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PLANNING IN MANAGEMENT

Planning is a process which involves the determination of future course of action,


i.e. why an action, how to take an action, and when to take action are main
subjects of planning.

Planning is deciding in advance what to do and how to do. It is one of the basic
managerial functions. Before doing something, the manager must formulate an
idea of how to work on a particular task. Thus, planning is closely connected with
creativity and innovation. It involves setting objectives and developing
appropriate courses of action to achieve these objectives.

Even though there is no unanimity of opinion on the subject, yet economic


planning as understood by the majority of economists implies deliberate control
and direction of the economy by a central authority for the purpose of achieving
definite targets and objectives within a specified period of time.

In developing countries we can identify two main characteristics of economic


planning:

(i) The governments mobilize domestic resources and also raise foreign finance
to carry out such projects which are expected to induce productive activities in
the private sector. This involve the development of infrastructure and heavy
industries.

(ii) The governments adopt certain monetary and fiscal policies to stimulate
private economic activity and to ensure harmony between the social objectives
of the government and the behaviour of the private producers and businessmen.

From the above characteristics of planning in mixed developing economy, it is


clear that the market and economic planning are complementary to one another.

Planning Definition
"Planning bridges the gap from where we are to where we want to go. It makes it
possible for things to occur which would not otherwise happen" - Koontz and
O'Donnel.

Planning may be broadly defined as a concept of executive action that embodies


the skill of anticipating, influencing, and controlling the nature and direction of
change. McFarland.

According to Prof. L. Robbins economic planning is collective control or


suppression of private activities of production and exchange.

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To Hayek, planning means, the direction of productive activity by a central


authority.
According to Dalton, Economic planning in the widest sense is the deliberate
direction by persons in charge of large resources of economic activity towards
chosen end.

Why is Planning required in Management?


Planning provides directions
Planning reduces the risks of uncertainty

Planning reduces overlapping and wasteful activities

Planning promotes innovative ideas

Planning facilitates decision making

Planning establishes standards for controlling

Purpose of a plan

Just as no two organizations are alike, so also their plans. It is therefore important
to prepare a plan keeping in view the necessities of the enterprise. A plan is an
important aspect of business. It serves the following three critical functions:

Helps management to clarify, focus, and research their business's or


project's development and prospects.
Provides a considered and logical framework within which a business can
develop and pursue business strategies over the next three to five years.

Offers a benchmark against which actual performance can be measured


and reviewed.

Importance of Planning
1. Planning increases the organization's ability to adapt to future
eventualities: The future is generally uncertain and things are likely to
change with the passage of time. The uncertainty is augmented with an
increase in the time dimension. With such a rise in uncertainty there is
generally a corresponding increase in the alternative courses of action from
which a selection must be made. The planning activity provides a
systematic approach to the consideration of such future uncertainties and
eventualities and the planning of activities in terms of what is likely to
happen.

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2. Planning helps crystallize objectives: The first step in planning is to fix


objectives which will give direction to the activities to be performed. This
step focuses attention on the iesults desired. A proper definition and
integration of overall and departmental objectives would result in more
coordinated inter-departmental activities and a greater chance of attaining
the overall objectives.

3. Planning ensures a relatedness among decisions: A crystallization of


objectives as mentioned above would lead to a relatedness among the
decisions which would otherwise have been random. Decisions of the
managers are related to each other and ultimately towards the goals or
objectives of the enterprise. Creativity and innovation of individuals is thus
harnessed towards a more effective management of the company.

4. Planning helps the company to remain more competitive in its


industry: Planning may suggest the addition of a new line of products,
changes in the methods of operation, a better identification of customer
needs and segmentation and timely expansion of plant capacity all of
which render the company better fitted to meet the inroads of competition.

5. Adequate planning reduces unnecessary pressures of immediacy: If


activities are not properly planned in anticipation of what is likely to
happen, pressures will be exerted to achieve certain results immediately or
a in a hurry. Thus adequate planning supplies orderliness and avoids
unnecessary pressures.

6. Planning reduces mistakes and oversights: Although mistakes cannot


be entirely obviated, they can certainly be reduced through proper
planning.

7. Planning ensures a more productive use of the organization's


resources: By avoiding wasted effort in terms of men, money and
machinery, adequate planning results in greater productivity through a
better utilization of the resources available to the organization.

8. Planning makes control easier: The crystallization of objectives and


goals simplify and highlight the controls required.

9. Identification of future problems: Planning enables the identification of


future problems and makes it possible to provide for such contingencies.

10. Planning can help the organization secure a better position


or standing: Adequate planning would stimulate improvements in terms
of the opportunities available.

11. Planning enables the organization to progress in the manner


considered most suitable by its management: Management, for

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example, may be interested in stability and moderate profits rather than


huge profits and risk of instability. In terms of its objectives, the plan would
ensure the actions are taken to achieve such objectives.

12. Planning increases the effectiveness of a manager: As his


goals are made clearer, adequate planning would help the manager in
deciding upon the most appropriate act.

Features of planning
Planning focuses on achieving objectives
Planning is a primary function of management

Planning is pervasive

Planning is continuous

Planning is futuristic

Planning involves decision making

Planning is a mental exercise

Planning Process
Setting objectives: Objectives may be set for the entire organization and
each department or unit within the organization.

Developing premises: Planning is concerned with the future which is


uncertain and every planner is using conjecture about what might happen
in future.

Identifying alternative courses of action: Once objectives are set,


assumptions are made. Then the next step would be to act upon them.

Evaluating alternative courses: The next step is to weigh the pros and
cons of each alternative.

Selecting an alternative: This is the real point of decision making. The


best plan has to be adopted and implemented.

Implement the plan: This is concerned with putting the plan into action.

Follow-up action: Monitoring the plans are equally important to ensure


that objectives are achieved.

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Types of Plans
[A] Activities Covered

[1] Corporate Planning

Determines longterm objectives of org. as a whole


Generates plans to achieve these objectives
Future Oriented
Integrated

[2] Functional Planning


Undertaken for subfunctions within each major function
Derived from Corporate Planning
Segmental

[B] Importance of Contents

[1] Strategic
Sets longterm direction of org. which it wants to proceed in future
Encompasses all functional areas of Business
Involves analysis of environmental factors
Period is a problem

[2] Operational
Tactical/Shortterm Planning
Aimed at sustaining the org. in its production and distribution of current
products and/or services to existing markets

[C] Time Period

Depends upon the type of Business and structure of the organization


What may be a longterm period of planning for one organization may be a
short period for
others.
Ideal planning period depends upon:

Commitment Principle:
Longrange planning is not really planning for future decisions, but rather
planning the future
impact of todays decision.

