heavy investment with long gestation period; another may be
less profitable but also involves less risk. Moreover, there is no certainty about the outcome of any alternative
because it is related with future and future is not certain. This is the reason why more sophisticated techniques
of planning and decision-making have been developed.

f) Choice of alternative plans: After the evaluation of various alternatives the fit one is selected. Sometimes
evaluation shows that more than one alternative is equally good. In such a case, a planner may choose more
than one alternative. There is another reason for choosing more than one alternative. Alternative course of
action is to be undertaken in future, which is not constant. A course of action chosen keeping in view the
various planning premises may not be the best one if there is change in planning premises. Therefore, planner
must be ready with alternative, normally known as contingency plan, which can be implemented in changed
situations.

g) Formulating of Supporting Plans: After formulating the basic plan, various plans are derived so as to
support the major plan. In an organization there can be various derivative plans like planning for buying
equipments, buying raw materials, recruiting and training personnel, developing new product, etc. These
derivative plans are formulated out of the main plan and, therefore, they support it.

h) Establishing sequence of activities: After formulating basic and derivative plans, the sequence of
activities is determined so that plans are put into action. Based on plans at various levels, it can be decided
who will do what and at what time. Budgets for various periods can be prepared to give plan more concrete
meaning or implementation.

TYPES OF PLANS / COMPONENTS OF PLANNING

Operational plans lead to the achievement of tactical plans, which in turn lead to the attainment of strategic
plans. In addition to these three types of plans, managers should also develop a contingency plan in case their
original plans fail.

Plans can be broadly classified as

a) Strategic plans: A strategic plan is an outline of steps designed with the goals of the entire organization as
a whole in mind, rather than with the goals of specific divisions or departments. It is further classified as
 Mission: The mission is a statement that reflects the basic purpose and focus of the organization
which normally remain unchanged. The mission of the company is the answer of the question: why
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 does the organization exists? Mission of Ford: ―we are a global, diverse family with a proud
inheritance, providing exceptional products and services‖.
 Objectives or goals: Both goal and objective can be defined as statements that reflect the end towards
which the organization is aiming to achieve. However, there are significant differences between the
two. A goal is an abstract and general umbrella statement, under which specific objectives can be
clustered. Objectives are statements that describe—in precise, measurable, and obtainable terms which
reflect the desired organization’s outcomes.
 Strategies: Strategy is the determination of the basic long term objectives of an organization and the
adoption of action and collection of action and allocation of resources necessary to achieve these
goals. Strategic planning begins with an organization's mission. Strategic plans look ahead over the
next two, three, five, or even more years to move the organization from where it currently is to where
it wants to be. Top management's strategic plan for the entire organization becomes the framework and
sets dimensions for the lower level planning.

b) Tactical plans: A tactical plan is concerned with what the lower level units within each division must do,
how they must do it, and who is in charge at each level. Tactics are the means needed to activate a strategy
and make it work. They are concerned with shorter time frames and narrower scopes than are strategic plans.
These plans usually span one year or less because they are considered short-term goals. Long-term goals, on
the other hand, can take several years or more to accomplish. Normally, it is the middle manager's
responsibility to take the broad strategic plan and identify specific tactical actions.

c) Operational plans: The specific results expected from departments, work groups, and individuals are the
operational goals. These goals are precise and measurable. ―Process 150 sales applications each week‖ or
―Publish 20 books this quarter‖ are examples of operational goals.
An operational plan is one that a manager uses to accomplish his or her job responsibilities. Supervisors, team
leaders, and facilitators develop operational plans to support tactical plans (see the next section). Operational
plans can be a single-use plan or a standing plan.
 Single-use plans apply to activities that do not recur or repeat. A one-time occurrence, such as a
special sales program, is a single-use plan because it deals with the who, what, where, how, and how
much of an activity.
¬ Programme: Programme consists of an ordered list of events to be followed to execute a project.
¬ Budget: A budget predicts sources and amounts of income and how much they are used for a
specific project.
 Standing plans are usually made once and retain their value over a period of years while undergoing
periodic revisions and updates. The following are examples of ongoing plans:
¬ Policy: Provides a broad guideline for managers to follow when dealing with important areas of
decision making. Policies are general statements that explain how a manager should attempt to
handle routine management responsibilities. Typical human resources policies, for example,
address such matters as employee hiring, terminations, performance appraisals, pay increases, and
discipline.
¬ Rule: Is an explicit statement that tells an employee what he or she can and cannot do. Rules are
―do‖ and ―don't‖ statements put into place to promote the safety of employees and the uniform
treatment and behavior of employees. For example, rules about absenteeism.
¬ Procedure: A procedure is a set of step-by-step directions that explains how activities or tasks are
to be carried out. Most organizations have procedures for purchasing supplies and equipment, for
example. This procedure usually begins with a supervisor completing a purchasing requisition. The

