UNIT 2

PLANNING
Nature and purpose of planning – planning process – types of planning – objectives – setting
objectives – policies – Planning premises – Strategic Management – Planning Tools and Techniques –
Decision making steps and process.

INTRODUCTION
Planning involves defining the organization‘s goals, establishing strategies for achieving those goals, and developing
plans to integrate and coordinate work activities. It‘s concerned with both ends (what) and means (how).
According to Koontz O‘Donnell - "Planning is an intellectual process, the conscious determination of courses of
action, the basing of decisions on purpose, acts and considered estimates".
Nature of Planning
1. Planning is goal-oriented:
Every plan must contribute in some positive way towards the accomplishment of group objectives. Planning has no
meaning without being related to goals.
2. Primacy of Planning:
Planning is the first of the managerial functions. It precedes all other management functions.
3. Pervasiveness of Planning:
Planning is found at all levels of management. Top management looks after strategic planning. Middle management is
in charge of administrative planning. Lower management has to concentrate on operational planning.
4. Efficiency, Economy and Accuracy:
Efficiency of plan is measured by its contribution to the objectives as economically as possible. Planning also focuses
on accurate forecasts.
5. Co-ordination:
Planning co-ordinates the what, who, how, where and why of planning. Without co-ordination of all activities, we
cannot have united efforts.
6. Limiting Factors:
A planner must recognize the limiting factors (money, manpower etc) and formulate plans in the light of these critical
factors.
7. Flexibility:
The process of planning should be adaptable to changing environmental conditions.
8. Planning is an intellectual process:
The quality of planning will vary according to the quality of the mind of the manager.
Purpose of Planning
As a managerial function planning is important due to the following reasons:-
1. To manage by objectives:
All the activities of an organization are designed to achieve certain specified objectives. However, planning makes the
objectives more concrete by focusing attention on them.
2. To offset uncertainty and change:
Future is always full of uncertainties and changes. Planning foresees the future and makes the necessary provisions for
it.
3. To secure economy in operation:
Planning involves, the selection of most profitable course of action that would lead to the best result at the minimum
costs.
4. To help in co-ordination:
Co-ordination is, indeed, the essence of management, the planning is the base of it. Without planning it is not possible
to co-ordinate the different activities of an organization.
5. To make control effective:
The controlling function of management relates to the comparison of the planned performance with the actual
performance. In the absence of plans, a management will have no standards for controlling other's performance.
6. To increase organizational effectiveness:
Mere efficiency in the organization is not important; it should also lead to productivity and effectiveness. Planning
enables the manager to measure the organizational effectiveness in the context of the stated objectives and take further
actions in this direction.
Features of Planning
 It is primary function of management.
 It is an intellectual process
 Focuses on determining the objectives
 Involves choice and decision making
 It is a continuous process
 It is a pervasive function
PLANNING PROCESS
 Planning is a process; therefore, it contains number of steps within it.
 A particular planning process or steps may not be same for all organizations and for all types of plans.
 A planning process is suitable for large scale organization which may not be suitable for small organizations.
Since, various factors that go into planning process may differ from plan to plan or from organization to
organization. The planning process or steps given here is mostly applicable for major programmes. But with
minor modifications, the process is applicable for all types of plans.
 The general planning steps is given in Figure

Fig. Planning Process

(i) Identification of opportunities
 Identification of awareness of the opportunity is the starting point of planning.
 First of all, we should identify the possible future opportunities and analyze them clearly and completely
 From that, we should know:
Where we stand,
What is our strength and weakness,
What problem we wish to solve and why, and
What we expect to gain
 Once, the opportunities are perceived from availability, the other steps of planning are undertaken.
(ii) Establishment of objectives or goals:
 The next step in planning is to establish objectives for the entire organization and then for each
subordinate unit.
 Objectives specify and indicate the results expected
• What is to be done?
• Where is the primary emphasis to be placed?
• What is to be accomplished by various types of plans?
 Organizational objectives should be specified in all key result areas. Key result areas are those which are
important for organization in achieving its objectives. The key result areas may be profitability, sales, research
and development, manufacturing and so on.
 Initially, overall objectives are set which shape the structure of other subsidiary objectives in an
organization. Then they are split into departmental, sectional and individual objectives. Overall objectives
give directions to the nature of all other plans of the major departments. Departmental objectives must
confirm the overall objectives.
 Thus, there will be a hierarchy of objectives in the organization.
(iii) Developing planning premises:
 Planning premises are the assumptions that should be made about the various elements of the environment.
It provides the basic framework in which plans operate.
 These premises may be internal or external.
Internal premises include organizational, polices, resources of various types, sales forecasts and the
ability of the organization to withstand the environmental pressure.
External premises include the total factors in task environment; such as political, social,
technological, competitors, plans and actions, and government polices etc.
 The plans are formulated on the basis of both internal and external premises.
 The nature of planning premises differs at different levels of planning.
The top level focuses external premises
The bottom level focuses internal premises
(iv) Identification of alternatives
 The next step in planning is to search for and designs the alternative courses of action.
 Based on organizational objectives and planning premises, various alternatives of plans can be identified.
 A particular objective can be achieved through a number of ways.
 All alternatives cannot be analyzed. Some alternatives can be rejected at its preliminary stage itself by
considering preliminary criteria, such as minimum investment required, matching with the present
business, market conditions, government control, skilled workers, technique available etc.
 Only the alternatives which meet the preliminary criteria may be chosen for further detailed analysis
(v) Evaluation of alternatives:
 The alternatives considered for the analysis according to preliminary criteria may be taken for further
evaluation.
 Each alternative course of action is evaluated on the basis of profitability, capital investment, risk involved,
gestation period etc.
  It presents a problem because each of these alternatives may have certain advantages and disadvantages. For
instance, an alternative may appear to be most profitable. But, it requires a large cash outlet with slow
payback; another may be less profitable but involves less risk factors.
 In evaluating the alternatives, sometimes intangible factors, such as public relations goodwill of the
company, employee morale, personal relations etc., are also be considered.
 Moreover, there is no certainty about the outcome of the alternative because it is related with future and
future is uncertain. Thus, the evaluation work becomes more complex. Therefore, more sophisticated
techniques of planning and decision-making have been developed.
(vi) Selecting alternatives:
 After the evaluation of various alternatives, the most appropriate course of action is selected.
 If more than one alternative is suitable, then many alternatives may be chosen for execution.
 When the situation changes and the selected plan does not provide to be the best, the other alternative may be
tried
(vii) Formulation of derivative plans:
 The derivative plans are formulated on the basis of the major plan.
 There are several minor plans required to support and execute the major plan. These plans are known as
derivative plans.
 The various derivative plans are planning for buying equipment, buying raw materials, recruiting and
training personal, developing new product etc.
(viii) Establishing sequence of activities:
 After formulating basic and derivative plans, the sequence of activities is determined so that plans are put
into action
 a built-in mechanism should be created for periodic review and updating of various plans whenever necessary.
 The starting and finishing times are fixed for each piece of work so as to indicate when and within what time
that work is to be commenced and completed.
TYPES OF PLANS / COMPONENTS OF PLANNING

