The Planning Function

Learning Outcomes
• Define the term planning
• Highlight the importance of forecasting in planning
• Explain the elements in the planning process
• Describe the planning process
• Discuss the importance of planning and its limitations
• Describe the decision making process

Introduction
Boeing called its new 787 aircraft the Dreamliner, but the project turned into more of a
nightmare for managers. The new plane was the company’s most popular product ever, mostly
because of its innovations, especially in fuel efficiency. However, the plane is two and a half
years behind schedule. The first airplanes are scheduled to be delivered to ANA (All Nippon
Airways) in the fourth quarter of 2010. Boeing admitted that the project’s timeline was way
too ambitious even though every detail had been meticulously planned. Some customers (the
airlines who ordered the jets)—around 60 in total—got tired of waiting or responded to the
changing economic environment and cancelled their orders. Could Boeing’s managers have
planned better?

Management Functions Recap

Planning
Planning is an ever-present feature of modern life, although there is no universal approach.
Virtually everyone is a planner, at least in the informal sense. We plan leisure activities after
school or work; we make career plans. Personal or informal plans give purpose to our lives. In
a similar fashion, more formalized plans enable managers to mobilize their intentions to
accomplish organizational purposes.

A plan is a specific, documented intention consisting of an objective and an action statement.

The objective portion is the end, and the action statement represents the means to that end.
Stated another way, objectives give management targets to shoot at, whereas action statements

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provide the arrows for hitting the targets. Properly conceived plans tell what, when, and how
something is to be done.

Planning is the function of management that involves setting objectives and determining a
course of action for achieving those objectives. Planning requires that managers be aware of
environmental conditions facing their organization and forecast future conditions. It also
requires that managers be good decision makers.
Planning involves defining the organization’s goals, establishing strategies for achieving those
goals, and developing plans to integrate and coordinate work activities. It’s concerned with
both ends (what) and means (how).

When we use the term planning, we mean formal planning. In formal planning, specific goals
covering a specific time period are defined. These goals are written and shared with
organizational members to reduce ambiguity and create a common understanding about what
needs to be done. Finally, specific plans exist for achieving these goals.

Planning is a process consisting of several steps. The process begins with environmental
scanning which simply means that planners must be aware of the critical contingencies facing
their organization in terms of economic conditions, their competitors, and their customers.
Planners must then attempt to forecast future conditions. These forecasts form the basis for
planning.

Planners must establish objectives, which are statements of what needs to be achieved and
when. Planners must then identify alternative courses of action for achieving objectives. After
evaluating the various alternatives, planners must make decisions about the best courses of
action for achieving objectives. They must then formulate necessary steps and ensure effective
implementation of plans. Finally, planners must constantly evaluate the success of their plans
and take corrective action when necessary.

Why Do Managers Plan?

1. Planning provides direction to managers and nonmanagers alike. When employees
know what their organization or work unit is trying to accomplish and what they must
contribute to reach goals, they can coordinate their activities, cooperate with each other,
and do what it takes to accomplish those goals. Without planning, departments and
individuals might work at cross-purposes and prevent the organization from efficiently
achieving its goals.
2. Planning reduces uncertainty by forcing managers to look ahead, anticipate change,
consider the impact of change, and develop appropriate responses. Although planning
won’t eliminate uncertainty, managers plan so they can respond effectively.
3. Planning minimizes waste and redundancy. When work activities are coordinated
around plans, inefficiencies become obvious and can be corrected or eliminated.
4. Planning establishes the goals or standards used in controlling. When managers plan,
they develop goals and plans. When they control, they see whether the plans have been

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 carried out and the goals met. Without planning, there would be no goals against which
to measure work effort.

Planning and Performance

Numerous studies have looked at the relationship between planning and performance.
Although most showed generally positive relationships, we can’t say that organizations that
formally plan always outperform those that don’t plan. What can we conclude?
- First, generally speaking, formal planning is associated with positive financial results—
higher profits, higher return on assets, and so forth.
- Second, it seems that doing a good job planning and implementing those plans play a
bigger part in high performance than does how much planning is done.
- Next, in those studies where formal planning didn’t lead to higher performance, the
external environment often was the culprit. When external forces—think governmental
regulations or powerful labour unions—constrain managers’ options, it reduces the
impact planning has on an organization’s performance.
- Finally, the planning-performance relationship seems to be influenced by the planning
time frame. It seems that at least four years of formal planning is required before it
begins to affect performance.

