Planning

Learning objectives:
The chapter planning provides understanding of basic concepts relating to this managerial
function. After reading this chapter, you should be able to:

define the nature and purpose of planning,

identify and analyze the various types of plans

outline and discuss the basic categories of planning,

and describe strategic planning process.

What is meant by the term planning?

In designing and environment for the effective performance of individuals working together
in groups, a managers most fundamental tasks is to see that everyone understands the
organizational purpose and objectives and its methods of attaining them. If group effort is to
be effective, everyone must know what they are expected to accomplish. This is the planning
function. It is the most basic of all the managerial function.
Planning encompasses selecting missions and objectives and establishing the actions to
achieve them. Plans thus provide a rational approach to achieving preselected goals.
Planning is a process, which is intellectually demanding; it requires that we consciously
determine courses of action and base our decision on purpose, knowledge and
considered estimates.
Planning also bridges the gap from where we are to where we want to go. It makes it possible
for matters to occur that would not otherwise happen. Just very seldom we can predict the
exact future, because factors beyond our control may interfere with the best-laid plans.
The nature of planning
We can emphasise the essential nature of planning by examining its four major standpoints:
1. contribute to achieving purpose and objectives,
2. its primacy among the managers tasks,
3. is relevant to all activities,
4. and the efficiency of resulting plans.
Perhaps it is not necessary to say that every plan and all its supporting plans should contribute
to the accomplishment of the purpose and objectives of the enterprise. This principle derives
from the nature of the organized enterprise, which exists for the accomplishment of group
purpose through deliberate cooperation.

Already we are pointed that planning precedes all the other managerial functions as
organizing, staffing, leading, and controlling. Although in practice all these functions mesh as
a system, planning is unique, because involves establishing the objectives necessary for all
group efforts.
Manager must also plan in order to know what kinds of organization relationships and
personal qualifications are needed, along which course subordinates are to be led, and what
kind of control is to be applied.
Planning and controlling are inseparable we can say the Siamese twins of management. Any
attempt to control without plans is meaningless, since there is no other possibility for people
to tell whether they are going where they wan to go (it is the result of the task of control)
unless they first know where they want to go (it is the task of planning). Plans thus furnish the
specifications or standards of control.
The effectiveness of a plan pertains to the degree to which it achieves the purpose of
objectives. On the other hand, the efficiency of a plan refers to its contribution to the purpose
and objectives, offset by the costs required to formulate and operate it.
Planning function must always start from four basic factors, which have to be included in
plans. These are:
1. Objectives it means future result that the managers of a firm want to achieve.
2. Actions specific activities establishing to achieve selected goals.
3. Resources restrictions and limits in which can organization proceed.
4. Rules methods of plans implementation, which enable to achieve the objectives to
particular persons.
Types of plans
The most popular ways to categorize the plans are in terms of time frame and level of
management involvement.
In level of management involvement we can differ:
strategic planning,
tactical planning,
operational planning.
Strategic planning is the starting decision making in organization. Strategic plans provide
the firm with a long-term sense of direction and are domain of top management. These plans
provide guidance a company to communicate its purpose to customers, owners, employees,
ant the general public. Strategic plans encompass broad issues, and include the formulation of

strategic objectives. As these plans filter down in the organization, they serve as a basis for
the tactical plans.
Tactical planning describes how strategic objectives will be attained. Tactical plans are
largely a middle-management responsibility, cover shorter periods of time, and focus on goals
specification and on resources necessary to achieve these objectives.
Operational planning appears from tactical planning. Operational plans are developed at the
lowest organizational level, focus on short-term time periods, and are narrowly defined. These
plans involve such activities as making daily or weekly work schedules, preparing a weekly
or monthly budget, and developing a list of tasks for an employee to complete during the next
week. The relevance of operational plans should not be overlooked; they provide managers
with guidance for dealing with events in the immediate future. A failure to use operational
plans directly and adversely affects a companys ability to meet high-level goals.
In terms of time frame we can distinguish three levels of planning:
long-term plans: plans that extend beyond five years,
medium-term plans: usually range from one year to five years,
short-term plans: plans that cover less than one year.
Basic categories of planning
We can identify these planning categories: mission, objectives, strategies, policies,
procedures, rules, programs and budgets.
Mission statement defines the purpose of an organization and identifies its basic function and
tasks. Mission statement is the basis for answering several major questions: What business
are we in? What do we sell? Who do we serve?
Objectives or goals are the end points toward which activity is aimed. They represent not
only the end point of planning but also the end toward which organizing, staffing, leading,
and controlling are oriented.
Objectives form both a hierarchy, ranging from the broad aim to specific individual goals, and
a network as they are reflected in interlocking programs. Generally we can express that in this
way:
strategic planning general overall objectives and strategic objectives,
tactical planning more specific objectives, such as those in the key result areas and
divisions objectives,
operational planning goals of departments, units and their subordinates.