[1] Long Term Planning

Strategic in Nature
Involves, generally, 35 yrs

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Involves analysis of environmental factors

[2] Short Term Planning


Operational in nature
Involves 6 months1 yr
Aimed at sustaining organization in its production and distribution of current
products and/or services to existing market

[D] Approach

[1] Proactive Planning

Designing suitable course of action in anticipation of likely changes in relevant


environment
To take decisions in advance

[2] Reactive Planning

Organizations response comes after environmental changes have taken place


Useful for fairly stable environment over a long period of time

[E] Degree of Formalization

[1] Formal Planning

Taken by larger organizations


Wellstructured, systematic process
Involves different steps
Rational
Welldocumented and regular

[2] Informal Planning

Taken by smaller organizations


Part of Managers regular activities
Based on Managers: Memory of events; Intuition; Gutfeeling.

Planning Principles
Planning is a dynamic process, it is very essential for every organization to
achieve their ultimate goals, but, there are certain principles which are essential
to be followed so as to formulate a sound plan. They are only guidelines in the
formulation and implementation of plans. These principles are as follows:

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1. Principle of Contribution: The purpose of planning is to ensure the


effective and efficient achievement of corporate objectives, in-fact, the
basic criteria for the formulation of plans are to achieve the ultimate
Objectives of the company. The accomplishment of the objectives always
depends on the soundness of plans and the adequate amount of
contribution of company towards the same.

2. Principle of Sound and Consistent Premising: Premises are the


assumptions regarding the environmental forces like economic and market
conditions, social, political, legal and cultural aspects, competitors actions,
etc. These are prevalent during the period of the implementation of plans.
Hence, Plans are made on the basis of premises accordingly, and the future
of the company depends on the soundness of plans they make so as to face
the state of premises.

3. Principle of Limiting factors : The limiting factors are the lack of


motivated employees, shortage of trained personnel, shortage of capital
funds, government policy of price regulation, etc. The company requires to
monitor all these factors and need to tackle the same in an efficient way so
as to make a smooth way for the achievement of its ultimate objectives.

4. Principle of Commitment: A commitment is required to carry-on the


business that is established. The planning shall has to be in such a way that
the product diversification should encompass the particular period during
which entire investment on that product is recovered.

5. Principle of Coordinated Planning: Long and short-range plans should


be coordinated with one another to form an integrated plan, this is possible
only when latter are derived from the former. Implementation of the long-
range plan is regarded as contributing to the implementation of the short-
range plan. functional plans of the company too should contribute to all
others plans i.e. implementation of one plan should contribute to all the
other plans, this is possible only when all plans are consistent with one
another and are viewed as parts of an integrated corporate plan.

6. Principle of Timing: Number of major and minor plans of the organization


should be arranged in a systematic manner. The plans should be arranged
in a time hierarchy, initiation and completion of those plans should be
clearly determined.

7. Principle of Efficiency: Cost of planning constitute human, physical and


financial resources for their formulation and implementation as well.
Minimizing the cost and achieving the efficient utilization of resources shall
has to be the aim of the plans. Cost of plan formulation and
implementation, in any case, should not exceed the organizations output's
monetary value. Employee satisfaction and development, and social

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standing of the organization are supposed to be considered while


calculating the cost and benefits of plan.

8. Principle of Flexibility: Plans are supposed to be flexible to favor the


organization to cope-up with the unexpected environments. It is always
required to keep in mind that future will be different in actuality. Hence
companies, therefore, require to prepare contingency plans which may be
put into operation in response to the situations.

9. Principle of Navigational Change: Since the environment is always not


the same as predicted, plans should be reviewed periodically. This may
require changes in strategies, objectives, policies and programs of the
organization. The management should take all the necessary steps while
reviewing the plans so that they efficiently achieve the ultimate goals of
the organization.

10. Principle of Acceptance: Plans should be understood and accepted by


the employees, since the successful implementation of plans requires the
willingness and cooperative efforts from them. Communication also plays a
crucial role in gaining the employee understanding and acceptance of the
plans by removing their doubts and misunderstanding about the plans also
their apprehensions and anxieties about consequences of plans for
achievement of their personal goal.

Strategic planning
Strategic planning is an organization's process of defining its strategy, or
direction, and making decisions on allocating its resources to pursue this
strategy. In order to determine the direction of the organization, it is necessary to
understand its current position and the possible avenues through which it can
pursue a particular course of action. Generally, strategic planning deals with at
least one of three key questions:

1. "What do we do?"
2. "For whom do we do it?"

3. "How do we excel?"

In many organizations, this is viewed as a process for determining where an


organization is going over the next year ormore typically3 to 5 years (long
term), although some extend their vision to 20 years.

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Key components

The key components of 'strategic planning' include an understanding of the firm's


vision, mission, values and strategies. The vision and mission are often captured
in a Vision Statement and Mission Statement.

Vision: outlines what the organization wants to be, or how it wants the
world in which it operates to be (an "idealized" view of the world). It is a
long-term view and concentrates on the future. It can be emotive and is a
source of inspiration. For example, a charity working with the poor might
have a vision statement which reads "A World without Poverty."

Mission: Defines the fundamental purpose of an organization or an


enterprise, succinctly describing why it exists and what it does to achieve
its vision. For example, the charity above might have a mission statement
as "providing jobs for the homeless and unemployed".

Values: Beliefs that are shared among the stakeholders of an organization.


Values drive an organization's culture and priorities and provide a
framework in which decisions are made. For example, "Knowledge and
skills are the keys to success" or "give a man bread and feed him for a day,
but teach him to farm and feed him for life". These example values may set
the priorities of self sufficiency over shelter.

Strategy: Strategy, narrowly defined, means "the art of the general." A


combination of the ends (goals) for which the firm is striving and the means
(policies) by which it is seeking to get there. A strategy is sometimes called
a roadmap which is the path chosen to plow towards the end vision. The
most important part of implementing the strategy is ensuring the company
is going in the right direction which is towards the end vision.

Organizations sometimes summarize goals and objectives into a mission


statement and/or a vision statement. Others begin with a vision and mission
and use them to formulate goals and objectives.

Many people mistake the vision statement for the mission statement, and
sometimes one is simply used as a longer term version of the other. However
they are meant to be quite different, with the vision being a descriptive picture of
future state, and the mission being an action statement for bringing about what
is envisioned (ie. the vision is what will be achieved if the company is successful
in achieving its mission).

For an organization's vision and mission to be effective, they must become


assimilated into the organization's culture. They should also be assessed
internally and externally. The internal assessment should focus on how members

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inside the organization interpret their mission statement. The external


assessment which includes all of the businesses stakeholders is valuable
since it offers a different perspective. These discrepancies between these two
assessments can provide insight into their effectiveness.