The most popular ways to describe organizational plans are breadth (strategic versus operational), time frame (short
term versus long term), specificity (directional versus specific), and frequency of use (single use versus standing). As
Figure shows, these types of plans are not independent. That is, strategic plans are usually long term, directional, and
single use whereas operational plans are usually short term, specific, and standing.
Strategic plans are plans that apply to the entire organization and establish the organization‘s overall goals. Plans that
encompass a particular operational area of the organization are called operational plans. These two types of plans
differ because strategic plans are broad while operational plans are narrow.
Long-term plans are those with a time frame beyond three years. Short-term plans cover one year or less. Any time
period in between would be an intermediate plan. Although these time classifications are fairly common, an
organization can use any planning time frame it wants.
Specific plans are clearly defined. It does not need any interpretation. A specific plan states its objectives in a way that
eliminates ambiguity and problems with misunderstanding. For example, a manager who seeks to increase his or her
unit‘s work output by 8 percent over a given 12-month period might establish specific procedures, budget allocations,
and schedules of activities to reach that goal.
However, when uncertainty is high and managers must be flexible in order to respond to unexpected changes,
directional plans are preferable. Directional plans are flexible plans that set out general guidelines. They provide focus
but don‘t lock managers into specific goals or courses of action. For example, Sylvia Rhone, president of Motown
Records, said she has a simple goal—to ―sign great artists.‖ So instead of creating a specific plan to produce and
market 10 albums from new artists this year, she might formulate a directional plan to use a network of people around
the world to alert her to new and promising talent so she can increase the number of new artists she has under contract.
Keep in mind, however, that the flexibility of directional plans must be weighed against the lack of clarity of specific
plans.
Some plans that managers develop are ongoing while others are used only once. A single-use plan is a one-time plan
specifically designed to meet the needs of a unique situation. In contrast, standing plans are ongoing plans that
provide guidance for activities performed repeatedly.
Single-use plans apply to activities that do not recur or repeat. A one-time occurrence, such as a special sales program,
is a single-use plan because it deals with the who, what, where, how, and how much of an activity.
 Programme: Programme consists of an ordered list of events to be followed to execute a project.
 Budget: A budget predicts sources and amounts of income and how much they are used for a specific project.
Standing plans are usually made once and retain their value over a period of years while undergoing periodic revisions
and updates. The following are examples of ongoing plans:
 Policy: A policy provides a broad guideline for managers to follow when dealing with important areas of
decision making. Policies are general statements that explain how a manager should attempt to handle routine
management responsibilities. Typical human resources policies, for example, address such matters as
employee hiring, terminations, performance appraisals, pay increases, and discipline.
 Procedure: A procedure is a set of step-by-step directions that explains how activities or tasks are to be
carried out. Most organizations have procedures for purchasing supplies and equipment, for example. This
procedure usually begins with a supervisor completing a purchasing requisition. The requisition is then sent to
the next level of management for approval. The approved requisition is forwarded to the purchasing
department. Depending on the amount of the request, the purchasing department may place an order, or they
may need to secure quotations and/or bids for several vendors before placing the order. By defining the steps
to be taken and the order in which they are to be done, procedures provide a standardized way of responding
to a repetitive problem.
 Rule: A rule is an explicit statement that tells an employee what he or she can and cannot do. Rules are ―do‖
and ―don't‖ statements put into place to promote the safety of employees and the uniform treatment and
behavior of employees. For example, rules about tardiness and absenteeism permit supervisors to make
discipline decisions rapidly and with a high degree of fairness.
OBJECTIVES
Nature of Objectives
Objectives are the aims, purposes or goals that an organization wants to achieve over varying periods of time.
Objectives simply let people know what they are trying to do, or what is expected of them at the close of the evaluation
period. These are the end points of management action. They provide meaning to existence of an organization. One of
the reason the success of any organization is their ability to set and periodically update objectives at all levels of
management. Overall objectives need to be supported by sub objectives. Because of time variation, objectives may be
of short term objectives and long term objectives. Long term Objectives supported by short term objectives.
Characteristics of objectives:
(i) Objectives have a hierarchy:
Objectives form a hierarchy, ranging from the broad aim specific individual objectives,
 Fig. Hierarchy of objectives
Generally, a top level management of an organization assigning is a part or mission to a particular department. Then,
the mission is subdivided into few parts and assigned among sections and individuals. This process creates a hierarchy
of objectives. Objectives at all levels in the organization are interrelated and form a network. The hierarchy of
objectives is given in Figure.
There are two approaches in which the hierarchy can be explained.
1. Top-down approach
2. Bottom-up approach
In the top-down approach, the total organization is directed through corporate objective provided by the top level
management.
In the bottom-up approach, the top level management needs to have information from lower level in the form of
objectives.
Both approaches have certain advantages and disadvantages. To utilize the advantages of both, a combination of these
two is followed.
(ii) Objectives form a network:
Both objective and planning, a network of desired results and events is formed. If goals are not interconnected by a
network, then it may not support one another. That means an objective formed by one department may seem to be good
for their own department, but it may not be suitable for other departments and to the company as a whole.
The top level management makes sure that the components of the objectives of the network fit one another. Fitting
network of objectives is not only used to carryout programs, but also of timing their completion because completion of
one program depends upon completing another. Thus, the objectives should form a network.
(iii) Multiplicity of objectives:
An organization may have multiple objectives. It helps to organization making balanced goals. The several objectives
be profits, survival, growth, service to society etc. For example an educational Institution is having education and
research objective but it is not enough. It would have some of following objectives:
 Selecting highly qualified students.
 Providing training and placement for their students.
 Providing higher degrees, such as master degree doctoral degrees .
  Interacting with industries, if it is engineering colleges,
 Attracting a highly qualified faculty.
 Discovering and organizing new knowledge research.
Similarly, at each and every level in the management, are likely multiple. This multiplicity of objectives may create
problem of giving priorities among different objectives harmonizing them.
(iv) Objectives have a time span:
An organization must have both short term and long term objectives. Some objectives may be achieved within a year,
these objectives are called short term objectives, whereas others can be achieved over a long term period called long
term objectives. Short term objectives are achieving long term objectives. Both the objectives need to he integrated so
that they reinforce each other.
(v) Objectives may be tangible or intangible.
(vi) Objectives must have social sanction since organizations are social units. Their objectives must conform to
the general needs of the society.
Significance or Role or Advantages of Objectives
The following are some of the major functions and contribution of objectives:
(i) Unified planning:
Clear definition of objectives leads to unified planning. Various plans are prepared by several people in an
organization. The unifying effect arises when these plans are adjusted to a common objective.
(ii) Defining an organization:
Every organization works for some objectives as what kind of company it is, or what kind of business it is in. It relates
the organization with its environment. For example, a company named "Vijay Motor Company" describes that it is
producing high quality motor cars to the society. Such a definition of the company in relation to its environment
provides a clear thinking for the type of efforts the company should make to achieve its objectives.
(iii) Direction:
Objectives give a meaning to the activities of an organization. They provide direction to think and bring into action.
The objectives define the limits and specify areas in which the managers can take decision.
(iv) Individual motivation:
The objectives of an organization specify the purpose of each job and fix the individual goals along with the overall
organizations goals. Thus, the objectives work as a motivating force by providing directions to organization members.
(v) Basis for decentralization:
Decentralization means assigning some decision-making authorities to lower level people to perform their work. It is
necessary for large-scale organization. In large-scale organizations, department wise or section wise objectives are
fixed in order to achieve common objectives. Thus, objectives provide a basis for decentralization.
(vi) Basis for Control:
Objectives help to keep the activities on the right track. They serve as a benchmark for the success. It provides the
yardstick for measuring the performance. The actual performance is compared with standard performance. It will
facilitate the control process.
(vii) Co-ordination:
Clearly defined and mutually agreed objectives help in achieving the voluntary co-ordination. Workers tend to work
within their own areas of discretion. They adjust according to the needs of others, if they know their own and others
objectives.
 SETTING OBJECTIVES
Objective is the most basic and fundamentally important tool of management. For setting the initial objectives, all
organizations have a formal, explicitly recognized, legally specified organization. In general, the overall objective of
the organization is set by the top management. However, in some organizations, the objectives are set by the vote of
shareholders; in others, by a vote of members, by a small number of trustees or by a few individuals who will win and
run the organization. In large organizations, objectives are set by the board of directors, governing board, executive
committee. Objectives should be verifiable and should state what is to be accomplished and when.
Guidelines for Objectives Setting
Objective setting is a difficult task which requires intelligent coaching by the superior and extensive practice by
subordinates. The list of objectives should not be too long, but I should cover the main features of the job. The various
cri for good objectives are summarized as follows:
1. Objective should cover the main features of the job
2. Objectives must be clearly specified in writing
3. The list of objectives should not be too long. Wherever it is possible, some objectives should be combined to
make the list reasonable
4. Objectives must set by considering the various factors affecting their achievement
5. Objectives should be verifiable
6. Objectives should clearly indicate the organizational mission
7. Objectives should be challenging and reasonable
8. Objectives should yield specific results when achieved
9. Objectives should be coordinated with these of other managers and. organizational units
10. Objectives should provide timely feedback so that the necessary corrective action can be taken
11. Short-term objectives should be consistent with long term objectives
12. Objectives should start with the word 'to' and be followed by an action.
13. Objectives should be periodically reviewed
14. Objectives should clearly indicate the resources and authority required for achieving it
15. All assumptions underlying the objectives are clearly identified
Benefits of Objective Setting
1. It sets specific targets for the employee to achieve which are linked to Business / Development Plan.
2. It states how performance of the employee is to be measured to assess progress.
3. It provides the direction for the employee.
4. It increases staff motivation.
5. It allows progress, targets and Successes to be monitored and measured by the manager.
6. It helps to build working relationships between employee, and manager, and improves overall
communications.
7. It helps to focus on a specific task.
8. It helps to prioritize.
9. It enables the Success to be measured.