The objectives are setting for various areas in organization, the most common are objectives
aimed at reasonable profit, marketing, growth, market standing, product quality, effectiveness
of production process, and research and development etc.
Objectives have to be verifiable if it is possible. That is, at the end of the period, to determine
whether or not objective has been accomplished. Clear and verifiable goals facilitate
measurement of the effectiveness and efficiency of managerial actions. For completeness`
sake, the essential requirements on objective setting therefore are following:
the clear formulation,
the uniquely determined area,
explicit time period,
the correlation breakdown linked to consecutive objectives.
Strategies reflect broad areas of an enterprise operation. Strategy can be defined as the
determination of the basic long-term goals of a company and the adoption of course of action
and allocation of resources necessary to achieve them. As pointed out earlier, strategies are
related to the strategic planning. Strategies furnish a framework for guiding thinking and
action. Basically they give answers on these fundamental questions:
how to keep or improve organization competitive advantage,
which products manufacture and which services provide,
which markets or their segment engage,
what kind of firm growth choose,
which financial strategy select.
Policies are general statements or understandings that guide thinking in decision making.
Policies define an area within which a decision is to be made and ensure that the decision will
be consistent with, and contribute to, a goal. Policies exist on all levels of the organization
and range from major company policies through department policies to minor policies
applicable to the smallest segment of the company. Since policies are guides to decision
making, it follows that they must allow for some free hand. Otherwise, they would be rules.
Policy is a means of encouraging discretion and initiative, but within limits. The amount of
freedom depends on the policy. Making policies consistent and integrated enough to
implement company goals is difficult for many reasons. First, policies are too seldom defined
in writing, so their exact explanations are little known. Second, it is not always easy to control
policy because actual policy may be hard to ascertain, and intended policy may not always be
clear.

Procedures establish a required method of handling future activities. They are chronological
sequences of desired actions. They are guides to action, rather than thinking, and they detail
the exact manner in which certain activities must be achieved.
Rules determine specific required actions, allowing no discretion. People frequently confuse
rules with policies or procedures. Rules are contrary to procedures in that they guide action
without specifying a time sequence. The purpose of policies is to guide decision making by
marking areas in which managers can use their discretion. Although rules also serve as guide,
they allow no discretion in their application. Rules and procedures are designed to repress
thinking: we can use them only when we do not want people in company to use their
discretion.
Programs are complex of goals, policies, procedures, rules, steps to be taken, resources to be
employed and other components necessary to carry out a given course of action. In programs
should be specified goals and strategies according to them is possible concretely act. They are
ordinarily supported by budgets.
A budget is a numerical statement of expected results. A budget can be expressed in financial
terms; in terms of labor-hours, units of product, or machine-hours or in any other numerically
measurable term. The budget is fundamental planning instrument in many firms and is closely
allied to control. One of the major advantages of budgeting is that it makes people plan, and
because budget is in the numeral form, it forces precision in planning. Budgets vary
substantially in accuracy, detail, and purpose. Some budgets vary according to the
organizations level of output. These are called variable, or flexible. Government agencies
often develop program budgets in which identifies goals, develops detailed programs to
achieve the goals, and estimates the cost of each program. Another type, which is a
combination of the variable budget and the program budget, is the zero-base budget. A
company using this type thinks of the goals and the programs needed to achieve them as a
work package, as though the programs have begun from scratch, or base zero.
One of the basic planning categories currently often practiced in many organizations process
called MBO - management by objectives. Management by objectives can be defined as a
comprehensive managerial system that integrates many key managerial activities in a
systematic manner and that is consciously directed toward the effective and efficient
achievement of organizational and individual objectives.1 MBO was first outlined by Peter