Strategic planning process

There are many approaches to strategic planning but typically one of the
following approaches is used:

Situation-Target-Proposal See-Think-Draw Draw-See-Think-Plan

Situation - evaluate See - what is Draw - what is the ideal


the current situation today's situation? image or the desired end
and how it came Think - define state?
about. goals/objectives See - what is today's
Target - define situation? What is the
goals and/or Draw - map a gap from ideal and why?
objectives route to
achieving the Think - what specific
(sometimes called
goals/objectives actions must be taken to
ideal state)
close the gap between
Path / Proposal - today's situation and the
map a possible route ideal state?
to the
Plan - what resources
goals/objectives
are required to execute
the activities?

Tools and approaches

Among the most useful tools for strategic planning is SWOT analysis (Strengths,
Weaknesses, Opportunities, and Threats). The main objective of this tool is to
analyze internal strategic factors, strengths and weaknesses attributed to the
organization, and external factors beyond control of the organization such as
opportunities and threats.

Other tools include:

Balanced Scorecards, which creates a systematic framework for strategic


planning;
Scenario planning, which was originally used in the military and recently
used by large corporations to analyze future scenarios.

PEST analysis (Political, Economic, Social, and Technological factors)

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STEER analysis (Socio-cultural, Technological, Economic, Ecological, and


Regulatory factors)

EPISTEL (Environment, Political, Informatics, Social, Technological,


Economic and Legal).

Benefits of Strategic Planning

Strategic planning serves a variety of purposes in organizations, including to:


1. Clearly define the purpose of the organization and to establish realistic goals
and objectives consistent with that mission in a defined time frame within the
organizations capacity for implementation.
2. Communicate those goals and objectives to the organizations constituents.
3. Develop a sense of ownership of the plan.
4. Ensure the most effective use is made of the organizations resources by
focusing the resources on the key priorities.
5. Provide a base from which progress can be measured and establish a
mechanism for informed change when needed.
6. Listen to everyones opinions in order to build consensus about where the
organization is going.

Other reasons include that strategic planning:

7. Provides clearer focus for the organization, thereby producing more efficiency
and effectiveness.
8. Bridges staff/employees and the board of directors (in the case of
corporations).
9. Builds strong teams in the board and in the staff/employees (in the case of
corporations).
10. Provides the glue that keeps the board members together (in the case of
corporations).
11.Produces great satisfaction and meaning among planners, especially around a
common vision.
12. Increases productivity from increased efficiency and effectiveness.
13. Solves major problems in the organization.

When Should Strategic Planning Be Done?

The scheduling for the strategic planning process depends on the nature and
needs of the organization and the its immediate external environment. For
example, planning should be carried out frequently in an organization whose
products and services are in an industry that is changing rapidly . In this
situation, planning might be carried out once or even twice a year and done in a
very comprehensive and detailed fashion (that is, with attention to mission,
vision, values, environmental scan, issues, goals, strategies, objectives,

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responsibilities, time lines, budgets, etc). On the other hand, if the organization
has been around for many years and is in a fairly stable marketplace, then
planning might be carried out once a year and only certain parts of the planning
process, for example, action planning (objectives, responsibilities, time lines,
budgets, etc) are updated each year. Consider the following guidelines:
1. Strategic planning should be done when an organization is just getting started.
(The strategic plan is usually part of an overall business plan, along with a
marketing plan, financial plan and operational/management plan.)
2. Strategic planning should also be done in preparation for a new major venture,
for example, developing a new department, division, major new product or line of
products, etc.
3. Strategic planning should also be conducted at least once a year in order to be
ready for the coming fiscal year (the financial management of an organization is
usually based on a year-to-year, or fiscal year, basis). In this case, strategic
planning should be conducted in time to identify the organizational goals to be
achieved at least over the coming fiscal year, resources needed to achieve those
goals, and funded needed to obtain the resources. These funds are included in
budget planning for the coming fiscal year. However, not all phases of strategic
planning need be fully completed each year. The full strategic planning process
should be conducted at least once every three years. As noted above, these
activities should be conducted every year if the organization is experiencing
tremendous change.
4. Each year, action plans should be updated.
5. Note that, during implementation of the plan, the progress of the
implementation should be reviewed at least on a quarterly basis by the board.
Again, the frequency of review depends on the extent of the rate of change in
and around the organization.

Strategic Planning or Business Planning

It seems that the two phrases strategic planning and business planning are
used interchangeably, much more than ever. I believe its better to see the
phrases as different than to generalize them as the same.

Strategic Planning Should Be Organization-Wide

Strategic planning is best viewed as clarifying the overall purpose and priorities
of the organization. There are many different ways to do strategic planning, and
the contents of the plan vary, depending on the purpose of the planning.
However, the focus of the planning should primarily be organization-wide.

Business Planning Should Be Product- or Service-Specific


Business planning is best viewed as planning for a specific product or service.
The customers and clients for a particular product or service might be very
different than for another product or service. You wouldnt advertise or sell race

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cars the same way youd advertise or sell minivans. Each needs a different
business plan.

The Nature of Organizational Goals


A goal is a future expectation. It is something the organization is striving to
accomplish. The meaning of the goal is subject to a number of interpretations. It
can be used in a broad sense to refer to the overall purpose of an organization. A
goal may be used to refer more specific desired accomplishment. For example, to
produce and sell a given number of range of books within a given period of time.

Goals and objectives provide organizations with a blueprint that determines a


course of action and aids them in preparing for future changes. A goal can be
defined as a future state that an organization or individual strives to achieve. For
each goal that an organization sets, it also sets objectives. An objective is a
short-term target with measurable results. Without clearly-defined goals and
objectives, organizations will have trouble coordinating activities and forecasting
future events.

According to Barney and Griffin, organizational goals serve four basic functions;
they provide guidance and direction, facilitate planning, motivate and inspire
employees, and help organizations evaluate and control performance.
Organizational goals inform employees where the organization is going and how
it plans to get there. When employees need to make difficult decisions, they can
refer to the organization's goals for guidance. Goals promote planning to
determine how goals will be achieved. Employees often set goals in order to
satisfy a need; thus, goals can be motivational and increase performance.
Evaluation and control allows an organization to compare its actual performance
to its goals and then make any necessary adjustments.

According to Locke and Latham, goals affect individual performance through


four mechanisms. First, goals direct action and effort toward goal-related
activities and away from unrelated activities. Second, goals energize employees.
Challenging goals lead to higher employee effort than easy goals. Third, goals
affect persistence. Employees exert more effort to achieve high goals. Fourth,
goals motivate employees to use their existing knowledge to attain a goal or to
acquire the knowledge needed to do so.