MANAGING BY OBJECTIVES (MBO)

MBO was conceptualized by peter. F. Drucker and was first put into practice by Harold smiddy, a long time vice
president of the General Electric Company. MBO is now practiced in all over the world. MBO is a management system
in which each member of the organization effectively participates and involves himself.
According to George Odiorne, "MBO is a process whereby the superior and the subordinate managers of an enterprise
jointly identify its common goals, define each individual's major areas of responsibility in terms of results expected of
him, and use these measures as guides for operating the unit and assessing the contribution of each of its members".
Koontz and Weihrich have defined MBO as follows: "MBO is a comprehensive managerial system that integrates
many key managerial activities in a systematic manner and that is consciously directed towards the effective and
efficient achievement of organizational and individual objectives".
From the above two definitions, we can understand that the MBO is a process whereby superiors and subordinates sit
together to identify the common objectives and set the results which are to be achieved by subordinates. Thus, it
assesses the contribution of each individual and integrates individual objectives with those of the organization so as to
make the best use of available resources of the organization. Subordinates are allowed to make creative decisions on
their own. Superiors are available for assistance, advice and direction. MBO harmonizes the goal of an individual with
the organizations goal. It creates self-control and motivates the manager into action before somebody tells him to do
something.
Features of MBO
Based all the previous definitions of MBO, its features can be identified as follows.
 MBO focuses attention on what must be accomplished and not how to accomplish the objectives. It is a goal
oriented rather than work-oriented approach.
 It is an attempt made by the management to integrate the goals of an organization and individuals. It will lead
to effective management.
 MBO tries to combine the long range goals of organization with short range of organization.
 MBO involves the participation of subordinate managers in the goal setting process.
 A high degree of motivation and satisfaction is available to employees through MBO.
 periodic review of performance is an important feature MBO. The review is future-oriented because it
provides the basis for planning and corrective actions.
 MBO increases the organizational capability of achieving goals at all levels.
 MBO's emphasis is not only on goals but also on effective performance.
 MBO provides better guidelines for appropriate systems and procedure to achieve the objectives .
 MBO has an evaluative mechanism by which contribution of each individual can be measured.
 MBO is not a set of rules, procedures or techniques; it is a particular way of thinking about management. It is
overall philosophy of management that management to attain maximum results from available resources.
2.6.1. The Process of MBO
Management by objectives has been recognized as a system for achieving the organizational objectives. The MBO
process consists of the following steps:
(i) Setting Preliminary Objectives:
The MBO process begins with the active support of managing direction who gives the direction to the organization.
Normally, setting of objectives starts from management. Then, it moves downwards. The definition of organizational
objectives states why the business is started and existed. The long-term objectives are laid down in the key result.
Then short-term objectives are framed taking into account the feasibility of achieving the long-term objectives. These
objectives are formed by keeping in view the internal and external environment of the organization. These objectives
are preliminary and tentative subjected to modification.
(ii) Fixing key result areas:
Key result areas (KRAs) are identified on the basis of organizational objectives and planning premises. These are the
areas reference to which organizational health can be measured. Key result areas are arranged on the priority basis.
Some examples of KRAs are: (i) Profitability, (ii) Market standing, (iii) Innovation, (iv) Productivity, (v) Market
Performance, (vi) Public responsibility, etc. These areas may vary for different organizations. KRAs indicate the
strength of an organization.
(iii) Setting subordinate's objectives:
The organizational objectives are achieved through individuals. Therefore, each individual must know what he is
expected to achieve. During setting of objectives for subordinates, we should consider the organizational goals,
subordinates ability and resources available to him. There should he an open discussion between superior and his
subordinates. The allocation of resources should also be made in consultation with subordinates.
(iv) Recycling objectives:
Under MBO goal-setting is not the direction from the top level management only. Ruther it is a two-way process in
which superior suggests a goal that is acceptable to the subordinates. Thus, setting objectives are not only a joint
process hut also an interactive one. A network of objectives is created. as shown in Figure so that every lower level
objective contributes effectively to the achievement of the objectives next to it.
(v) Matching resources with objectives:
Objectives should he carefully marched with the available resources. If certain resources are not adequately available,
the objectives of an organization are changed accordingly. The allocation and movement of resources should be done
in consultation with the subordinates.
(vi) Periodic performance reviews:
At specified intervals, the superior and subordinates should hold meetings in which they discuss the progress in the
accomplishment of objectives. Such reviews are made to identify shortcomings and to take timely steps to improve
results. Feedback from these reviews is provided to each individual to facilitate self regulation and control.