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 requisition is then sent to the next level of management for approval. The approved requisition is
forwarded to the purchasing department. Depending on the amount of the request, the purchasing
department may place an order, or they may need to secure quotations and/or bids for several
vendors before placing the order. By defining the steps to be taken and the order in which they are
to be done, procedures provide a standardized way of responding to a repetitive problem.

d) Contingency plans: Intelligent and successful management depends upon a constant pursuit of adaptation,
flexibility, and mastery of changing conditions. Strong management requires a ―keeping all options open‖
approach at all times — that's where contingency planning comes in. Contingency planning involves
identifying alternative courses of action that can be implemented if and when the original plan proves
inadequate because of changing circumstances. Keep in mind that events beyond a manager's control may
cause even the most carefully prepared alternative future scenarios to go awry. Unexpected problems and
events frequently occur. When they do, managers may need to change their plans. Anticipating change during
the planning process is best in case things don't go as expected. Management can then develop alternatives to
the existing plan and ready them for use when and if circumstances make these alternatives appropriate.

OBJECTIVES
Objectives may be defined as the goals which an organization tries to achieve. Objectives are
described as the end- points of planning. According to Koontz and O'Donnell, "an objective is a term
commonly used to indicate the end point of a management programme." Objectives constitute the purpose of
the enterprise and without them no intelligent planning can take place.

Features of Objectives
• The objectives must be predetermined. • All objectives are interconnected and
• clearly defined provides clear direction for mutually supportive.
managerial effort • Objectives may be short-range, medium-
• Objectives must be realistic. range long-range.
• Objectives must be measurable. • Objectives may be constructed into a
• Objectives must have social sanction. hierarchy.

Advantages of Objectives
• Clear definition of objectives encourages unified planning.
• Objectives provide motivation to people in the organization.
• When the work is goal-oriented, unproductive tasks can be avoided.
• Objectives provide standards which aid in the control of human efforts in an organization.
• Objectives serve to identify the organization and to link it to the groups upon which its existence
depends.
• Objectives act as a sound basis for developing administrative controls.
• Contribute to the management process: they influence the purpose of the orgn, policies, personnel,
leadership as well as managerial control.

Process of Setting Objectives: Objectives are the keystone of management planning. It is the most important
task of management. Objectives are required to be set in every area which directly and vitally effects the
survival and prosperity of the business. In the setting of objectives, the following points should be borne in
mind.
• Objectives are required to be set by management in every area which directly and vitally affects the
survival and prosperity of the business.
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 • The objectives to be set in various areas have to be identified.
• the past performance must be reviewed, since past performance indicates what the organization will be
able to accomplish in future.
• The objectives should be set in realistic terms i.e., the objectives to be set should be reasonable and
capable of attainment.
• Objectives must be consistent with one and other.
• Objectives must be set in clear-cut terms.
• For the successful accomplishment of the objectives, there should be effective communication.

MANAGEMENT BY OBJECTIVES (MBO) MBO was first popularized by Peter Drucker in 1954 in his
book 'The practice of Management’.
Definition: ―MBO is a process whereby the superior and the mangers of an organization jointly identify its
common goals, define each individual’s major area of responsibility in terms of results expected of him, and
use these measures as guides for operating the unit and assessing the contribution of each of its members.‖

Features of MBO
1. MBO is concerned with goal setting and planning for individual managers and their units.
2. The essence of MBO is a process of joint goal setting between a supervisor and a subordinate.
3. Managers work with their subordinates to establish the performance goals that are consistent with their
higher organizational objectives.
4. MBO focuses attention on appropriate goals and plans.
5. MBO facilitates control through the periodic development and subsequent evaluation of individual
goals and plans.