Goals and Plans

Planning is often called the primary management function because it establishes the basis
for all the other things managers do as they organize, lead, and control. It involves two
important aspects: goals and plans.

Goals (objectives) are desired outcomes or targets. They guide management decisions and form
the criterion against which work results are measured. That’s why they’re often described as
the essential elements of planning. You have to know the desired target or outcome before you
can establish plans for reaching it.

Plans are documents that outline how goals are going to be met. They usually include resource
allocations, schedules, and other necessary actions to accomplish the goals. As managers plan,
they develop both goals and plans.

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 Planning: The Primary Management Function

Types of Goals
It might seem that organizations have a single goal. In reality, all organizations have multiple
goals. For instance, businesses may want to increase market share, keep employees enthused
about working for the organization, and work toward more environmentally sustainable
practices.

We can classify most company’s goals as either strategic or financial. Financial goals are
related to the financial performance of the organization, while strategic goals are related to all
other areas of an organization’s performance.

Types of Plans
Strategic plans and Operational plans.
The most popular ways to describe organizational plans are breadth (strategic versus
operational), time frame (short term versus long term), specificity (directional versus specific),
and frequency of use (single use versus standing). These types of plans aren’t independent.
That is, strategic plans are usually long term, directional, and single use whereas operational
plans are usually short term, specific, and standing.

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 Types of Plans

Strategic plans are plans that apply to the entire organization and establish the organization’s
overall goals. Strategic planning is the process of determining how to pursue the organization’s
long-term goals with the resources expected to be available. A well-conceived strategic plan
communicates much more than general intentions about profit and growth. It specifies how the
organization will achieve a competitive advantage, with profit and growth as necessary by-
products.

Strategic planning involves analysing competitive opportunities and threats, as well as the
strengths and weaknesses of the organization, and then determining how to position the
organization to compete effectively in their environment. Strategic planning has a long time
frame, often three years or more. Strategic planning generally includes the entire organization
and includes formulation of objectives. Strategic planning is often based on the organization’s
mission, which is its fundamental reason for existence. An organization’s top management
most often conducts strategic planning.

Intermediate planning is the process of determining the contributions that subunits can make
with allocated resources. Tactical planning is intermediate-range (one to three years) planning
that is designed to develop relatively concrete and specific means to implement the strategic
plan. Middle-level managers often engage in tactical planning.

Operational planning is the process of determining how specific tasks can best be
accomplished on time with available resources. Plans that encompass a particular operational
area of the organization are called Operational plans.

Operational planning generally assumes the existence of organization-wide or subunit goals

and objectives and specifies ways to achieve them. Operational planning is short-range (less
than a year) planning that is designed to develop specific action steps that support the strategic
and tactical plans.

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These three types of plans differ because strategic plans are broad while operational plans are
narrow. Each level of planning is vital to an organization’s success and cannot effectively
stand-alone without the support of the other two levels.

The number of years used to define short-term and long-term plans has declined considerably
because of environmental uncertainty. Long-term used to mean anything over seven years. Try
to imagine what you’re likely to be doing in seven years and you can begin to appreciate how
difficult it would be for managers to establish plans that far in the future. We define long-term
plans as those with a time frame beyond three years. Short-term plans cover one year or less.
Any time period in between would be an intermediate plan. Although these time classifications
are fairly common, an organization can use any planning time frame it wants.

Intuitively, it would seem that specific plans would be preferable to directional, or loosely
guided, plans. Specific plans are clearly defined and leave no room for interpretation. A specific
plan states its objectives in a way that eliminates ambiguity and problems with
misunderstanding. For example, a manager who seeks to increase his or her unit’s work output
by 8 percent over a given 12-month period might establish specific procedures, budget
allocations, and schedules of activities to reach that goal. However, when uncertainty is high
and managers must be flexible in order to respond to unexpected changes, directional plans are
preferable. Directional plans are flexible plans that set out general guidelines. They provide
focus but don’t lock managers into specific goals or courses of action.