The goal-setting model indicates that individuals have needs and values that
influence what they desire. A need is defined as a lack of something desirable or
useful. According to Maslow's hierarchy of needs, all individuals possess the same
basic needs. Individuals do, however, differ in their values. Values are defined as

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a group of attitudes about a concept that contains a moral quality of like or


dislike and acceptable or unacceptable. Values determine whether a particular
outcome is rewarding. Employees compare current conditions to desired
conditions in order to determine if they are satisfied and fulfilled. If an employee
finds that he or she is not satisfied with the current situation, goal setting
becomes a way of achieving what he or she wants.

Functions of Goals

-Goals provide a standard of performance. They focus attention on the activities


of the organization and the direction of the staffs.
-Goals provide a basis for planning and control related to the activities of the
organization.
-Goals influences the structure of the organization and help to determine the
nature of technology employed.
-Goals are basis for objectives and policies of the organization
-Goals are important feature of work organization. Goals should be stated clearly,
emphasized and communicated to all employees of the organization in order to
achieve effectiveness.
-Goals help to develop commitment of individuals and group to the activities of
the organization. They focus attention on purposeful behavior and provide a basis
for motivation and reward system.

Classification of Organization Goals

The organization goals can be classified in the following different ways:

-Economic goals. This goals are concerned with production of goods and
services for people outside the organization.
-Cultural goals. This goals are concerned with the symbolic objects and with
creating or maintaining value systems of society.
-Order goals. This goals are negative and attempt to place some kind of
constraints upon members of the organization and to prevent certain forms of
behavior.
-Product goal. These related to the nature and characteristics of the outputs
themselves. Example the design, quality and the availability of their output.
-Consumer goal. These goal related to the nature of outputs in term of market
to be served and consumer satisfaction.
-Secondary goal. There related to goals that are not the main aim of the
organization.
-Operational goal. These related to the activities which involved in providing
outputs, and the operation of the organization. For example, the choice of
structure, the management process and the nature of technology.

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Situation analysis
A situation refers to the general position or context that a person or organization
is operating within at a specific point in time. A situation refers to the general
state of things; or the combination of circumstances occurring at a given time.

A situation analysis defines and interprets the state of the environment of a


person or organization. A situation analysis provides the context and knowledge
for planning. A situation analysis describes an organizations competitive
position, operating and financial condition and general state of internal and
external affairs.

Situation awareness concerns the identification and perception of the elements in


the relevant environment, the comprehension of their meaning, and the
projection of their status into the near future. Situation analysis is defined as a
process that examines a situation, its elements, and their relations, and that is
intended to provide and maintain a state of situation awareness for the decision
maker/commander. Situation analysis develops hypotheses about meaningful
relations between entities and events, estimates the organizational structures
and intentions of threat entities, assesses vulnerabilities of both one's own force
and of threat assets and the level of risk posed by specific threats.

Situation analysis is a marketing term, and involves evaluating the situation and
trends in a particular company's market. The Situation Analysis allows a company
to understand their own internal and external situation, the customer, the market
environment, and the firms own capabilities. A SWOT Analysis is a type of
situation analysis that examines the Strengths and Weaknesses of a company
(its internal environment) as well as Opportunities and Threats in the market (in
the external environment).

The "5 C Analysis" tends to be the most useful and common approach to
conducting a Situation Analysis. In this approach a firm will examine the:

Company: This includes the product line, product image, production


technology, as well as company culture and goals
Collaborators: Those who help the company develop, produce, or
distribute the product.

Customers: The ideal target segment (researching demographics,


geographic location, and psychographics), consumer trends and the
characteristics of purchases they make, consumer motivation, as well as
market size and growth

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Competitors: Both actual and/or potential, direct and/or indirect. This


includes looking into their strengths and weaknesses, market share,
products, and product or market positioning

Climate/Context: Research in regards to the current or future political,


economic, social/cultural, technological environments that will ultimately
influence the success or failure of the product (PEST Analysis). A thorough
historical context can also be useful.

The final written format of the situation analysis is ultimately broken down into
different sections regarding each of the different Cs, and a thorough
examination of each of them. It may also include information on the use and cost
of different methods of advertising that the company desires to use for the
launch of the product.

A situation analysis helps a company determine whether the rewards of a product


outweigh the risks, depending on if they are entering it in a new market,
developing a brand/product line extension, or creating a completely new product.
Ultimately, the purpose of the situation analysis is to identify and define the
product position, as well as analyze the environment in which it will be placed in,
and will attempt to help the company determine if the product will survive and
thrive, if drastic changes must be made for it to be successful, or if any more
advancement on the product should be stopped immediately.

What are DECISIONS?


The word decision is defined as: A choice between two or more alternatives.
Thus decision making can be understood as:
The act of making up your mind about something, or a position or opinion or
judgment reached after consideration.
The process of selecting from several choices, products or ideas, and taking
action.

Decision Making defined:


The procedure and course of action involved in examining your possibilities of
options, comparing them, and choosing an appropriate course of action.

Factors for making affective decisions


Perception
Priority
Acceptability

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Risk
Resources
Goals
Values
Demands
Style
Judgment

Steps in Decision Making


An effective decision making involves the following four steps:

Types of problems decision makers face


Managerial decision making typically centers on three types of problems:

Crisis: A crisis problem is a serious difficulty requiring immediate


action.

Non-Crisis: A non-crisis problem is an issue that requires resolution


but does not simultaneously have the importance and immediacy
characteristics of a crisis.

Opportunity Problems: An opportunity problem is a situation that


offers strong potential for significant organizational gain if appropriate actions
are taken.

The DecisionMaking Process


Quite literally, organizations operate by people making decisions. A manager
plans, organizes, staffs, leads, and controls her team by executing decisions. The
effectiveness and quality of those decisions determine how successful a manager
will be.

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Managers are constantly called upon to make decisions in order to solve


problems. Decision making and problem solving are ongoing processes of
evaluating situations or problems, considering alternatives, making choices, and
following them up with the necessary actions. Sometimes the decision-making
process is extremely short, and mental reflection is essentially instantaneous. In
other situations, the process can drag on for weeks or even months. The entire
decision-making process is dependent upon the right information being available
to the right people at the right times.

The decision-making process involves the following steps:

1. Define the problem.


2. Identify limiting factors.

3. Develop potential alternatives.

4. Analyze the alternatives.

5. Select the best alternative.

6. Implement the decision.

7. Establish a control and evaluation system.

Define the problem


The decision-making process begins when a manager identifies the real problem.
The accurate definition of the problem affects all the steps that follow; if the
problem is inaccurately defined, every step in the decision-making process will be
based on an incorrect starting point. One way that a manager can help determine
the true problem in a situation is by identifying the problem separately from its
symptoms.

The most obviously troubling situations found in an organization can usually be


identified as symptoms of underlying problems. (See Table 1 for some examples
of symptoms.) These symptoms all indicate that something is wrong with an
organization, but they don't identify root causes. A successful manager doesn't
just attack symptoms; he works to uncover the factors that cause these
symptoms.