Steps in MBO:

The typical MBO process consists of:

1) Establishing a clear and precisely defined statement of objectives for the employee
2) Developing an action plan indicating how these objectives are to be achieved
3) Reviewing the performance of the employees
4) Appraising performance based on objective achievement

1) Setting objectives: To be effective, individual managers must understand the specific objectives of their
job and how those objectives fit in with the overall company objectives set by the board of directors. The
managers of the various units or sub-units, or sections of an organization should know not only the objectives
of their unit but should also actively participate in setting these objectives and make responsibility for them.
MBO systems, objectives are written down for each level of the organization, and individuals are given
specific aims and targets.
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2) Developing action plans: Actions plans specify the actions needed to address each of the top
organizational issues and to reach each of the associated goals, who will complete each action and according
to what timeline. An overall, top-level action plan that depicts how each strategic goal will be reached is
developed by the top level management. The format of the action plan depends on the objective of the
organization.

3) Reviewing Progress: Performance is measured in terms of results. Job performance is the net effect of an
employee's effort as modified by abilities, role perceptions & results produced. Effort refers to the amount
of energy an employee uses in performing a job. Abilities are personal characteristics used in performing a
job and usually do not fluctuate widely over short periods of time. Role perception refers to direction in
which employees believe they should channel their efforts on their jobs, & they are defined by the activities
& behaviors they believe are necessary.

4) Performance appraisal: Performance appraisals communicate to employees how they are performing
their jobs, and they establish a plan for improvement. Performance appraisals are extremely important to
both employee and employer, as they are often used to provide predictive information related to possible
promotion. Appraisals can also provide input for determining both individual and organizational training
and development needs. Performance appraisals encourage performance improvement.

Advantages
• Motivation – Involving employees in the whole process of goal setting and increasing employee
empowerment.
• Better communication and Coordination – Frequent reviews and interactions between superiors and
subordinates Clarity of goals
• Subordinates have a higher commitment to objectives they set themselves than those imposed on them
by another person.
• Managers can ensure that objectives of the subordinates are linked to the organization's objectives.

Limitations: There are several limitations to the assumptive base underlying the impact of managing by
objectives, including:
• It over-emphasizes the setting of goals over the working of a plan as a driver of outcomes.
• It underemphasizes the importance of the environment or context in which the goals are set. That
context includes everything from the availability and quality of resources, to relative buy-in by
leadership and stake-holders.
• Companies evaluated their employees by comparing them with the "ideal" employee. Trait appraisal
only looks at what employees should be, not at what they should do.
• When this approach is not properly set, agreed and managed by organizations, self-centered employees
might be prone to distort results, falsely representing achievement of targets that were set in a short-term,
narrow fashion. In this case, managing by objectives would be counterproductive.

STRATEGIES:
According to Koontz and O' Donnell, "Strategies must often denote a general programme of action
and deployment of emphasis and resources to attain comprehensive objectives". Strategies are plans made in
the light of the plans of the competitors because a modern business institution operates in a competitive
environment. They are a useful framework for guiding enterprise thinking and action.
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Characteristics of Strategy
• It is the right combination of different factors.
• It relates the business organization to the environment.
• It is an action to meet a particular challenge, to solve particular problems or to attain desired
objectives.
• Strategy is a means to an end and not an end in itself.
• It is formulated at the top management level.
• It involves assumption of certain calculated risks.

Strategic Planning Process / Strategic Formulation Process

1. Input to the Organization: Various Inputs (People, Capital, Management and Technical skills,
others) including goals input of claimants (Employees, Consumers, Suppliers, Stockholders,
Government, Community and others)need to be elaborated.
2. Industry Analysis: Formulation of strategy requires the evaluation of the attractiveness of an
industry by analyzing the external environment. The focus should be on the kind of compaction
within an industry, the possibility of new firms entering the market, the availability of substitute
products or services, the bargaining positions of the suppliers, and buyers or customers.
3. Enterprise Profile: Enterprise profile is usually the starting point for determining where the
company is and where it should go. Top managers determine the basic purpose of the enterprise and
clarify the firm’s geographic orientation.
4. Orientation, Values, and Vision of Executives: The enterprise profile is shaped by people,
especially executives, and their orientation and values are important for formulation the strategy.
They set the organizational climate, and they determine the direction of the firm though their vision.
Consequently, their values, their preferences, and their attitudes toward risk have to be carefully
examined because they have an impact on the strategy.
5. Mission (Purpose), Major Objectives, and Strategic Intent: Mission or Purpose is the answer to
the question: What is our business? The major Objectives are the end points towards which the
activates of the enterprise are directed. Strategic intent is the commitment (obsession) to win in the
competitive environment, not only at the top-level but also throughout the organization.
6. Present and Future External Environment: Must be assessed in terms of threats and
opportunities.
7. Internal Environment: Internal Environment should be audited and evaluated with respect to its
resources and its weaknesses, and strengths in research and development, production, operation,
procurement, marketing and products and services. Other internal factors include, human resources
and financial resources as well as the company image, the organization structure and climate, the
planning and control system, and relations with customers.
8. Development of Alternative Strategies: Strategic alternatives are developed on the basis of an
analysis of the external and internal environment. Strategies may be specialize or concentrate.
Alternatively, a firm may diversify, extending the operation into new and profitable markets. Other
examples of possible strategies are joint ventures, and strategic alliances which may be an
appropriate strategy for some firms.
9. Evaluation and Choice of Strategies: Strategic choices must be considered in the light of the risk
involved in a particular decision. Some profitable opportunities may not be pursued because a failure
in a risky venture could result in bankruptcy of the firm. Another critical element in choosing a