Some plans that managers develop are ongoing while others are used only once. A single-use
plan is a one-time plan specifically designed to meet the needs of a unique situation. For
instance, when a Giant Supermarket wanted to expand the number of its stores in China, top-
level executives formulated a single-use plan as a guide. In contrast, standing plans are ongoing
plans that provide guidance for activities performed repeatedly. Standing plans include
policies, rules, and procedures.

Ideally, planning begins at the top of the organizational pyramid and filters down. The rationale
for beginning at the top is the need for coordination. It is top management’s job to state the
organization’s mission, establish strategic priorities, and draw up major policies.

After these statements are in place, successive rounds of strategic, intermediate, and
operational planning can occur. The figure below presents an idealized picture of the three
types of planning, as carried out by different levels of management.

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Setting Goals and Developing Plans
Just as a distant port is the target or goal for a ship’s crew, objectives are targets that
organization members steer toward. Although some theorists distinguish between goals and
objectives, managers typically use the terms interchangeably. A goal or an objective is defined
as a specific commitment to achieve a measurable result within a given time frame. Many
experts view objectives as the single most important feature of the planning process. They help
managers and entrepreneurs build a bridge between their dreams, aspirations, and visions and
an achievable reality.

Goals provide the direction for all management decisions and actions and form the criterion
against which actual accomplishments are measured. Everything organizational members do
should be oriented toward achieving goals. These goals can be set either through a traditional
process or by using management by objectives.

Traditional goal setting

Goals set by top managers flow down through the organization and become subgoals for each
organizational area. This traditional perspective assumes that top managers know what’s best
because they see the “big picture.” And the goals passed down to each succeeding level guide
individual employees as they work to achieve those assigned goals.

For example, take a manufacturing business, the president tells the vice president of production
what he expects manufacturing costs to be for the coming year and tells the marketing vice
president what level he expects sales to reach for the year. These goals are passed to the next
organizational level and written to reflect the responsibilities of that level, passed to the next
level, and so forth. Then, at some later time, performance is evaluated to determine whether
the assigned goals have been achieved.

Although the process is supposed to happen in this way, in reality it doesn’t always do so.
Turning broad strategic goals into departmental, team, and individual goals can be a difficult
and frustrating process.

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Another problem with traditional goal setting is that when top managers define the
organization’s goals in broad terms—such as achieving “sufficient” profits or increasing
“market leadership”—these ambiguous goals have to be made more specific as they flow down
through the organization. Managers at each level define the goals and apply their own
interpretations and biases as they make them more specific. However, what often happens is
that clarity is lost as the goals make their way down from the top of the organization to lower
levels.

The Downside of Traditional Goal Setting

When the hierarchy of organizational goals is clearly defined, it forms an integrated network
of goals, or a means-ends chain. Higher level goals (or ends) are linked to lower-level goals
(or means), which serve as the means for their accomplishment. In other words, the goals
achieved at lower levels become the means to reach the goals (ends) at the next level. And the
accomplishment of goals at that level becomes the means to achieve the goals (ends) at the next
level and on up through the different organizational levels. That’s how traditional goal setting
is supposed to work.

Means-Ends Chain of objectives/goals

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Management By Objectives (MBO)
Management by objectives (MBO) is a comprehensive management system based on
measurable and participatively set objectives. MBO has come a long way since it was first
suggested by Peter Drucker in 1954 as a means of promoting managerial self-control.

MBO theory and practice subsequently mushroomed and spread around the world. In one form
or another, and under various labels, MBO has been adopted by most public and private
organizations of any significant size. The common denominator that has made MBO programs
so popular in management theory and practice is the emphasis on objectives that are both
measurable and participatively set.

Instead of using traditional goal setting, many organizations use management by objectives
(MBO), a process of setting mutually agreed-upon goals and using those goals to evaluate
employee performance. MBO programs have four elements: goal specificity, participative
decision making, an explicit time period, and performance feedback.
Instead of using goals to make sure employees are doing what they’re supposed to be doing,
MBO uses goals to motivate them as well. The appeal is that it focuses on employees working
to accomplish goals they’ve had a hand in setting.

The MBO Cycle. MBO combines planning and control. Steps 1 and 2 make up the planning
phase of MBO, and steps 3 and 4 are the control phase.