Fig. Process of MBO

(vii) Appraisal:
Appraisal aspect of MBO tries to measure whether the subordinates is achieving his objective or not. At the end of the
fixed period for achieving the objectives, there should be a discussion between superior and subordinate. If
subordinates do not achieve their objectives, then the superior should identify what are the problems and how these
problems can be overcome. The main purpose of the appraisal is to find out the shortcomings in achieving objectives
and also to remove them promptly. It ensures that everything is going on according to the plan.
Benefits of MBO
MBO offers the following benefits:
(i) Improvement of managing:
MBO forces managers to think about planning for end results rather than merely planning activities or work. MBO
produces clear and measurable performance goals. A network of goals is created and appropriate action plans arc
formulated for goal achievement.
(ii) Clarification of organization:
Another major benefit of MBO is that it forces managers to clarify organizational roles, authorities and responsibilities.
(iii) Personnel satisfaction:
MBO provides the greatest opportunity for personnel satisfaction. This is possible for two reasons.
1. Participation in objective setting, and
2. Rational performance appraised.
When the individuals arc involved in setting goals, they feel satisfaction that they are important for the organization.
(iv) Team work:
MBO results a better communication between superiors and subordinates which reduces conflicts. The whole
management team is actively involved in goal setting. There is an integration of lower level goals with organizational
goals.
(v) Development of effective control:
MBO not only provides a better planning, hut also aids in developing effective control. Control involves the measuring
of results and taking corrective action, if any deviations arise from plans. Objectives serve as the standards for
appraising performance. Actual performance is compared with the objectives; any deviation is identified and corrected.
It ensures that goals are achieved. MBO also allows employees to monitor and control their own performance.
(vi) Fast decision-making:
Decision is taken by the management very quickly. The reason is that each worker knows the purpose of taking the
decision and does not oppose the decision.
Weakness of MBO
The main problems and weakness of MBO are as follows:
(i) Failure to teach the philosophy of MBO:
MBO fails to explain the philosophy. Most of the executive do not know what is MBO, how MBO works and why is
MBO necessary and how participants call benefit by MBO.
(ii) Failure to give guidelines to goals sellers:
MBO does not provide any guidelines for setting goals. Therefore, often managers are neither taught how to set the
objectives nor familiarized with the various plans and policies of the organization, In such cases, each department ends
up going its own way, and the results are counterproductive to the overall organization.
(iii) Difficulty of setting goals:
MBO requires verifiable objectives against which performance can be measured. However, setting of objectives is
more difficult in some areas especially where they cannot be presented in quantitative form. Objectives are more in the
form of statement rather than in quantitative form. Of course, some objectives can be quantified and can be broken in
terms of time period but others lack this characteristic for further course of action.
(iv) Emphasis on short-term goals:
MBO emphasis only on short-term objectives and does not consider the long-term objectives. By emphasizing short
range objectives, performance appraisal become easier, but there is always a danger in emphasizing short-term
objectives at the cost of long-term objectives. Sometimes, an organization‘s short-term and long-term objectives may
be incompatible because of certain specific problems.
(v) Danger of inflexibility:
MBO is rigid one. Objectives should not be changed under MBO. Thus, it introduces inflexibility in the organization.
In present situations, all objective cannot be valid forever. It needs a change with the change in environment. But once
goals are set down, the superior may not like to change them due to fear of resistance from the subordinate. Thus,
inflexibility created by applying MBO may cause harm than what it may contribute.
(vi) Time consuming:
MHO is a time-consuming process. Much time is needed by senior people for framing the MBO. Particularly, at the
initial stage, several meetings may have to he held to instill confidence in subordinates. The formal periodic reviews
and final appraisal sessions also consume a lot of time.
(vii) Increased paper work:
MBO contains many newsletter, instructions, booklets, training manuals, performance appraisal reports etc. This
increased paper work reduces the effectiveness of MBO in many organizations.
POLICIES
A policy is a broad statement formulated to provide guidance in decision-making. It defines the area or limits within
which decisions can be made.
According to Weihrich and Koontz, ―Policies are general statements of understandings which guide or channel
thinking in decision-making of subordinates ‖
According to L.M.Prased, ―A policy is a guidance in decision-making to members of an organization in respect to any
course of action.‖
Policy Formulation Process
A policy formulation process involves the following steps
(i) Definition of policy area
The initial step in policy formulation is to specify the area in which the policies are formulated. During this process, the
objectives, needs and environment of the organization should be kept in mind.
(ii) Creation of policy alternatives
By analyzing the internal and external environment of the enterprise carefully, the opportunities and constraints,
strengths and weakness are identified. On the basis of such analysis, we can identify the policy alternative for each
objective.
(iii) Evaluation of policy alternatives
Each of the policy alternatives is evaluated in terms of the contribution to objectives. The various factors, such as costs,
benefits and resources required should be considered in evaluating alternatives.
(iv) Choice of policy
After evaluation of each policy alternative, the most appropriate alternative is selected for implementation. This is the
step of policy making.
(v) Communication of policy
The chosen policy is communicated to those responsible person for its implementation. The policy may be
communicated through policy manuals, company handbooks and written memorandums.
(vi) Implementation of policy
The chosen policy is then put into action by converting it into operational plan. Implementation of policy requires
policy education, interpretation and acceptance.
(vii) Review of policy
Policies should be reviewed periodically to facilitate the rapid changes in the environment. Without such review,
policies become obsolete over the period of time.