Koontz. H., Weihrich. H.,

Drucker in 1954 in his book 'The Practice of Management'. Its appeal lies in its emphasis on
converting overall objectives into specific goals for company units and individual members.
At present is MBO approach also known in terms Management by Results, Performance
Management, Goals Management etc.
MBO makes objective operational by a process in which they cascade down through the
organization. The organizations overall objectives are translated into specific goals for each
following level in the enterprise (divisional, departmental, and individual). 2 MBO works from
the bottom up as well as from the top down, because lower managers participate in setting
their own goals. The result is a hierarchy that connects goals at one level to these at the next
level. For the individual employee, MBO provides specific personal performance objectives.
Each individual, therefore, has and identified specific contribution to make his units
performance. If all the employees attain their goals, then the units goals will be
accomplished, and subsequently, the overall objectives of the organization become real. The
important ingredient of the MBO process is continuous feedback on performance and goals
supplemented by periodic formal appraisal.
Benefits of MBO are:
improvement of managing,
clarification of organization,
encouragement of personal commitment,
development of effective control.
Improvement of managing the major advantage of MBO can be summarized by saying
that is in greatly improved management. It is not possible established objectives without
planning, and only results-oriented planning makes sense. MBO forces managers to think
about planning in light of results, rather than only planning activities or work. To ensure
realistic objectives, mangers thing of the way they will achieve results, the organization and
personnel they will need to do so, and also the resources and assistance they will require.
Also, there is no better impulse for control and no better method to know the control standard
than having a set of clear goals.
Clarification of organization another MBO benefit is that it forces managers to clarify
organizational roles and structures. Positions should be reasonable built around the key results
expected of the people occupying them. Companies that have effectively implemented MBO

Planning II

programs have often discovered deficiencies in their organization. Managers often forget to
delegate authority according to the results they expect.
Encouragement of personal commitment MBO encourages people to commit themselves
to their goals. If individuals have clearly defined their objectives, there is no need to waiting
for guidance, following instruction and decisions. Also if they share in setting their goals,
they have opportunity to place their ideas into planning programs, understand their area of
discretion, their authority and superiors can help them to ensure that they attain the set
objectives. These are the elements that create a feeling of commitment.
Development of effective control MBO also helps in developing effective control. Control
involves measuring result and taking action to correct deviations from plans to ensure that
objectives are achieved. As will be explained in chapter Control, one of the major problems
on the process of management control is to know what to watching. The best way is to have
clear set of verifiable goals.
There are also some difficulties and weaknesses of processes like MBO e.g.:
managers fail to understand the philosophy of MBO,
goal setters need to give guidelines,
difficulty of setting verifiable goals,
objectives tend to be short-term,
questionable is area of goals inflexibility.
Strategic planning
We can find a lot of definitions of the term strategy in literature. Henry Mintzberg (McGill
University Montreal) in his book The Rise and Fall of Strategic Planning, points out that
people use strategy in several different ways. Mintzberg has been inspired with known
marketing definition 4P (Product, Price, Place and Promotion) and introduced strategy 5P:
Strategy is a Plan - sort of consciously intended course of action, a guideline to deal
with a situation. By this definition strategies have two essential features: they are
created in advance of the actions to which they apply, and they are developed
consciously and purposefully.
Strategy is a Play - a plan (specific) can also be a play or manoeuvre to outwit a
competitor. We might put it about that we are going to do something. This may deter,
confuse or prompt a competitor to take action or not to take action.

 Strategy is a Pattern

after having taken action, we reflect on what we have done

and define it as a consistent pattern - whether or not it was intended. Strategy as a

pattern determines changes and limits (barriers) for set period.
Strategy is a Position - position strategy relates to the context and external situation.
Coming-out from primary determination of critical strategic problem on the basis of
locating a company in the particular environment.
Strategy is a Perspective looks inside the organization emphatically on top
management decision-making. Strategy in this respect is to the organization what
personality is to the individual. What is the main importance is that strategy is a
perspective shared by members of a company.
Strategy presents the determination of the basic long-term objectives of an enterprise,
and adoption of courses of action and allocation of resources necessary to accomplish
these goals.
Although specific steps in formulation strategy can vary, planning process is generally built
from following steps:
1. setting strategic objectives,
2. strategic analysis of external environment,
3. strategic analysis of internal environment,
4. identify strengths and weaknesses of enterprise, develop a competitive advantages,
5. basic alternatives of corporate strategies
6. development of portfolio strategy
7. design and coordinate a development strategies namely: marketing, production,
finance, innovative, organizational, and human resources,
8. evaluation and strategic choice,
9. formulate a complex strategic plan,
10. budgeting,
11. and development of tactical and operational plans.
Setting strategic objectives is the starting point of strategic planning process. Without clear
goals, managing is haphazard. No one can expect to perform effectively and efficiently unless
there is a clear aim. Objectives should be defined in three sequential steps:
1. formulate overall objectives,
2. formulate specific objectives (goals for each decision-making level),
3. prioritizing objectives relevancy.