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 strategy is timing. Even the best product may fail if it is introduced to the market at an inappropriate
time.
10. Consistency Testing and Contingency Planning: The last key aspect of the strategic planning
process is the testing for consistency and preparing for contingency plans.

TYPES OF STRATEGIES
According to Michel Porter, the strategies can be classified into three types. They are
a) Cost leadership strategy
b) Differentiation strategy
c) Focus strategy
The following table illustrates Porter's generic strategies:

a) Cost Leadership Strategy: This generic strategy calls for being the low cost producer in an industry for
a given level of quality. The firm sells its products either at average industry prices to earn a profit higher
than that of rivals, or below the average industry prices to gain market share. In the event of a price war, the
firm can maintain some profitability while the competition suffers losses. Even without a price war, as the
industry matures and prices decline, the firms that can produce more cheaply will remain profitable for a
longer period of time. The cost leadership strategy usually targets a broad market. Some of the ways that
firms acquire cost advantages are by improving process efficiencies, gaining unique access to a large source
of lower cost materials, making optimal outsourcing and vertical integration decisions. If competing firms
are unable to lower their costs by a similar amount, the firm may be able to sustain a competitive advantage
based on cost leadership.

Firms that succeed in cost leadership often have the following internal strengths:
• Access to the capital required to make a significant investment in production assets; this investment
represents a barrier to entry that many firms may not overcome.
• Skill in designing products for efficient manufacturing, for example, having a small component
count to shorten the assembly process.
• High level of expertise in manufacturing process engineering.
• Efficient distribution channels.

Each generic strategy has its risks, including the low-cost strategy. For example, other firms may be able to
lower their costs as well. As technology improves, the competition may be able to leapfrog the production
capabilities, thus eliminating the competitive advantage. Additionally, several firms following a focus
strategy and targeting various narrow markets may be able to achieve an even lower cost within their
segments and as a group gain significant market share.

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b) Differentiation Strategy: A differentiation strategy calls for the development of a product or service that
offers unique attributes that are valued by customers and that customers perceive to be better than or
different from the products of the competition. The value added by the uniqueness of the product may allow
the firm to charge a premium price for it. The firm hopes that the higher price will more than cover the extra
costs incurred in offering the unique product. Because of the product's unique attributes, if suppliers
increase their prices the firm may be able to pass along the costs to its customers who cannot find substitute
products easily.

Firms that succeed in a differentiation strategy often have the following internal strengths:
• Access to leading scientific research.
• Highly skilled and creative product development team.
• Strong sales team with the ability to successfully communicate the perceived strengths of the
product.
• Corporate reputation for quality and innovation.

The risks associated with a differentiation strategy include imitation by competitors and changes in
customer tastes. Additionally, various firms pursuing focus strategies may be able to achieve even greater
differentiation in their market segments.

c) Focus Strategy: The focus strategy concentrates on a narrow segment and within that segment attempts
to achieve either a cost advantage or differentiation. The premise is that the needs of the group can be better
serviced by focusing entirely on it. A firm using a focus strategy often enjoys a high degree of customer
loyalty, and this entrenched loyalty discourages other firms from competing directly.

Because of their narrow market focus, firms pursuing a focus strategy have lower volumes and therefore
less bargaining power with their suppliers. However, firms pursuing a differentiation-focused strategy may
be able to pass higher costs on to customers since close substitute products do not exist.

Firms that succeed in a focus strategy are able to tailor a broad range of product development strengths to a
relatively narrow market segment that they know very well.