Step 1: Setting objectives. A hierarchy of challenging, fair, and internally consistent objectives
is the necessary starting point for the MBO cycle and serves as the foundation for all that
follows. All objectives, according to MBO theory, should be reduced to writing and put away
for later reference during steps 3 and 4. Consistent with what was said earlier about objectives,
objective setting in MBO begins at the top of the managerial pyramid and filters down, one
layer at a time. MBO’s main contribution to the objective setting process is its emphasis on the
participation and involvement of people at lower levels. There is no place in MBO for the
domineering manager (“Here are the objectives I’ve written for you”) or for the passive

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manager (“I’ll go along with whatever objectives you set”). MBO calls for a give-and-take
negotiation of objectives between the manager and those who report directly to him or her.

Step 2: Developing action plans. With the addition of action statements to the participatively
set objectives, the planning phase of MBO is complete. Managers at each level develop plans
that incorporate objectives established in step 1. Higher managers are responsible for ensuring
that their direct assistants’ plans complement one another and do not work at cross-purposes.

Step 3: Periodic review. As plans turn into action, attention turns to step 3, monitoring
performance. Advocates of MBO usually recommend face-to-face meetings between a
manager and his or her people at three-, six-, and nine-month intervals. These periodic check-
ups permit those who are responsible for a particular set of objectives to reconsider them,
checking their validity in view of unexpected events—added duties or the loss of a key
assistant—that could make them obsolete. If an objective is no longer valid, it is amended
accordingly. Otherwise, progress toward valid objectives is assessed. Periodic check-ups also
afford managers an excellent opportunity to give their people needed and appreciated feedback.

Step 4: Performance appraisal. At the end of one complete cycle of MBO, typically one year
after the original goals were set, final performance is compared with the previously agreed-
upon objectives. The pairs of superior and subordinate managers who mutually set the
objectives one year earlier meet face to face once again to discuss how things have turned out.
MBO emphasizes results, not personalities or excuses. The control phase of the MBO cycle is
completed when success is rewarded with promotion, merit pay, or other suitable benefits and
when failure is noted for future corrective action.

After one round of MBO, the cycle repeats itself, with each cycle contributing to the learning
process. A common practice in introducing MBO is to start at the top and to pull a new layer
of management into the MBO process each year. Experience has shown that plunging several
layers of management into MBO all at once often causes confusion, dissatisfaction, and failure.
In fact, even a moderate-sized organization usually takes five or more years to evolve a full-
blown MBO system that ties together such areas as planning, control, performance appraisal,
and the reward system.
MBO proponents believe that effective leadership and greater motivation—through the use of
realistic objectives, more effective control, and self-control—are the natural by-products of a
proper MBO system.

Strengths and Limitations of MBO.

Present and future managers will have more realistic expectations for MBO if they are familiar
with both sides of this debate. The four primary strengths of MBO and four common
complaints about it are compared below.

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8 Steps in MBO
1. The organization’s overall objectives and strategies are formulated.
2. Major objectives are allocated among divisional and departmental units.
3. Unit managers collaboratively set specific objectives for their units with their managers.
4. Specific objectives are collaboratively set with all department members.
5. Action plans, defining how objectives are to be achieved, are specified and agreed upon
by managers and employees.
6. The action plans are implemented.
7. Progress toward objectives is periodically reviewed, and feedback is provided.
8. Successful achievement of objectives is reinforced by performance-based rewards.

Does MBO work? Studies have shown that it can increase employee performance and
organizational productivity. For example, one review of MBO programs found productivity
gains in almost all of them. But is MBO relevant for today’s organizations? If it’s viewed as a
way of setting goals, then yes, because research shows that goal setting can be an effective
approach to motivating employees.
It is important for present and future managers to be able to write good objectives, to be aware
of their importance, and to understand how objectives combine to form a means-ends chain.

WRITING GOOD OBJECTIVES.

An authority on objectives recommends that “as far as possible, objectives [should be]
expressed in quantitative, measurable, concrete terms, in the form of a written statement of
desired results to be achieved within a given time period.” In other words, objectives represent
a firm commitment to accomplish something specific. A well written objective should state
what is to be accomplished and when it is to be accomplished. In the following sample
objectives, note that the desired results are expressed quantitatively, in units of output, dollars,
or percentage of change.