Types of Policies
On the basis of source of formulation, policies may be classified as follows:
(i) Formulated policies
Formulated policy is the policy which is originated by the top level managers, and therefore, flows down the level of
the management. It is also known as originated policy. The top level manager lays down the policy which serves as
the guide for the managers at lower levels of the organization while formulating for their departments. These policies
help the delegation of authority and retain overall control.
(ii) Appealed policy
It is a policy formulated on the request or appeal of lower level managers. The subordinates may make a request for
policy to deal with an existing problem which is not covered by the formulated policy.
(iii) Imposed policy
It is a policy which is imposed by some external forces, such as government, trade union or trade association. Such
policies are formed by compiling the force which cannot be avoided. For example, in public sector commercial banks,
recruitment and selection of manpower are done by banking service commission and individual banks do not have any
control over this aspect.
On the basis of being written or not, policies may be classified as follows:
(i) Written policies
Written policies are formal and explicit declarations in writing. They are very clear and clearly reveal the intention of
the management. They are definite and cannot be interpreted otherwise.
(ii) Implied policies
Sometimes, policies may not be clearly stated, and the actions of managers at the higher levels provide guidelines for
actions at lower levels. Therefore, implied policies are oral understandings that can be inferred from the decisions of
managers. Such policies may change with the change of person.
 PLANNING PREMISES
Generally, plans are prepared for future. But all of we know that the future is uncertain. Therefore, the management
makes certain assumptions about the future. These assumptions should be derived from scientific forecasting of future
events. The assumptions about future derived from forecasting and used in planning are known as Planning premises.
Planning premises imply not only assumptions about the future, but also predictions. Effective planning is, therefore,
largely dependent upon the correct knowledge and choice of planning premises.
Koontz and Weihrich have defined planning premises as, "Planning premises are the anticipated environment in which
plans are expected to operate".
They include assumptions or forecasts of the future and known conditions that will affect the operation of plans.
Premises guide planning. One of the major purposes of premises is to facilitate the planning process by guiding,
directing, simplifying and reducing the degree of uncertainty in it.
Classification of planning premises:
Planning premises may be classified as follows.
1. Internal and External
2. Tangible and intangible
3. Controllable and uncontrollable
1. Internal and External premises:
Internal premises exist within a business enterprise. These include resources and abilities of enterprise in the form of
men, material, machine, money and methods. Competence of management personal and skill of the labour force may
be regarded as the most important internal premises.
External premises are those which lie outside the firm. There are many kinds of external premises.
(a) General business environment including economic, technological, political, and social conditions.
(b) The product market consisting of the demand and supply forces for the product or service, and
(c) The factor market for land, labour, capital etc.
2. Tangible and Intangible premises:
Tangible premises are those which can be expressed in quantitative terms, such as monetary unit, unit of product,
labour hour, machine hour and so on.
Intangible premises are those which cannot be measured quantitatively. The example of such premises is reputation of
the concern, public relations, employee morale, motivation etc.
3. Controllable and uncontrollable premises:
This classification is on the basis of controllability.
Controllable premises are those which are entirely within the control and realm of management. These include
organizational policies, structure, systems, procedures etc. Such premises are mostly internal. The management may
change these premises whenever they require according to circumstances in order to achieve the organizational
objectives.
Uncontrollable premises are those which cannot be controlled by an organization action. These include the rate of
economic growth, population growth, taxation policy of government, natural climate, war etc.
Some premises can be controlled to some extent but not fully. Such premises are called as semi-controllable premises.
Example: Union-management relations, market share of a company's products, labour efficiency, product price etc.
Making premising effective:
Special attention should be given to premising step in planning since so many failures occur in planning and planning
coordination through poor premising. It is difficult to achieve practical implementation of consistent and meaningful
planning premises. The following practices are helpful in achieving more effective premising.
(i) Selection of premises:
The initial step in this process is the selection of premises on the basis of which plans are formulated. There are many
premises that are important to one enterprise but not to another. Thus, all managers of every enterprise should select
their own premises. For identifying the relevant environment, both external and internal premises, a manager can put
the question "what factors will influence the most of the course of plans for which I am responsible".
(ii) Collection of information:
Identification and collection of factors which are significant for setting planning premises are another major step. The
information collection technique may vary from simple verbal method to highly complex forecasting technique
according to their needs. More relevant information is available from published sources and marketing research
agencies. The following questions are more useful to judge the validity of such information.
 Who has collected the information?
 What was the objective of collecting the information?
 When was information collected?
 How was information analyzed?
 How satisfactory was the process of information collection?
(iii) Development of alternative premises for contingency planning:
Planning premises are not constant but dynamic. Some of the premises change slowly and steady, and others may
change rapidly. Since the future is not certain, managers should be ready with alternative premises and align their plans
accordingly.
(iv) Verification of the consistency of premises:
One way of ensuring that premises are consistent is to have each planning staff at various levels recommended its
crucial planning premises which are applicable for an enterprise to the appropriate top executive. After consultation
with their staff, the top executives will ensure that the assumptions are selected and formulated ones on which the
enterprise is willing to stake its future.
(v) Communication of planning premises:
Sound planning premises development is not sufficient. They must be communicated to those who are involved in
planning process at different levels of the organization. A basis problem which provides hindrance in communication
of planning premises is the confidential nature of some information. In order to solve this problem, managers should
take an adequate care so that confidentiality of information is maintained.
STRATEGIC MANAGEMENT
Strategic management is what managers do to develop the organization‘s strategies. It‘s an important task involving
all the basic management functions—planning, organizing, leading, and controlling. Organization‘s strategies are the
plans for
how the organization will do whatever it‘s in business to do,
how it will compete successfully, and
how it will attract and satisfy its customers in order to achieve its goals.
The Strategic Management Process
The strategic management process is a six-step process that includes strategy planning, implementation, and
evaluation. Although the first four steps describe the planning that must take place, implementation and evaluation are
just as important. Even the best strategies can fail if management doesn‘t implement or evaluate them properly.
Step 1: Identifying the Organization’s Current Mission, Goals, and Strategies
Every organization needs a mission—a statement of its purpose. Defining the mission forces managers to identify what
it‘s in business to do.
For example, the mission of Avon is ―To be the company that best understands and satisfies the product, service, and
self-fulfillment needs of women on a global level.‖
The mission of Facebook is ―a social utility that connects you with the people around you.‖
The mission of the National Heart Foundation of Australia is to ―reduce suffering and death from heart, stroke, and
blood vessel disease in Australia.‖
These statements provide clues to what these organizations see as their purpose. A mission statement include some
typical components.

Components of a Mission Statement

Customers: Who are the firm‘s customers?
Markets: Where does the firm compete geographically?
Concern for survival, growth, and profitability: Is the firm committed to growth and
financial stability?
Philosophy: What are the firm‘s basic beliefs, values, and ethical priorities?
Concern for public image: How responsive is the firm to societal and environmental
concerns?
Products or services: What are the firm‘s major products or services?
Technology: Is the firm technologically current?
Self-concept: What are the firm‘s major competitive advantage and core competencies?
Concern for employees: Are employees a valuable asset of the firm?