Some risks of focus strategies include imitation and changes in the target segments. Furthermore, it may be
fairly easy for a broad-market cost leader to adapt its product in order to compete directly. Finally, other
focusers may be able to carve out sub-segments that they can serve even better.

A Combination of Generic Strategies: These generic strategies are not necessarily compatible with one
another. If a firm attempts to achieve an advantage on all fronts, in this attempt it may achieve no advantage
at all. For example, if a firm differentiates itself by supplying very high quality products, it risks
undermining that quality if it seeks to become a cost leader. Even if the quality did not suffer, the firm
would risk projecting a confusing image. For this reason, Michael Porter argued that to be successful over
the long-term, a firm must select only one of these three generic strategies. Otherwise, with more than one
single generic strategy the firm will be "stuck in the middle" and will not achieve a competitive advantage.
Porter argued that firms that are able to succeed at multiple strategies often do so by creating separate
business units for each strategy. By separating the strategies into different units having different policies and
even different cultures, a corporation is less likely to become "stuck in the middle."
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However, there exists a viewpoint that a single generic strategy is not always best because within the same
product customers often seek multi-dimensional satisfactions such as a combination of quality, style,
convenience, and price. There have been cases in which high quality producers faithfully followed a single
strategy and then suffered greatly when another firm entered the market with a lower-quality product that
better met the overall needs of the customers.

POLICIES

Policies are general statements or understandings that guide managers’ thinking in decision making.
They usually do not require action but are intended to guide managers in their commitment to the decision
they ultimately make.

The first step in the process of policy formulation, as shown in the diagram below, is to capture the values or
principles that will guide the rest of the process and form the basis on which to produce a statement of
issues. The statement of issues involves identifying the opportunities and constraints affecting the local
housing market, and is to be produced by thoroughly analyzing the housing market. The kit provides the
user with access to a housing data base to facilitate this analysis.

The statement of issues will provide the basis for the formulation of a set of housing goals and objectives,
designed to address the problems identified and to exploit the opportunities which present themselves.

The next step is to identify and analyze the various policy options which can be applied to achieve the set of
goals and objectives. The options available to each local government will depend on local circumstances as
much as the broader context and each local authority will have to develop its own unique approach to
addressing the housing needs of its residents.

An implementation program for realizing the policy recommendations must then be prepared, addressing
budgetary and programming requirements, and allocating roles and responsibilities. Finally, the
implementation of the housing strategy needs to be systematically monitored and evaluated against the
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stated goals and objectives, and the various components of the strategy modified or strengthened, as
required.

At each step of the way, each component of the strategy needs to be discussed and debated, and a public
consultation process engaged in. The extent of consultation and the participants involved will vary with each
step.

Essentials of Policy Formulation

The essentials of policy formation may be listed as below:
• A policy should be definite, positive and clear. It should be understood by everyone in the
organization.
• A policy should be translatable into the practices.
• A policy should be flexible and at the same time have a high degree of permanency.
• A policy should be formulated to cover all reasonable anticipatable conditions.
• A policy should be founded upon facts and sound judgment.
• A policy should conform to economic principles, statutes and regulations.
• A policy should be a general statement of the established rule.

Importance of Policies
Policies are useful for the following reasons:
• They provide guides to thinking and action and provide support to the subordinates.
• They delimit the area within which a decision is to be made.
• They save time and effort by pre-deciding problems and
• They permit delegation of authority to mangers at the lower levels.

DECISION MAKING
The word decision has been derived from the Latin word "decidere" which means "cutting off".
Thus, decision involves cutting off of alternatives between those that are desirable and those that are not
desirable. In the words of George R. Terry, "Decision-making is the selection based on some criteria from
two or more possible alternatives".

Characteristics of Decision Making

• Decision making implies that there are various alternatives and the most desirable alternative is chosen
to solve the problem or to arrive at expected results.
• The decision-maker has freedom to choose an alternative.
• Decision-making may not be completely rational but may be judgemental and emotional.
• Decision-making is goal-oriented.
• Decision-making is a mental or intellectual process because the final decision is made by the decision-
maker.
• A decision may be expressed in words or may be implied from behaviour.
• Choosing from among the alternative courses of operation implies uncertainty about the final result of
each possible course of operation.
• Decision making is rational. It is taken only after a thorough analysis and reasoning and weighing the
consequences of the various alternatives.