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 • To increase subcompact car production by 240,000 units during the next production
year.
• To reduce bad-debt loss by $50,000 during the next six months.
• To achieve an 18 percent increase in Brand X sales by December 31 of the current
year.

Importance of Objectives.
From the standpoint of planning, carefully prepared objectives benefit managers by serving as
targets and measuring sticks, fostering commitment, and enhancing motivation.
1. Targets- As mentioned earlier, objectives provide managers with specific targets.
Without objectives, managers at all levels would find it difficult to make coordinated
decisions. People quite naturally tend to pursue their own ends in the absence of formal
organizational objectives.
2. Measuring sticks- An easily overlooked, after-the fact feature of objectives is that they
are useful for measuring how well an organizational subunit or individual has
performed. When appraising performance, managers need an established standard
against which they can measure performance. Concrete objectives enable managers to
weigh performance objectively on the basis of accomplishment, rather than subjectively
on the basis of personality or prejudice.
3. Commitment- The very process of getting an employee to agree to pursue a given
objective gives that individual a personal stake in the success of the enterprise. Thus,
objectives can be helpful in encouraging personal commitment to collective ends.
Without individual commitment, even well-intentioned and carefully conceived
strategies are doomed to failure.
4. Motivation: Good objectives represent a challenge—something to reach for.
Accordingly, they have a motivational aspect. People usually feel good about
themselves and what they do when they successfully achieve a challenging objective.
Moreover, objectives give managers a rational basis for rewarding performance.
Employees who believe they will be equitably rewarded for achieving a given objective
will be motivated to perform well.

Developing Plans
The process of developing plans is influenced by three contingency factors and by the planning
approach followed. Three contingency factors affect the choice of plans: organizational level,
degree of environmental uncertainty, and length of future commitments.

Organizational level: The diagram below shows the relationship between a manager’s level in
the organization and the type of planning done. For the most part, lower-level managers do
operational planning while upper-level managers do strategic planning.

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 Planning and Organizational Level

Environmental uncertainty: When uncertainty is high, plans should be specific, but flexible.
Managers must be prepared to change or amend plans as they’re implemented. At times, they
may even have to abandon the plans. For example, prior to Continental Airlines’ merger with
United Airlines, the former CEO and his management team established a specific goal of
focusing on what customers wanted most—on-time flights—to help the company become more
competitive in the highly uncertain airline industry. Because of the high level of uncertainty,
the management team identified a “destination, but not a flight plan,” and changed plans as
necessary to achieve that goal of on-time service.
Future commitment concept says that plans should extend far enough to meet those
commitments made when the plans were developed. Planning for too long or too short a time
period is inefficient and ineffective.

Approaches to Planning
In the traditional approach, planning is done entirely by top-level managers who often are
assisted by a formal planning department, a group of planning specialists whose sole
responsibility is to help write the various organizational plans. Under this approach, plans
developed by top-level managers flow down through other organizational levels, much like the
traditional approach to goal-setting. As they flow down through the organization, the plans are
tailored to the particular needs of each level. Although this approach makes managerial
planning thorough, systematic, and coordinated, all too often the focus is on developing “the
plan,” a thick binder (or binders) full of meaningless information that’s stuck away on a shelf
and never used by anyone for guiding or coordinating work efforts. In fact, in a survey of
managers about formal top-down organizational planning processes, over 75 percent said that
their company’s planning approach was unsatisfactory. A common complaint was that, “plans
are documents that you prepare for the corporate planning staff and later forget.” Although
this traditional top-down approach to planning is used by many organizations, it can be
effective only if managers understand the importance of creating documents that organizational
members actually use, not documents that look impressive but are never used.

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Another approach to planning is to involve more organizational members in the process. In this
approach, plans aren’t handed down from one level to the next, but instead are developed by
organizational members at the various levels and in the various work units to meet their specific
needs. For instance, at Dell, employees from production, supply management, and channel
management meet weekly to make plans based on current product demand and supply. In
addition, work teams set their own daily schedules and track their progress against those
schedules. If a team falls behind, team members develop “recovery” plans to try to get back
on schedule. When organizational members are more actively involved in planning, they see
that the plans are more than just something written down on paper. They can actually see that
the plans are used in directing and coordinating work.