Setting objectives is a difficult task. As previous chapter emphasized, objectives should be

variable and should state what is to be reached and when. If it is possible, the quality desired
and the projected cost of accomplishing the objectives should be indicated. Furthermore,
goals should be challenging, indicate priorities, and promote personal and professional
growth. It is also necessary to avoid the conflict of objectives, e.g.:
short-term profit x long-term growth,
immediate rise in sales x new products development,
profitability x growth of competitive positions.
Assessing the External Environment this phase focuses on a review of data concerning
conditions and trends in the external environment (factors outside the basic control of the
organization) that could influence the organization and its future. External environment must
be assessed in terms of threats and opportunities. According to Jauch and Glueck is external
business environment divided into:
macroenvironment comprising socioeconomic, technological, and governmental
sectors.
sector environment (microenvironment) comprising customers, suppliers,
competitor sector.
Socioeconomic sector - economic, social, environmental and climatic factors are relevant.
Economic factors: business cycle stage, GNP trends, interest rate, money supply, inflation,
unemployment, disposable income.
Sociocultural factors: population demographics, income distribution, social mobility, lifestyle
changes, attitudes to work and leisure, consumerism, level of education.
Environmental factors: environmental protection laws, waste disposal, and energy
consumption.
Technological sector - inventions and innovations have strategic meaning for all companies.
Technological factors: government spending on research, government and industry focus on
technological effort, new discoveries and developments, speed of technology transfer, or rates
of obsolescence.
Government sector - businesses are obligate to obey laws, and the expenditures necessary to
comply with these laws may increase. In addition to this regulatory role, the government is a
major purchaser of a variety of goods and services. Legal factors: competition law,
employment law, health and safety, product safety.

Customer sector firms serve user needs for products and services. Customer choices have a
major influence on strategic plans. Drucker has argued, There is only one valid definition of
business purpose: to create a customer.
Supplier sector the availability of materials, money, and human talent influences what a
firm can and cannot achieve. If the costs of these resources increase or if access to them
become restricted, than the likelihood of a threat to the firms productivity is increased.
Competitor sector - when a companys entry into the marketplace is costly, time-consuming,
and resource-intensive, the possibility of threat to its competitiveness declines. If competitors
go out of business, then serving their former customers becomes a possible business
opportunity for the firm.
One of the most often used tools to analysis micro-environment of the company is Porters
framework. Porter emphasizes the important impact of competitive forces on industry
profitability. The Porters model is made by the identification of five fundamental competitive
forces:
1. the entry of new competitors,
2. the bargaining powers of buyers,
3. the bargaining powers of suppliers,
4. the rivalry among the existing players,
5. availability of substitute products.
Assessing the internal environment - next step of planning process is move from looking
outside the organization to looking inside. The organization should be evaluated in respect to
its resources and its weaknesses and strengths in research and development, products and
services, production, operations, marketing, and procurement. Other internal factors that are
important for strategy formulation and should be assessed include human resources and
financial resources, company image, as well as organization structure and climate.
A merging of the externalities with the internalities results is an assessment of the
organizations opportunities. This merging is called SWOT analysis. SWOT analysis is
analysis of an organizations strengths, weaknesses, opportunities, and treats in order to
identify a competitive advantage.
On the basis of an analysis of the external and internal environment are developed strategic
alternatives. A company may pursue many different kinds of strategies. It may:
specialize or concentrate on actual operation,
diversify extending the operation into new and profitable markets.

Still another strategy is to go international and expand the operation into other countries.
Firm may also adopt a liquidation strategy by terminating an unprofitable production. In some
cases retrenchment strategy can be appropriate. In such situation the company may curtail the
operations temporarily. These are just a few examples of possible strategies. Success depends
on selecting the right strategy, the one that fits to the complete picture of the organization and
the industry of which it is a part.
The identification of possible development directions builds on an understanding of an
enterprises strategic positions. Next exhibit Ansoff`s product/market matrix shows one of the
main approaches used for identifying directions for strategic development. According to
this matrix the company can use four strategic options in terms of:
protect and build on current position organizations protect and strengthen their
position in current market with current products,
product development organizations deliver modified or new products to existing
markets,
market development existing products are offered in new markets,
diversification strategy that takes organization away from both its existing market
and current products.
Exhibit: Strategy development directions
Products
Existing
Markets
Protect/build
Existing
consolidation
market penetration
Market development
New

new segments
new territories
new uses
with new capabilities

New
Product development
with existing capabilities
with new capabilities
Diversification
with existing capabilities
with new capabilities

Source: Adapted from H. Ansoff, Corporate strategy, Penguin 1998.