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TYPES OF DECISIONS
a) Programmed and Non-Programmed Decisions: Herbert Simon has grouped organizational decisions
into two categories based on the procedure followed. They are:
i) Programmed decisions: Programmed decisions are routine and repetitive and are made within
the framework of organizational policies and rules. These policies and rules are established well in
advance to solve recurring problems in the organization. Programmed decisions have short-run
impact. They are, generally, taken at the lower level of management.
ii) Non-Programmed Decisions: Non-programmed decisions are decisions taken to meet non-
repetitive problems. Non-programmed decisions are relevant for solving unique/ unusual problems
in which various alternatives cannot be decided in advance. A common feature of non-programmed
decisions is that they are novel and non-recurring and therefore, readymade solutions are not
available. Since these decisions are of high importance and have long-term consequences, they are
made by top level management.
b) Strategic and Tactical Decisions: Organizational decisions may also be classified as strategic or
tactical.
i) Strategic Decisions: Basic decisions or strategic decisions are decisions which are of crucial
importance. Strategic decisions a major choice of actions concerning allocation of resources and
contribution to the achievement of organizational objectives. Decisions like plant location, product
diversification, entering into new markets, selection of channels of distribution, capital expenditure
etc are examples of basic or strategic decisions.
ii) Tactical Decisions: Routine decisions or tactical decisions are decisions which are routine and
repetitive. They are derived out of strategic decisions. The various features of a tactical decision are
as follows:
• Tactical decision relates to day-to-day operation of the organization and has to be taken very
frequently.
• Tactical decision is mostly a programmed one. Therefore, the decision can be made within
the context of these variables.
• The outcome of tactical decision is of short-term nature and affects a narrow part of the
organization.
• The authority for making tactical decisions can be delegated to lower level managers
because: first, the impact of tactical decision is narrow and of short-term nature and Second,
by delegating authority for such decisions to lower-level managers, higher level managers are
free to devote more time on strategic decisions.

DECISION MAKING PROCESS

The decision making process is presented in the figure below:

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1. Specific Objective: The need for decision making arises in order to achieve certain specific objectives.
The starting point in any analysis of decision making involves the determination of whether a decision needs
to be made.

2. Problem Identification: A problem is a felt need, a question which needs a solution. In the words of
Joseph L Massie "A good decision is dependent upon the recognition of the right problem". The objective of
problem identification is that if the problem is precisely and specifically identifies, it will provide a clue in
finding a possible solution. A problem can be identified clearly, if managers go through diagnosis and
analysis of the problem.
Diagnosis: Diagnosis is the process of identifying a problem from its signs and symptoms. A
symptom is a condition or set of conditions that indicates the existence of a problem. Diagnosing the
real problem implies knowing the gap between what is and what ought to be, identifying the reasons
for the gap and understanding the problem in relation to higher objectives of the organization.

Analysis: Diagnosis gives rise to analysis. Analysis of a problem requires:

• Who would make decision? What information would be needed? From where the information is
available?

3. Search for Alternatives: A problem can be solved in several ways; however, all the ways cannot be
equally satisfying. Therefore, the decision maker must try to find out the various alternatives available in
order to get the most satisfactory result of a decision. A decision maker can use several sources for
identifying alternatives:
• His own past experiences
• Practices followed by others and
• Using creative techniques.

4. Evaluation of Alternatives: After the various alternatives are identified, the next step is to evaluate them
and select the one that will meet the choice criteria. /the decision maker must check proposed alternatives
against limits, and if an alternative does not meet them, he can discard it. Having narrowed down the
alternatives which require serious consideration, the decision maker will go for evaluating how each
alternative may contribute towards the objective supposed to be achieved by implementing the decision.

5. Choice of Alternative: The evaluation of various alternatives presents a clear picture as to how each one
of them contribute to the objectives under question. A comparison is made among the likely outcomes of
various alternatives and the best one is chosen.

6. Action: Once the alternative is selected, it is put into action. The actual process of decision making ends
with the choice of an alternative through which the objectives can be achieved.

7. Results: When the decision is put into action, it brings certain results. These results must correspond
with objectives, the starting point of decision process, if good decision has been made and implemented
properly. Thus, results provide indication whether decision making and its implementation is proper.

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Characteristics of Effective Decisions

An effective decision is one which should contain three aspects. These aspects are given below:
• Action Orientation: Decisions are action-oriented and are directed towards relevant and controllable
aspects of the environment. Decisions should ultimately find their utility in implementation.
• Goal Direction: Decision making should be goal-directed to enable the organization to meet its
objectives.
• Effective in Implementation: Decision making should take into account all the possible factors not
only in terms of external context but also in internal context so that a decision can be implemented
properly.