Step 2: Doing an External Analysis

What impact might the following trends have for businesses?
 With the passage of the national health care legislation, every big restaurant chain will now be required to post
calorie information on their menus and drive-through signs.
 Cell phones are now used by customers more for data transmittal and retrieval than for phone calls.
 The share of new high-school graduates enrolled in college hit a record high in 2009 and continues to climb.
Analyzing that environment is a critical step in the strategic management process. Managers do an external analysis so
they know what the competition is doing, what pending legislation might affect the organization, or what the labor
supply is like in locations where it operates. In an external analysis, managers should examine the economic,
demographic, political/legal, socio-cultural, technological, and global components to see the trends and changes.
Once they‘ve analyzed the environment, managers need to identify opportunities that the organization can exploit and
threats that it must counteract or buffer against.
Opportunities are positive trends in the external environment; threats are negative trends.
Step 3: Doing an Internal Analysis
Internal analysis provides important information about an organization‘s specific resources and capabilities.
An organization‘s resources are its assets—financial, physical, human, and intangible—that it uses to develop,
manufacture, and deliver products to its customers. sss
On the other hand, its capabilities are its skills and abilities in doing the work activities needed in its business—―how‖
it does its work. The major value-creating capabilities of the organization are known as its core competencies.
Both resources and core competencies determine the organization‘s competitive weapons.
After completing an internal analysis, managers should be able to identify organizational strengths and weaknesses.
Any activities the organization does well or any unique resources that it has are called strengths. Weaknesses are
activities the organization doesn‘t do well or resources it needs but doesn‘t possess.
The combined external and internal analyses are called the SWOT analysis, which is an analysis of the organization‘s
strengths, weaknesses, opportunities, and threats. After completing the SWOT analysis, managers are ready to
formulate appropriate strategies—that is, strategies that
a) exploit an organization‘s strengths and external opportunities,
b) buffer or protect the organization from external threats, or
c) correct critical weaknesses.
Step 4: Formulating Strategies
As managers formulate strategies, they should consider the realities of the external environment and their available
resources and capabilities in order to design strategies that will help an organization achieve its goals. The three main
types of strategies managers will formulate include corporate, competitive, and functional.
Step 5: Implementing Strategies
Once strategies are formulated, they must be implemented. No matter how effectively an organization has planned its
strategies, performance will suffer if the strategies are not implemented properly.
Step 6: Evaluating Results
The final step in the strategic management process is evaluating results. How effective have the strategies been at
helping the organization reach its goals? What adjustments are necessary? After assessing the results of previous
strategies and determining that changes were needed.
Ursula Burns, Xerox‘s CEO, made strategic adjustments to regain market share and improve her company‘s bottom
line. The company cut jobs, sold assets, and reorganized management.
Types of Strategies
According to Michel Porter, the strategies can be classified into three types. They are
 Cost leadership strategy
 Differentiation strategy
 Focus strategy
The following table illustrates Porter's generic strategies:
a) Cost Leadership Strategy
This generic strategy calls for being the low cost producer in an industry for a given level of quality. The firm sells its
products either at average industry prices to earn a profit higher than that of rivals, or below the average industry prices
to gain market share.
In the event of a price war, the firm can maintain some profitability while the competition suffers losses. Even without
a price war, as the industry matures and prices decline, the firms that can produce more cheaply will remain profitable
for a longer period of time. The cost leadership strategy usually targets a broad market.
Firms acquire cost advantages are by improving process efficiencies, gaining unique access to a large source of lower
cost materials, making optimal outsourcing and vertical integration decisions, or avoiding some costs altogether. If
competing firms are unable to lower their costs by a similar amount, the firm may be able to sustain a competitive
advantage based on cost leadership.
Firms that succeed in cost leadership often have the following internal strengths:
 Access to the capital required to make a significant investment in production assets; this investment represents
a barrier to entry that many firms may not overcome.
 Skill in designing products for efficient manufacturing, for example, having a small component count to
shorten the assembly process.
 High level of expertise in manufacturing process engineering.
 Efficient distribution channels.
Risks:
1. Each generic strategy has its risks, including the low-cost strategy. For example, other firms may be able to lower
their costs as well. As technology improves, the competition may be able to leapfrog the production capabilities, thus
eliminating the competitive advantage.
2. Additionally, several firms following a focus strategy and targeting various narrow markets may be able to achieve
an even lower cost within their segments and as a group gain significant market share.
b) Differentiation Strategy
A differentiation strategy calls for the development of a product or service that offers unique attributes that are valued
by customers and that customers perceive to be better than or different from the products of the competition. The value
added by the uniqueness of the product may allow the firm to charge a premium price for it. The firm hopes that the
higher price will more than cover the extra costs incurred in offering the unique product. Because of the product's
unique attributes, if suppliers increase their prices the firm may be able to pass along the costs to its customers who
cannot find substitute products easily. Firms that succeed in a differentiation strategy often have the following internal
strengths:
 Access to leading scientific research.
 Highly skilled and creative product development team.
 Strong sales team with the ability to successfully communicate the perceived strengths of the product.
 Corporate reputation for quality and innovation.
Risks:
1. The risks associated with a differentiation strategy include imitation by competitors and changes in customer tastes.
2. Additionally, various firms pursuing focus strategies may be able to achieve even greater differentiation in their
market segments.
c) Focus Strategy
The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost
advantage or differentiation. The premise is that the needs of the group can be better serviced by focusing entirely on it.
A firm using a focus strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages
other firms from competing directly.
Because of their narrow market focus, firms pursuing a focus strategy have lower volumes and therefore less
bargaining power with their suppliers. However, firms pursuing a differentiation focused strategy may be able to pass
higher costs on to customers since close substitute products do not exist.
Firms that succeed in a focus strategy are able to tailor a broad range of product development strengths to a relatively
narrow market segment that they know very well.
Risks:
1. Some risks of focus strategies include imitation and changes in the target segments.
2. Furthermore, it may be fairly easy for a broad-market cost leader to adapt its product in order to compete directly.
3. Finally, other focusers may be able to carve out sub-segments that they can serve even better.
A Combination of Generic Strategies
These generic strategies are not necessarily compatible with one another. If a firm attempts to achieve an advantage on
all fronts, in this attempt it may achieve no advantage at all. For example, if a firm differentiates itself by supplying
very high quality products, it risks undermining that quality if it seeks to become a cost leader. Even if the quality did
not suffer, the firm would risk projecting a confusing image. For this reason, Michael Porter argued that to be
successful over the long-term, a firm must select only one of these three generic strategies. Otherwise, with more than
one single generic strategy the firm will be "stuck in the middle" and will not achieve a competitive advantage.
Porter argued that firms that are able to succeed at multiple strategies often do so by creating separate business units for
each strategy. By separating the strategies into different units having different policies and even different cultures, a
corporation is less likely to become "stuck in the middle."
However, there exists a viewpoint that a single generic strategy is not always best because within the same product
customers often seek multi-dimensional satisfactions such as a combination of quality, style, convenience, and price.
There have been cases in which high quality producers faithfully followed a single strategy and then suffered greatly
when another firm entered the market with a lower-quality product that better met the overall needs of the customers.
……………………………………………………………………………………………………………………………
Organizations use three types of strategies: corporate, competitive, and functional. Top-level managers typically are
responsible for corporate strategies, middle-level managers for competitive strategies, and lower-level managers for the
functional strategies.
I. Corporate Strategies
A corporate strategy is one that determines

 what businesses a company is in or wants to be in, and

 what it wants to do with those businesses.

It‘s based on the mission and goals of the organization and the roles that each business unit of the organization will
play.