TABL Symptoms and Their


E1 Real Causes
Symptoms Underlying Problem
Low profits and/or Poor market research
declining sales

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Symptoms Underlying Problem


High costs Poor design process; poorly trained employees
Low morale Lack of communication between management and
subordinates
High employee turnover Rate of pay too low; job design not suitable
High rate of absenteeism Employees believe that they are not valued

Identify limiting factors


All managers want to make the best decisions. To do so, managers need to have
the ideal resources information, time, personnel, equipment, and supplies
and identify any limiting factors. Realistically, managers operate in an
environment that normally doesn't provide ideal resources. For example, they
may lack the proper budget or may not have the most accurate information or
any extra time. So, they must choose to satisfy to make the best decision
possible with the information, resources, and time available.

Develop potential alternatives


Time pressures frequently cause a manager to move forward after considering
only the first or most obvious answers. However, successful problem solving
requires thorough examination of the challenge, and a quick answer may not
result in a permanent solution. Thus, a manager should think through and
investigate several alternative solutions to a single problem before making a
quick decision.

One of the best known methods for developing alternatives is through


brainstorming, where a group works together to generate ideas and alternative
solutions. The assumption behind brainstorming is that the group dynamic
stimulates thinking one person's ideas, no matter how outrageous, can
generate ideas from the others in the group. Ideally, this spawning of ideas is
contagious, and before long, lots of suggestions and ideas flow. Brainstorming
usually requires 30 minutes to an hour. The following specific rules should be
followed during brainstorming sessions:

Concentrate on the problem at hand. This rule keeps the discussion


very specific and avoids the group's tendency to address the events
leading up to the current problem.
Entertain all ideas. In fact, the more ideas that come up, the better. In
other words, there are no bad ideas. Encouragement of the group to freely
offer all thoughts on the subject is important. Participants should be

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encouraged to present ideas no matter how ridiculous they seem, because


such ideas may spark a creative thought on the part of someone else.

Refrain from allowing members to evaluate others' ideas on the


spot. All judgments should be deferred until all thoughts are presented,
and the group concurs on the best ideas.

Although brainstorming is the most common technique to develop alternative


solutions, managers can use several other ways to help develop solutions. Here
are some examples:

Nominal group technique. This method involves the use of a highly


structured meeting, complete with an agenda, and restricts discussion or
interpersonal communication during the decision-making process. This
technique is useful because it ensures that every group member has equal
input in the decision-making process. It also avoids some of the pitfalls,
such as pressure to conform, group dominance, hostility, and conflict, that
can plague a more interactive, spontaneous, unstructured forum such as
brainstorming.
Delphi technique. With this technique, participants never meet, but a
group leader uses written questionnaires to conduct the decision making.

No matter what technique is used, group decision making has clear advantages
and disadvantages when compared with individual decision making. The
following are among the advantages:

Groups provide a broader perspective.


Employees are more likely to be satisfied and to support the final decision.

Opportunities for discussion help to answer questions and reduce


uncertainties for the decision makers.

These points are among the disadvantages:

This method can be more time-consuming than one individual making the
decision on his own.
The decision reached could be a compromise rather than the optimal
solution.

Individuals become guilty of groupthink the tendency of members of a


group to conform to the prevailing opinions of the group.

Groups may have difficulty performing tasks because the group, rather
than a single individual, makes the decision, resulting in confusion when it
comes time to implement and evaluate the decision.

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The results of dozens of individual-versus-group performance studies indicate


that groups not only tend to make better decisions than a person acting alone,
but also that groups tend to inspire star performers to even higher levels of
productivity.

So, are two (or more) heads better than one? The answer depends on several
factors, such as the nature of the task, the abilities of the group members, and
the form of interaction. Because a manager often has a choice between making a
decision independently or including others in the decision making, she needs to
understand the advantages and disadvantages of group decision making.

Analyze the alternatives


The purpose of this step is to decide the relative merits of each idea. Managers
must identify the advantages and disadvantages of each alternative solution
before making a final decision.

Evaluating the alternatives can be done in numerous ways. Here are a few
possibilities:

Determine the pros and cons of each alternative.


Perform a cost-benefit analysis for each alternative.

Weight each factor important in the decision, ranking each alternative


relative to its ability to meet each factor, and then multiply by a probability
factor to provide a final value for each alternative.

Regardless of the method used, a manager needs to evaluate each alternative in


terms of its

Feasibility Can it be done?


Effectiveness How well does it resolve the problem situation?

Consequences What will be its costs (financial and nonfinancial) to the


organization?

Select the best alternative


After a manager has analyzed all the alternatives, she must decide on the best
one. The best alternative is the one that produces the most advantages and the
fewest serious disadvantages. Sometimes, the selection process can be fairly
straightforward, such as the alternative with the most pros and fewest cons.
Other times, the optimal solution is a combination of several alternatives.

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Sometimes, though, the best alternative may not be obvious. That's when a
manager must decide which alternative is the most feasible and effective,
coupled with which carries the lowest costs to the organization. (See the
preceding section.) Probability estimates, where analysis of each alternative's
chances of success takes place, often come into play at this point in the decision-
making process. In those cases, a manager simply selects the alternative with
the highest probability of success.

Implement the decision


Managers are paid to make decisions, but they are also paid to get results from
these decisions. Positive results must follow decisions. Everyone involved with
the decision must know his or her role in ensuring a successful outcome. To make
certain that employees understand their roles, managers must thoughtfully
devise programs, procedures, rules, or policies to help aid them in the problem-
solving process.

Establish a control and evaluation system


Ongoing actions need to be monitored. An evaluation system should provide
feedback on how well the decision is being implemented, what the results are,
and what adjustments are necessary to get the results that were intended when
the solution was chosen.

In order for a manager to evaluate his decision, he needs to gather information to


determine its effectiveness. Was the original problem resolved? If not, is he closer
to the desired situation than he was at the beginning of the decision-making
process?

If a manager's plan hasn't resolved the problem, he needs to figure out what
went wrong. A manager may accomplish this by asking the following questions:

Was the wrong alternative selected? If so, one of the other alternatives
generated in the decision-making process may be a wiser choice.
Was the correct alternative selected, but implemented improperly?
If so, a manager should focus attention solely on the implementation step
to ensure that the chosen alternative is implemented successfully.

Types of Managerial Decisions:-


1. ORGANISATIONAL AND PERSONAL DECISIONS

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Organizational decisions are made to advance the interest of the organization.


When an executive acts formally in his expected role in an organization he makes

organizational decisions making become organizations official decisions making


power is delegated to others also and calls for decisions at subordinate levels
supporting it.