RATIONAL DECISION MAKING MODEL: The Rational Decision Making Model is a model which
emerges from Organizational Behavior. The process is one that is logical and follows the orderly path from
problem identification through solution. It provides a structured and sequenced approach to decision
making. Using such an approach can help to ensure discipline and consistency is built into your decision
making process.

The Six-Step Rational Decision-Making Model

1) Defining the problem: This is the initial step of the rational decision making process. First the
problem is identied and then defined to get a clear view of the situation.
2) Identify decision criteria: Once a decision maker has defined the problem, he or she needs to
identify the decision criteria that will be important in solving the problem. In this step, the decision
maker is determining what’s relevant in making the decision. This step brings the decision maker’s
interests, values, and personal preferences into the process. Identifying criteria is important because
what one person thinks is relevant, another may not. Also keep in mind that any factors not
identified in this step are considered as irrelevant to the decision maker.
3) Weight the criteria: The decision-maker weights the previously identified criteria in order to give
them correct priority in the decision.
4) Generate alternatives: The decision maker generates possible alternatives that could succeed in
resolving the problem. No attempt is made in this step to appraise these alternatives, only to list
them.
5) Rate each alternative on each criterion: The decision maker must critically analyze and evaluate
each one. The strengths and weakness of each alternative become evident as they compared with the
criteria and weights established in second and third steps.
6) Compute the optimal decision: Evaluating each alternative against the weighted criteria and
selecting the alternative with the highest total score.

DECISION MAKING UNDER VARIOUS CONDITIONS

The conditions for making decisions can be divided into three types. Namely
a) Certainty,
b) Uncertainty and
c) Risk.
Virtually all decisions are made in an environment to at least some uncertainty However; the degree
will vary from relative certainty to great uncertainty. There are certain risks involved in making decisions.
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a) Certainty: In a situation involving certainty, people are reasonably sure about what will happen when
they make a decision. The information is available and is considered to be reliable, and the cause and effect
relationships are known.

b) Uncertainty: In a situation of uncertainty, on the other hand, people have only a meager database, they
do not know whether or not the data are reliable, and they are very unsure about whether or not the situation
may change. Moreover, they cannot evaluate the interactions of the different variables. For example, a
corporation that decides to expand its Operation to an unfamiliar country may know little about the country,
culture, laws, economic environment, and politics. The political situation may be volatile that even experts
cannot predict a possible change in government.

c) Risk: In a situation with risks, factual information may exist, but it may be incomplete. 1o improve
decision making One may estimate the objective probability of an outcome by using, for example,
mathematical models On the other hand, subjective probability, based on judgment and experience may be
used. All intelligent decision makers dealing with uncertainty like to know the degree and nature of the risk
they are taking in choosing a course of action. One of the deficiencies in using the traditional approaches of
operations research for problem solving is that many of the data used in model are merely estimates and
others are based on probabilities. The ordinary practice is to have staff specialists conic up with best
estimates.
Virtually every decision is based on the interaction of a number of important variables, many of
which has an element of uncertainty but, perhaps, a fairly high degree of probability. Thus, the wisdom of
launching a new product might depend on a number of critical variables: the cost of introducing the product,
the cost of producing it, the capital investment that will he required, the price that can be set for the product,
the size of the potential market, and the share of the total market that it will represent.

PLANNING PREMISES

According to H. weihrich and H.koontz, ‖Planning premises are identified as the anticipated environment in
which plans are expected to operate."

PROCESS OF PLANNING PREMISES: Wrong premises can lead to failure of plans.

1. Selection of the premises: Though there are innumerable factors in the environment, all of them do not
affect operations of the business enterprise. Top managers should select the premises which have direct
impact on developing organizational plans. There are many factors that affect business decisions, some of
which are general in nature while others are selective. The general factors affect all the firms alike but
specific factors affect different firms differently. While developing premises, organizations should focus
more on specific factors (or its micro environment) as they have immediate impact on making the plans.
In order to analyze the factors that affect developing the premises, two factors have to be taken into account:

I. The probability of impact of factors: Represents whether the factors under study affect or do not affect
the planning premises. This probability can be high, medium or low.

II. The degree of impact of factors: Given the factors which have the probability of developing planning
premises, it represents the degree to which these factors affect the planning premises. This can also be high,
medium or low.
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Based on these two broad factors, nine different combinations can be formed which broadly result
into four categories:
1. Critical factors: These factors must be thoroughly analyzed as they significantly affect making of the
planning premises.
(i) High probability of impact, and (ii) High degree of impact.