For example, The mission of PepsiCo: To be the world‘s premier consumer products company focused on convenient
foods and beverages. It follows that mission with a corporate strategy that has put it in different businesses including
PepsiCo Americas Beverages (which includes Pepsi, Gatorade, and other beverages), PepsiCo Americas Foods (which
includes Frito-Lay North America, Quaker Foods North America, and Latin American Foods), and PepsiCo
International (which includes all PepsiCo‘s other international products). The other part of corporate strategy is when
top managers decide what to do with those businesses: grow them, keep them the same, or renew them.
Types of Corporate Strategy
The three main types of corporate strategies are growth, stability, and renewal.
1. Growth.
Even though Walmart is the world‘s largest retailer, it continues to grow internationally and in the United States. A
growth strategy is when an organization expands the number of markets served or products offered, either through its
current business(es) or through new business(es). Because of its growth strategy, an organization may increase
revenues, number of employees, or market share. Organizations grow by using concentration, vertical integration,
horizontal integration, or diversification.
(i) An organization that grows using concentration focuses on its primary line of business and increases the number of
products offered or markets served in this primary business. For example, Beckman Coulter, Inc., a Fullerton,
California-based organization with annual revenues over $3.2 billion, has used concentration to become one of the
world‘s largest medical diagnostics and research equipment companies. Another example of a company using
concentration is Bose Corporation of Framingham, Massachusetts, which focuses on developing innovative audio
products and has become one of the world‘s leading manufacturers of speakers for home entertainment, automotive,
and pro audio markets with sales of more than $2 billion.
(ii) A company also might choose to grow by vertical integration, either backward, forward, or both. In backward
vertical integration, the organization becomes its own supplier so it can control its inputs.
For example, eBay owns an online payment business that helps it provide more secure transactions and control one of
its most critical processes. In forward vertical integration, the organization becomes its own distributor and is able to
control its outputs.

For example, Apple has more than 287 retail stores worldwide to distribute its product.
(iii) In horizontal integration, a company grows by combining with competitors.
For example, French cosmetics giant L‘Oreal acquired The Body Shop. Another example is Live Nation, the largest
concert promoter in the United States, which combined operations with competitor HOB Entertainment, the operator of
the House of Blues Clubs. Horizontal integration has been used in a number of industries in the last few years—
financial services, consumer products, airlines, department stores, and software, among others.
The U.S. Federal Trade Commission usually scrutinizes these combinations closely to see if consumers might be
harmed by decreased competition. Other countries may have similar restrictions.
For example, the European Commission, the ―watchdog‖ for the European Union, conducted an in-depth investigation
into Unilever‘s acquisition of the body and laundry care units of Sara Lee.
(iv) Finally, an organization can grow through diversification, either related or unrelated. Related diversification
happens when a company combines with other companies in different, but related, industries.
For example, American Standard Cos., based in Piscataway, New Jersey, is in a variety of businesses including
bathroom fixtures, air conditioning and heating units, plumbing parts, and pneumatic brakes for trucks. Although this
mix of businesses seems odd, the company‘s ―strategic fit‖ is the efficiency-oriented manufacturing techniques
developed in its primary business of bathroom fixtures, which it has transferred to all its other businesses. Unrelated
diversification is when a company combines with firms in different and unrelated industries.
For example, the Tata Group of India has businesses in chemicals, communications and IT, consumer products, energy,
engineering, materials, and services. Again, an odd mix. But in this case, there‘s no strategic fit among the businesses.
2. Stability
As the global recession dragged on and U.S. sales of candy and chocolate slowed down, Cadbury Schweppes—with
almost half of its confectionary sales coming from chocolate—is maintaining things as they are. A stability strategy is
a corporate strategy in which an organization continues to do what it is currently doing. Examples of this strategy
include continuing to serve the same clients by offering the same product or service, maintaining market share, and
sustaining the organization‘s current business operations. The organization doesn‘t grow, but doesn‘t fall behind,
either.
3. Renewal.
In 2009, Symantec lost $6.7 billion. Sprint-Nextel lost $2.4 billion, and many financial services and real-estate-related
companies faced serious financial issues with huge losses. When an organization is in trouble, something needs to be
done. Managers need to develop strategies, called renewal strategies, which address declining performance.
The two main types of renewal strategies are retrenchment and turnaround strategies.

(i) A retrenchment strategy is a short-run renewal strategy used for minor performance problems. This
strategy helps an organization stabilize operations, revitalize organizational resources and capabilities,
and prepare to compete once again.

(ii) When an organization‘s problems are more serious, more drastic action—the turnaround strategy—is
needed. Managers do two things for both renewal strategies: cut costs and restructure organizational
operations.

How Are Corporate Strategies Managed?

When an organization‘s corporate strategy encompasses a number of businesses, managers can manage this collection
of businesses using a tool called a corporate portfolio matrix. This matrix provides a framework for understanding
diverse businesses and helps managers establish priorities for allocating resources.
The first portfolio matrix—the BCG matrix—was developed by the Boston Consulting Group and introduced the idea
that an organization‘s various businesses could be evaluated and plotted using a 2 * 2 matrix to identify which ones
offered high potential and which were a drain on organizational resources. The horizontal axis represents market share
(low or high) and the vertical axis indicates anticipated market growth (low or high). A business unit is evaluated using
a SWOT analysis and placed in one of the four categories.
The dogs should be sold off or liquidated as they have low market share in markets with low growth potential.
Managers should ―milk‖ cash cows for as much as they can, limit any new investment in them, and use the large
amounts of cash generated to invest in stars and question marks with strong potential to improve market share. Heavy
investment in stars will help take advantage of the market‘s growth and help maintain high market share. The stars, of
course, will eventually develop into cash cows as their markets mature and sales growth slows. The hardest decision
for managers relates to the question marks. After careful analysis, some will be sold off and others strategically
nurtured into stars.
II. Competitive Strategies
A competitive strategy is a strategy for how an organization will compete in its business(es). For a small organization
in only one line of business or a large organization that has not diversified into different products or markets, its
competitive strategy describes how it will compete in its primary or main market. For organizations in multiple
businesses, however, each business will have its own competitive strategy that defines its competitive advantage, the
products or services it will offer, the customers it wants to reach, and the like.
For example, the French company LVMH-Moët Hennessy Louis Vuitton SA has different competitive strategies for its
businesses, which include Donna Karan fashions, Louis Vuitton leather goods, Guerlain perfume, TAG Heuer watches,
Dom Perignon champagne, and other luxury products.
When an organization is in several different businesses, those single businesses that are independent and that have their
own competitive strategies are referred to as strategic business units (SBUs).
The Role of Competitive Advantage
Michelin has mastered a complex technological process for making superior radial tires. Coca- Cola has created the
world‘s best and most powerful brand using specialized marketing and merchandising capabilities. The Ritz Carlton
hotels have a unique ability to deliver personalized customer service. Each of these companies has created a
competitive advantage.
Developing an effective competitive strategy requires an understanding of competitive advantage, which is what sets
an organization apart—that is, its distinctive edge. That distinctive edge can come from the organization‘s core
competencies by doing something that others cannot do or doing it better than others can do it.
For example, Southwest Airlines has a competitive advantage because of its skills at giving passengers what they
want—convenient and inexpensive air passenger service. Or competitive advantage can come from the company‘s
resources because the organization has something that its competitors do not have.
For instance, Walmart‘s state-of-the-art information system allows it to monitor and control inventories and supplier
relations more efficiently than its competitors, which Walmart has turned into a cost advantage.
Quality as a Competitive Advantage.
When W. K. Kellogg started manufacturing his cornflake cereal in 1906, his goal was to provide his customers with a
high-quality, nutritious product that was enjoyable to eat. That emphasis on quality is still important today. Every
employee has a responsibility to maintain the high quality of Kellogg products. If implemented properly, quality can be
a way for an organization to create a sustainable competitive advantage. That‘s why many organizations apply quality
management concepts in an attempt to set themselves apart from competitors. If a business is able to continuously
improve the quality and reliability of its products, it may have a competitive advantage that can‘t be taken away.
Sustaining Competitive Advantage.
Every organization has resources (assets) and capabilities (how work gets done). So what makes some organizations
more successful than others? Why do some professional baseball teams consistently win championships or draw large
crowds? Why do some organizations have consistent and continuous growth in revenues and profits? Why do some
colleges, universities, or departments experience continually increasing enrollments? Why do some companies
consistently appear at the top of lists ranking the ―best,‖ or the ―most admired,‖ or the ―most profitable‖? The answer is
that not every organization is able to effectively exploit its resources and to develop the core competencies that can
provide it with a competitive advantage. And it‘s not enough simply to create a competitive advantage. The
organization must be able to sustain that advantage; that is, to keep its edge despite competitors‘ actions or
evolutionary changes in the industry. But that‘s not easy to do! Market instabilities, new technology, and other changes
can challenge managers‘ attempts at creating a long-term, sustainable competitive advantage. However, by using
strategic management, managers can better position their organizations to get a sustainable competitive advantage.
Many important ideas in strategic management have come from the work of Michael Porter. One of his major
contributions was explaining how managers can create a sustainable competitive advantage. An important part of doing
this is an industry analysis, which is done using the five forces model.