They thus touch off chain of behavior throughout the organization. Personal
decisions are made by an executive as an individual and not as a part of an
organization. An executive who charges jobs or organization is making a personal
decision. Decisions to many to buy a house, to purchase a car are examples of
personal decisions. Such decisions life of an executive but may affect the
personal life of an executive but may affect the organization sometimes directly
or indirectly.

2. INDIVIDUAL AND GROUP DECISIONS

When a decision is taken by an individual in the organization, it is known as


individual decision. These are concerned mainly with routine problems for which
broad policies are available. Such decisions are generally taken in small
organizations and in those organizations where autocratic style of management
prevails. Group decisions are those taken by a group of persons constituted for
the purpose. Decisions taken by the board of directors or a committee are,
examples of group decisions. Group decision making generally results in more
realistic and well balanced decisions and encourages participative decision
making.

3. ROUTINE AND STRATEGIC DECISIONS

Routine decisions are made repetitively following certain established rules,


procedures and policies. They do not require collection of new data and can be
taken without much deliberation. Such decisions are taken generally by the
executives at the middle and lower management levels.

Strategic or basic decisions, on the other hand, are more important and are
generally taken by the top management of organizations. They relate to policy
matters and so require a thorough fact finding and analysis of the possible
alternatives. Launching a new program, location of a new plant, installation of a
computer system are examples of strategic decisions.

4. PROGRAMME AND NON-PROGRAMME DECISIONS

Programmed decisions are concerned with relatively routine and repetitive


problems. Information on these problems is already available and can be
processed in a pre-planned manner. Such decisions have short-term impact and

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are relatively simply. They are, made at lower levels of management. These
decisions require little thought and judgment. The decision maker identifies the
problem and applies the predetermined solution. For example, if an employee is
habitually late comer he can easily be dealt with under the established
procedure.

Non-programmed decisions deal with unique or unusual problems. Such novel or


non-repetitive problems cannot be tackled in a predetermined manner. There are
no cut-and-dried of executive judgment and deliberation is required to solve
them. To order firing on a rioting mob, to impose curfew in the city, opening of a
new branch are examples of such decisions. The ability to make good non-
programmed decisions help to distinguish effective executives from non effective
executives.

5. POLICY AND CREATIVE DECISIONS

Policy decisions are of vital importance and are taken by the top management.
They effect the entire organization. But operating decisions are taken by the
lower management in order to put into action the policy decisions. For instance,
the bonus issue is a policy matter which is to be decided by the top management
and calculation of bonus is an operating decision which is taken at the lower
levels.

Conditions that Influence Decision Making


Managers make problem-solving decisions under three different conditions:
certainty, risk, and uncertainty. All managers make decisions under each
condition, but risk and uncertainty are common to the more complex and
unstructured problems faced by top managers.

Certainty

Decisions are made under the condition of certainty when the manager has
perfect knowledge of all the information needed to make a decision. This
condition is ideal for problem solving. The challenge is simply to study the
alternatives and choose the best solution.

When problems tend to arise on a regular basis, a manager may address them
through standard or prepared responses called programmed decisions. These
solutions are already available from past experiences and are appropriate for the
problem at hand. A good example is the decision to reorder inventory
automatically when stock falls below a determined level. Today, an increasing

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number of programmed decisions are being assisted or handled by computers


using decision-support software.

Structured problems are familiar, straightforward, and clear with respect to the
information needed to resolve them. A manager can often anticipate these
problems and plan to prevent or solve them. For example, personnel problems
are common in regard to pay raises, promotions, vacation requests, and
committee assignments, as examples. Proactive managers can plan processes for
handling these complaints effectively before they even occur.

Risk

In a risk environment, the manager lacks complete information. This condition is


more difficult. A manager may understand the problem and the alternatives, but
has no guarantee how each solution will work. Risk is a fairly common decision
condition for managers.

When new and unfamiliar problems arise, nonprogrammed decisions are


specifically tailored to the situations at hand. The information requirements for
defining and resolving nonroutine problems are typically high. Although computer
support may assist in information processing, the decision will most likely involve
human judgment. Most problems faced by higher-level managers demand
nonprogrammed decisions. This fact explains why the demands on a manager's
conceptual skills increase as he or she moves into higher levels of managerial
responsibility.

A crisis problem is an unexpected problem that can lead to disaster if it's not
resolved quickly and appropriately. No organization can avoid crises, and the
public is well aware of the immensity of corporate crises in the modern world.
The Chernobyl nuclear plant explosion in the former Soviet Union and the Exxon
Valdez spill of years past are a couple of sensational examples. Managers in more
progressive organizations now anticipate that crises will occur. These managers
are installing early-warning crisis information systems and developing crisis
management plans to deal with these situations in the best possible ways.

Uncertainty

When information is so poor that managers can't even assign probabilities to the
likely outcomes of alternatives, the manager is making a decision in an uncertain
environment. This condition is the most difficult for a manager. Decision making
under conditions of uncertainty is like being a pioneer entering unexplored
territory. Uncertainty forces managers to rely heavily on creativity in solving
problems: It requires unique and often totally innovative alternatives to existing
processes. Groups are frequently used for problem solving in such situations. In

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all cases, the responses to uncertainty depend greatly on intuition, educated


guesses, and hunches all of which leave considerable room for error.

These unstructured problems involve ambiguities and information deficiencies


and often occur as new or unexpected situations. These problems are most often
unanticipated and are addressed reactively as they occur. Unstructured problems
require novel solutions. Proactive managers are sometimes able to get a jump on
unstructured problems by realizing that a situation is susceptible to problems and
then making contingency plans. For example, at the Vanguard Group, executives
are tireless in their preparations for a variety of events that could disrupt their
mutual fund business. Their biggest fear is an investor panic that overloads their
customer service system during a major plunge in the bond or stock markets. In
anticipation of this occurrence, the firm has trained accountants, lawyers, and
fund managers to staff the telephones if needed.

Decision Making Styles


As a leader you're stuck with decision making. It's your job to make decisions that
are in the best interest of the whole organization. You must consider the good of
many, not of a few. This is a big responsibility and very often people don't
appreciate your efforts. In fact, many times people get angry at you because of
the decisions you make to help them! Let's take a moment and discuss decision
making style. Not the decision itself, but style.

Democratic decision making is when the leader gives up ownership and control of a
decision and allows the group to vote. Majority vote will decide the action. Advantages
include a fairly fast decision, and a certain amount of group participation. The
disadvantage of this style includes no responsibility. An individual is not responsible for
the outcome. In fact, even the group feels no real responsibility because some members
will say, "I didn't vote for that.". Lack of group and personal responsibility seems to
disqualify this style of decision making; however, the democratic style does not have its
place in business.