2. High priority factors: Though these factors are not as important as critical factors, they rank high in
priority in developing the planning premises. These factors also must be thoroughly analysed by managers
as they significantly affect the making of planning premises.
(i) Medium probability of impact, and High degree of impact and (ii) High/Medium probability of impact,
and Medium degree of impact

3. Factors to be watched: Thus, while these factors may not affect the planning premises, but if they affect,
their degree of impact is high. A close watch must be kept on these factors so that their impact may not be
ignored.
(i) Low probability of impact, and (ii) High degree of impact.

4. Low priority factors: These factors rank low in priority in affecting the planning premises as either their
probability of impact is low or the degree of impact is low. These factors do not significantly affect making
of the planning premises and, therefore, do not require extensive scanning by managers.
(i) Low probability of impact, and Medium degree of impact and (ii) High/Medium/Low probability of
impact, and Low degree of impact.
The factors covered under various categories are not generic and determination of these factors depends
upon the judgment of managers, nature and size of the organization and nature of environment in which the
organizations are operating.

2. Development of alternative premises: Since factors affecting organizational plans cannot be perfectly
predicted, managers should develop alternative premises i.e., plans under different sets of assumptions about
the future events. This helps in developing contingent plans. Contingent plans are the alternative plans for
alternative premises. Since the premises keep changing, some slowly and some fast, to keep pace with such
changes, alternative plans must be developed. As developing too many plans is costly in terms of time and
money, the following factors should be considered in developing contingent plans:
(a) Should be made for those factors which are important for corporate decisions like economic factors,
competitors’ policies, consumers’ tastes etc. They should be made in the order of priority of factors like:
Critical factors, High priority factors, To be watched factors, Low priority factors,
(b) They should be made on the basis of cost-benefit analysis, i.e., alternative whose cost seems to be more
than its benefits should be dropped out.

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(c) Though maximum details should be covered in each contingency plan, all the plans cannot cover
extensive information. Contents or details should depend on the order of priority of plans. Important plans
made for critical factors should cover maximum information while plans for low priority factors should not
contain extensive details as the degree of their impact on organizational plans is low.

Collecting details or information about the factors that affect the premises is based on forecasting
techniques. The choice of technique (simple or complex) depends upon the need of the organization,
resources, the period in which information is collected, the sample size, to what degree is the sample
representative of the general population etc. Every technique has costs and benefits and a thorough cost-
benefit analysis should be undertaken before adopting a specific technique of forecasting. In some cases,
this information is available through secondary sources like published journals, magazines and information
agencies. The relevance of such information should be considered before using it for development of
premises.

3. Verification of premises: Planning staff at different levels of different departments makes plans
according to their judgement. These premises are then sent to top executives for their approval. The
premises which involve both staff and line managers are more consistent than those that are developed by
executives alone.

4. Communication of premises: After the premises are developed, they are supported by budgets and
programmes and communicated to all those concerned with development of plans at different levels in
different departments. Planning premises are contained in documents like environmental threat and
opportunity profile (ETOP) and communicated to managers concerned. The premises, thus, help to develop
sound plans followed by strategies, policies, procedures etc. which further help in effective implementation
of plans.

Types of Planning Premises

1. Internal and External Premises

 Internal Premises come from the business itself. It includes skills of the workers, capital investment
policies, philosophy of management, sales forecasts, etc.
 External Premises come from the external environment. That is, economic, social, political, cultural
and technological environment. External premises cannot be controlled by the business.
2. Controllable, Semi-controllable and Uncontrollable Premises
 Controllable Premises are those which are fully controlled by the management. They include
factors like materials, machines and money.
 Semi-controllable Premises are partly controllable. They include marketing strategy.
 Uncontrollable Premises are those over which the management has absolutely no control. They
include weather conditions, consumers' behavior, government policy, natural calamities, wars, etc.
3. Tangible and Intangible Premises
 Tangible Premises can be measured in quantitative terms. They include units of production and
sale, money, time, hours of work, etc.
 Intangible Premises cannot be measured in quantitative terms. They include goodwill of the
business, employee's morale, employee's attitude and public relations.

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4. Constant and Variable Premises
 Constant Premises do not change. They remain the same, even if there is a change in the course of
action. They include men, money and machines.
 Variable Premises are subject to change. They change according to the course of action. They
include union-management relations.

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