Contemporary Issues in Planning

Two contemporary issues in planning. Specifically, we’re going to look at planning effectively
in dynamic environments and then at how managers can use environmental scanning,
especially competitive intelligence.

How Can Managers Plan Effectively in Dynamic Environments?

The external environment is continually changing. For instance, Social networking sites are
being used by companies to connect with customers, employees, and potential employees. In
an uncertain environment, managers should develop plans that are specific, but flexible.
Although this may seem contradictory, it’s not. To be useful, plans need some specificity, but
the plans should not be set in stone. Managers need to recognize that planning is an ongoing
process. The plans serve as a road map although the destination may change due to dynamic
market conditions. They should be ready to change directions if environmental conditions
warrant. This flexibility is particularly important as plans are implemented. Managers need to
stay alert to environmental changes that may impact implementation and respond as needed.

Keep in mind, also, that even when the environment is highly uncertain, it’s important to
continue formal planning in order to see any effect on organizational performance. It’s the
persistence in planning that contributes to significant performance improvement. Why? It
seems that, as with most activities, managers “learn to plan” and the quality of their planning
improves when they continue to do it.

Finally, make the organizational hierarchy flatter to effectively plan in dynamic environments.
This means allowing lower organizational levels to set goals and develop plans because there’s
little time for goals and plans to flow down from the top. Managers should teach their
employees how to set goals and to plan and then trust them to do it. Because the information
services industry is continually changing, employees should be taught to analyze situations and
to define the scale and scope of a client’s problems in order to offer the best solutions. These
employees are the ones on the front line with the clients and it’s their responsibility to establish
what to do and how to do it.

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How Can Managers Use Environmental Scanning?
A manager’s analysis of the external environment may be improved by environmental
scanning, which involves screening information to detect emerging trends. One of the fastest-
growing forms of environmental scanning is competitor intelligence, which is gathering
information about competitors that allows managers to anticipate competitors’ actions rather
than merely react to them. It seeks basic information about competitors: Who are they? What
are they doing? How will what they’re doing affect us? Many who study competitive
intelligence suggest that much of the competitor-related information managers need to make
crucial strategic decisions is available and accessible to the public.

In other words, competitive intelligence isn’t corporate espionage. Advertisements,

promotional materials, press releases, reports filed with government agencies, annual reports,
want ads, newspaper reports, information on the Internet, and industry studies are readily
accessible sources of information. Specific information on an industry and associated
organizations is increasingly available through electronic databases.

Managers can literally tap into this wealth of competitive information by purchasing access to
databases. Attending trade shows and debriefing your own sales staff also can be good sources
of information on competitors. In addition, many organizations even regularly buy
competitors’ products and ask their own employees to evaluate them to learn about new
technical innovations.

In a changing global business environment, environmental scanning and obtaining competitive

intelligence can be quite complex, especially since information must be gathered from around
the world. However, one thing managers could do is subscribe to news services that review
newspapers and magazines from around the globe and provide summaries to client companies.

Managers do need to be careful about the way information, especially competitive intelligence,
is gathered to prevent any concerns about whether it’s legal or ethical. For instance, Starwood
Hotels recently sued Hilton Hotels alleging that two former employees stole trade secrets and
helped Hilton develop a new line of luxury, trendy hotels designed to appeal to a young
demographic. Competitive intelligence becomes illegal corporate spying when it involves the
theft of proprietary materials or trade secrets by any means.

Scanning the environment helps Toyota Motor Corporation managers detect emerging trends
that influence the company’s future plans. Based on trends in computing and communications
technology plus demographic trends such as a rapidly aging population and a decreasing
birthrate in Japan and other developing nations, Toyota sees robotics as a key business in
coming years. Its violin-playing robot, with 17 joints in each hand and arm, has the precise
control and coordination to achieve humanlike agility for performing domestic chores like
folding laundry and medical tasks such as dispensing medicine. Toyota and competitors such
as Honda and Hitachi are racing to build robots that will serve the needs of the elderly in
Japan, where 40 percent of the population is expected to be older than 65 by 2055, and in other
global markets.

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