Managing the corporate portfolio is next basic step in strategic planning process. A number
of tools have been developed to help managers choose what business unit to have in a
portfolio. Each tool focuses more or less of one of these criteria:
the balance of the portfolio, in relation to its markets and the needs of the company,
the attractiveness of the business units in the portfolio in terms of how profitable
they are or will be and how fast they are growing, and

 the degree of fit that the business units have with each other in terms of potential
synergies.
As we pointed there are several models of conceiving the balance of portfolio. The most
common are: BCG matrix, the directional policy matrix, the parenting matrix, General electric
approach etc. Portfolio strategies are closely related to marketing strategies; in the majority of
cases are parts of them.
Finally is developed the overall strategic plan. This step involves putting it all together so
that the plan becomes a useful tool. Overall strategic plan must be supplemented by budgeting
system.
Strategic planning, to be effective, must be accompanied by tactical and operational plans.
Generally the medium and short-term plans are developed in the following areas: marketing,
production, supply, investment, personnel, finance, organization, public relations, and
research and development.

Summary
Planning is a process, which is intellectually demanding; it requires that we
consciously determine courses of action and base our decision on purpose, knowledge
and considered estimates.
Planning encompasses selecting missions and objectives and establishing the actions
to achieve them. Plans thus provide a rational approach to achieving preselected goals.
We can emphasise the essential nature of planning by examining its four major
standpoints: contribute to achieving purpose and objectives, primacy among the
managers tasks, relevant to all activities, and the efficiency of resulting plans.
Planning function must always start from four basic factors, which have to be included
in plans. These are objectives, actions, resources, and rules.
In level of management involvement we can differ: strategic planning, tactical
planning, and operational planning. Strategic planning is the starting decision making
in organization. Tactical planning describes how strategic objectives will be attained.
Operational planning appears from tactical planning, focuses on short-term periods,
and is narrowly defined.
In terms of time frame we can distinguish three levels of planning: long-term.
medium-term, and short-term planning.

 Mission statement defines the purpose of an organization and identifies its basic
function and tasks.
Objectives or goals are the end points toward which activity is aimed.
Strategy can be defined as the determination of the basic long-term goals of a
company and the adoption of course of action and allocation of resources necessary to
achieve them.
Policies are general statements or understandings that guide thinking in decision
making.
Procedures establish a required method of handling future activities. Rules determine
specific required actions, allowing no discretion. Programs are complex of goals,
policies, procedures, rules, steps to be taken, resources to be employed and other
components necessary to carry out a given course of action. A budget is a numerical
statement of expected results.
MBO process comprise setting objectives at the highest level of the organization,
clarifying the specific roles of those responsible for achieving the goals, and setting
and modifying goals for subordinates. Among its other benefits we can class
improvement of managing, clarification of organization, encouragement of personal
commitment, and development of effective control.
Planning process can be generally built from following steps: setting strategic
objectives, strategic analysis of external environment, strategic analysis of internal
environment, identify strengths and weaknesses of enterprise, develop a competitive
advantages, basic alternatives of corporate strategies, development of portfolio
strategy, design and coordinate a development strategies namely - marketing,
production, finance, innovative, organizational, and human resources, evaluation and
strategic choice, formulate a complex strategic plan, budgeting, and development of
tactical and operational plans.
According to Jauch and Glueck is possible external business environment divided into
macroenvironment socioeconomic, technological, and governmental sectors, and
sector environment (microenvironment) customers, suppliers, competitor sector.
Assessing the internal environment the organization should be evaluated in respect to
its weaknesses and strengths in research and development, products and services,
production, operations, marketing, and procurement.

 On the basis of an analysis of the external and internal environment are developed
strategic alternatives. A company may specialize or concentrate on actual operation or
extending the operation into new and profitable markets.
Finally is developed the overall strategic plan that must be supplemented by budgeting
system.

Key terms
Planning
Objective or goal
Strategy
Policy
Procedure
Strategic planning
Tactical planning
Operational planning
Management by objectives
Macroenvironment and sector environment (microenvironment)
SWOT analysis
Corporate portfolio
Overall strategic plan

Review and discussion questions

1. Define term planning in own words.
2. Explain the nature and purpose of planning.
3. How can be plans in level of management involvement categorized?
4. Differentiate among strategy, policy and procedure.
5. Characterize the process called MBO and its benefits.
6. Explain the 5P strategy according to Mintzberg.
7. Describe each step in planning process.
8. Identify the company macroenvironment and sector environment.
9. Enumerate five fundamental competitive forces of Porters model.
10. Which kinds of strategies may company pursue? Describe portfolio strategy.
11. For which areas are generally short and medium-term plans developed?