Autocratic decision making is when the leader maintains total control and ownership of
the decision. The leader is also completely responsible for the good or bad outcome as a
result of the decision. The leader does not ask for any suggestions or ideas from outside
sources and decides from his or her own internal information and perception of the
situation. Advantages include a very fast decision, and personal responsibility by the
leader, for the outcome. If an emergency situation exists, the autocratic style is usually
the best choice. The disadvantages are varied and sometimes include less than desired
effort from the people that must carry out the decision. If the employee is personally
affected by the decision but not included when the decision is made, morale and effort
may or may not suffer. It is not always predictable. If the outcome for the decision is not
positive, members of the organization begin to feel they could have done a better job
themselves and the leader may lose credibility.

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Collective - Participative decision making is when the leader involves the members of
the organization. Other perspectives of the situation are discovered because the leader
deliberately asks and encourages others to participate by giving their ideas, perceptions,
knowledge, and information concerning the decision. The leader maintains total control
of the decision because, although outside information is considered, the leader alone
decides. The leader is also completely responsible for the good or bad outcome as a
result of the decision. The advantages include some group participation and
involvement. This is especially valuable when a person is affected negatively by the
decision. In most cases, the individual is informed before the decision is implemented
(no surprises) and usually feels good about personal involvement. If the leader is a good
communicator, and listens carefully to the information collected, he or she will usually
have a more accurate understanding of the situation and make a better decision. The
disadvantages of this style include a fairly slow, time consuming decision; less security,
because so many people are involved in the decision.

Consensus decision making is when the leader gives up total control of the decision.
The complete group is totally involved in the decision. The leader is not individually
responsible for the outcome. The complete organization or group is now responsible for
the outcome. This is not a democratic style because everyone must agree and "buy in"
on the decision. If total commitment and agreement by everyone is not obtained the
decision becomes democratic. The advantages include group commitment and
responsibility for the outcome. Teamwork and good security is also created because
everyone has a stake in the success of the decision. A more accurate decision is usually
made, with a higher probability of success, because so many ideas, perspectives, skills
and "brains" were involved in the creation. The disadvantages include a very slow and
extremely time consuming decision. It is also a lot of work getting everyone in the
organization involved. It takes skill and practice for a group to learn how to work
together.

Decision Making with Quantitative Tools


Quantitative techniques help a manager improve the overall quality of decision
making. These techniques are most commonly used in the rational/logical
decision model, but they can apply in any of the other models as well. Among the
most common techniques are decision trees, payback analysis, and simulations.

Decision trees
A decision tree shows a complete picture of a potential decision and allows a
manager to graph alternative decision paths. Decision trees are a useful way to
analyze hiring, marketing, investments, equipment purchases, pricing, and
similar decisions that involve a progression of smaller decisions. Generally,
decision trees are used to evaluate decisions under conditions of risk.

The term decision tree comes from the graphic appearance of the technique that
starts with the initial decision shown as the base. The various alternatives, based

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upon possible future environmental conditions, and the payoffs associated with
each of the decisions branch from the trunk.

Decision trees force a manager to be explicit in analyzing conditions associated


with future decisions and in determining the outcome of different alternatives.
The decision tree is a flexible method. It can be used for many situations in which
emphasis can be placed on sequential decisions, the probability of various
conditions, or the highlighting of alternatives.

Payback analysis
Payback analysis comes in handy if a manager needs to decide whether to
purchase a piece of equipment. Say, for example, that a manager is purchasing
cars for a rental car company. Although a less-expensive car may take less time
to pay off, some clients may want more luxurious models. To decide which cars to
purchase, a manager should consider some factors, such as the expected useful
life of the car, its warranty and repair record, its cost of insurance, and, of course,
the rental demand for the car. Based on the information gathered, a manager can
then rank alternatives based on the cost of each car. A higher-priced car may be
more appropriate because of its longer life and customer rental demand. The
strategy, of course, is for the manager to choose the alternative that has the
quickest payback of the initial cost.

Many individuals use payback analysis when they decide whether they should
continue their education. They determine how much courses will cost, how much
salary they will earn as a result of each course completed and perhaps, degree
earned, and how long it will take to recoup the investment. If the benefits
outweigh the costs, the payback is worthwhile.

Simulations
Simulation is a broad term indicating any type of activity that attempts to imitate
an existing system or situation in a simplified manner. Simulation is basically
model building, in which the simulator is trying to gain understanding by
replicating something and then manipulating it by adjusting the variables used to
build the model.

Simulations have great potential in decision making. In the basic decision-making


steps, Step 4 is the evaluation of alternatives. If a manager could simulate
alternatives and predict their outcomes at this point in the decision process, he or
she would eliminate much of the guesswork from decision making.

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Decision-Making Tools & Techniques for


Strategic Planning
One of the most fundamental aspects of starting and managing a business is
formulating the company's overall mission and goals. Strategic planning is the
process of creating a mission, objectives and then creating and implementing
strategies to fulfill the mission and work toward objectives. Business managers
often use a variety of management tools and techniques to aid in making
strategic planning decisions.

Market Research

Market research is the process of gathering information about a certain market,


such as the preferences of potential customers, the presence of competitors and
the current state of the market. Market research is an essential strategic planning
tool because insight into the needs of customers can help managers create a
mission, goals and strategies that better fulfill those needs.

Cost-Benefit Analysis

A cost-benefit analysis is a common type of strategic decision-making tool that


consists of assessing the costs and potential benefits associated with different
courses of action and choosing the course of action that results in the greatest
net benefit. For example, if managers expect that a certain project would cost
$100,000 and result in a $110,000 benefit while a second project would cost
$90,000 and result in a $105,000 benefit, managers would pursue the second
project, as it is expected to produce a net benefit that is $5,000 greater than the
other project.

SWOT Analysis

A SWOT analysis is a strategic planning tool that consists of assessing the


strengths and weaknesses of a business and the threats and opportunities a
business faces. A SWOT analysis can help managers take advantage of company
strengths and implement strategies to reduce weaknesses or turn them into
strengths. Assessing external threats and opportunities can aid in the strategic
decision-making process, as it allows managers to plan for things like the
presence of new competitors or the impact of new government regulations.

Feasibility Study

A feasibility study or feasibility analysis is a business-planning tool that involves


assessing whether a certain project or goal can actually be created or achieved
and whether the project can make a profit. A feasibility analysis can help

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entrepreneurs in the beginning planning stages of launching a company decide


whether to pursue a certain opportunity or not. For example, if an inventor
creates a new type of television display technology that is expensive to produce
and does not provide significant benefits over existing technologies, a feasibility
study might reveal that products that use the technology would be too expensive
to attract customers, making a business based on selling the product unfeasible.

Selecting a Decision Making Model


Depends on the managers personal preference.
Whether the decision is programmed or non-programmed.

Extent to which the decision is characterized by risk, uncertainty, or


ambiguity.

Three Decision Making Models

Classical Model

Based on economic conditions.


Is considered to be normative.

Accomplishes goals that are known and agreed upon.

Strives for certainty by gathering complete information.

Criteria for evaluating alternatives are known.

Decision maker is rational and uses logic.

Administrative Model

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How managers actually make decisions in situations characterized by non-


programmed decisions, uncertainty, and ambiguity.
Focuses on organizational, rather than economic.

Two concepts are instrumental in shaping the administrative model.

bounded rationality: means that people have limits or boundaries on


how rational they can be.

satisfying: means that decision makers choose the first solution


alternative that satisfies minimal decision criteria.

Is considered to be descriptive.

It is considered intuitive.

Political Model

Closely resembles the real environment in which most managers and


decision makers operate.
Decisions are complex.

Disagreement and conflict over problems and solutions are normal.

Coalition building is important.

Comparison of Classical, Administrative, and Political Models

Overcoming barriers to effective decision


making
Accepting the problem challenge
Searching for sufficient Alternatives

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Recognizing common Decision Making Biases

Avoiding the Decision Escalation Phenomenon

Planning Tools and Techniques


Environmental scanning

The screening of large amounts of information to anticipate & interpret change in


the environment.
Competitor Intelligence
- The process of gathering information about competitors who they are?; what
are they doing?
- Is not spying but rather careful attention to readily accessible information from
employees, customers, suppliers, the Internet, and competitors themselves.
- May involved reverse engineering of competing products to discover technical
innovations.

Global Scanning
- Screening a broad scope of information on global forces that might affect the
organization.
- Has value to firms with significant global interests.
- Draws information from sources that provide global perspectives on world-wide
issues and opportunities.

Forecasting

The part of organizational planning that involves creating predictions of


outcomes based on information gathered by environmental scanning.
Facilitates managerial decision making.
Is most accurate in stable environments.

Types of forecasting
Quantitative forecasting
Applying a set of mathematical rules to a series of hard data to predict
outcomes (e.g., units to be produced).
Qualitative forecasting
Using expert judgments and opinions to predict less than precise outcomes
(e.g., direction of the economy).
Collaborative planning, forecasting, and replenishment (CPFR) software
A standardized way for organizations to use the Internet to exchange data.

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Forecasting techniques

Quantitative

Time series analysis


Regression models
Econometric models
Economic indicators
Substitution effect

Qualitative

Jury of opinion
Sales force composition
Customer evaluation

Making forecasting more effective

1. Use simple forecasting methods.


2. Compare each forecast with its corresponding no change forecast.
3. Dont rely on a single forecasting method.
4. Dont assume that the turning points in a trend can be accurately identified.
5. Shorten the time period covered by a forecast.
6. Remember that forecasting is a developed managerial skill that supports
decision making.

Benchmarking

The search for the best practices among competitors and non-competitors
that lead to their superior performance.
By analyzing and copying these practices, firms can improve their
performance.

The Benchmarking Process

1. Form a benchmarking team.


Identify what is to be benchmarked, select comparison organizations, and
determine data collection methods.
2. Collect internal and external data on work methods.
3. Analyze data to identify performance gaps and the cause of differences.
4. Prepare and implement an action plan to meet or exceed the standards of
others.

Steps in Benchmarking

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Allocating Resources

Types of resources

The assets of the organization

Financial: debt, equity, and retained earnings


Physical: buildings, equipment, and raw materials
Human: experiences, skills, knowledge, and competencies
Intangible: brand names, patents, reputation, trademarks, copyrights, and
databases
Structural/cultural: history, culture, work systems, working relationships,
trust, and policies

Allocating Resources: Budgeting

Budgets

Numerical plans for allocating resources to specific activities


Used to improve time, space, and use of material resources.
Are the most commonly used and most widely applicable planning technique
for organizations.

Types of Budgets

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Suggestions for improving budgets

Be flexible.
Goals should drive budgetsbudgets should not determine goals.
Coordinate budgeting throughout the organization.
Use budgeting/planning software when appropriate.
Remember that budgets are tools.
Remember that profits result from smart management, not because you
budgeted for them.

Allocating Resources: Scheduling

Schedules

Plans that allocate resources by detailing what activities have to be done, the
order in which they are to be completed, who is to do each, and when they are
to be completed.
Represent the coordination of various activities.

Allocating Resources: Charting

Gantt Chart

A bar graph with time on the horizontal axis and activities to be accomplished
on the vertical axis.
Shows the expected and actual progress of various tasks.

Load Chart

A modified Gantt chart that lists entire departments or specific resources on


the vertical axis.
Allows managers to plan and control capacity utilization.

A Gantt Chart

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A Load Chart

Allocating Resources: Analysis

Program Evaluation and Review Technique (PERT)

A flow chart diagram that depicts the sequence of activities needed to


complete a project and the time or costs associated with each activity.
Events: endpoints for completion.
Activities: time required for each activity.
Slack time: the time that a completed activity waits for another activity to
finish so that the next activity, which depends on the completion of both
activities, can start.
Critical path: the path (ordering) of activities that allows all tasks to be
completed with the least slack time.

Steps in a PERT network

1. Identify every significant activity that must be achieved for a project to be


completed.
2. Determine the order in which these events must be completed.
3. Diagram the flow of activities from start to finish, identifying each activity and
its relationship to all other activities.
4. Compute a time estimate for completing each activity.
5. Using the network diagram that contains time estimates for each activity,
determine a schedule for the start and finish dates of each activity and for the
entire project.

A PERT network constructing an office building

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Breakeven analysis

Is used to determine the point at which all fixed costs have been recovered and
profitability begins.
Fixed cost (FC)
Variable costs (VC)
Total Fixed Costs (TFC)
Price (P)

The break-even formula:

Breakeven: Total Fixed Costs


Unit Price -Unit Variable Costs

Break even Analysis

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Linear programming

A technique that seeks to solve resource allocation problems using the


proportional relationships between two variables.

Production data for cinnamon-scented products

Graphical solution to linear programming problem

Contemporary planning techniques

Project

A one-time-only set of activities that has a definite beginning and ending point
time.

Project management

The task of getting a projects activities done on time, within budget, and
according to specifications.

Define project goals


Identify all required activities, materials, and labor
Determine the sequence of completion

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Project Planning Process

Scenario

A consistent view of what the future is likely to be.

Scenario planning

An attempt, not to try to predict the future but to reduce uncertainty by playing
out potential situations under different specified conditions.

Contingency planning

Developing scenarios that allow managers determine in advance what their


actions should be should a considered event actually occur.

Preparing for unexpected events

Identify potential unexpected events.


Determine if any of these events would have early indicators.
Set up an information gathering system to identify early indicators.
Have appropriate responses (plans) in place if these unexpected events occur.

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