Five Forces Model.

In any industry, five competitive forces dictate the rules of competition. Together, these five forces determine industry
attractiveness and profitability, which managers assess using these five factors:
1. Threat of new entrants. How likely is it that new competitors will come into the industry?
2. Threat of substitutes. How likely is it that other industries‘ products can be substituted for our industry‘s products?
3. Bargaining power of buyers. How much bargaining power do buyers (customers) have?
4. Bargaining power of suppliers. How much bargaining power do suppliers have?
5. Current rivalry. How intense is the rivalry among current industry competitors?
Choosing a Competitive Strategy
Once managers have assessed the five forces and done a SWOT analysis, they‘re ready to select an appropriate
competitive strategy—that is, one that fits the competitive strengths (resources and capabilities) of the organization and
the industry it‘s in. According to Porter, no firm can be successful by trying to be all things to all people. He proposed
that managers select a strategy that will give the organization a competitive advantage, either from having lower costs
than all other industry competitors or by being significantly different from competitors.
When an organization competes on the basis of having the lowest costs (costs or expenses, not prices) in its industry,
it‘s following a cost leadership strategy. A low-cost leader is highly efficient. Overhead is kept to a minimum, and the
firm does everything it can to cut costs. You won‘t find expensive art or interior décor at offices of low-cost leaders.
For example, at Walmart‘s headquarters in Bentonville, Arkansas, office furnishings are functional, not elaborate,
maybe not what you‘d expect for the world‘s largest retailer. Although a low-cost leader doesn‘t place a lot of
emphasis on ―frills,‖ its product must be perceived as comparable in quality to that offered by rivals or at least be
acceptable to buyers.
A company that competes by offering unique products that are widely valued by customers is following a
differentiation strategy. Product differences might come from exceptionally high quality, extraordinary service,
innovative design, technological capability, or an unusually positive brand image. Practically any successful consumer
product or service can be identified as an example of the differentiation strategy; for instance, Nordstrom (customer
service); 3M Corporation (product quality and innovative design); Coach (design and brand image); and Apple
(product design).
Although these two competitive strategies are aimed at the broad market, the final type of competitive strategy—the
focus strategy—involves a cost advantage (cost focus) or a differentiation advantage (differentiation focus) in a
narrow segment or niche. Segments can be based on product variety, customer type, distribution channel, or
geographical location.
For example, Denmark‘s Bang & Olufsen, whose revenues are over $527 million, focuses on high-end audio
equipment sales. Whether a focus strategy is feasible depends on the size of the segment and whether the organization
can make money serving that segment.
What happens if an organization can‘t develop a cost or a differentiation advantage?
Porter called that being stuck in the middle and warned that‘s not a good place to be. An organization becomes stuck
in the middle when its costs are too high to compete with the low-cost leader or when its products and services aren‘t
differentiated enough to compete with the differentiator. Getting unstuck means choosing which competitive advantage
to pursue and then doing so by aligning resource, capabilities, and core competencies.
Although Porter said that you had to pursue either the low cost or the differentiation advantage to prevent being stuck
in the middle, more recent research has shown that organizations can successfully pursue both a low cost and a
differentiation advantage and achieve high performance.22 Needless to say, it‘s not easy to pull off! You have to keep
costs low and be truly differentiated. But companies such as Hewlett-Packard, FedEx, Intel, and Coca- Cola have been
able to do it.
III. Functional Strategies
The functional strategies are the strategies used by an organization‘s various functional departments to support the
competitive strategy. For example, when R. R. Donnelley & Sons Company, a Chicago-based printer, wanted to
become more competitive and invested in high-tech digital printing methods, its marketing department had to develop
new sales plans and promotional pieces, the production department had to incorporate the digital equipment in the
printing plants, and the human resources department had to update its employee selection and training programs.
PLANNING TOOLS AND TECHNIQUES
Managers use planning tools and techniques to help their organizations be more efficient and effective. There are three
categories of basic planning tools and techniques:
 Techniques for assessing the environment,
 Techniques for allocating resources, and
 Contemporary planning techniques.
Techniques for Assessing the Environment
There are three techniques used for assessing the environment:
o environmental scanning,
o forecasting, and
 o benchmarking
1. Environmental Scanning
Environmental scanning is the screening of large amounts of information to anticipate and interpret changes in the
environment. Managers in both small and large organizations use environmental scanning environmental scanning
reveal issues and concerns that could affect an organization‘s current or planned activities.
Research has shown that companies that use environmental scanning have higher performance
Competitor Intelligence.
A fast-growing area of environmental scanning is competitor intelligence. It‘s a process by which organizations
gather information about their competitors and get answers to questions such as Who are they? What are they doing?
How will what they‘re doing affect us?
Competitor intelligence experts suggest that 80 percent of what managers need to know about competitors can be
found out from their own employees, suppliers, and customers. Competitor intelligence doesn‘t have to involve spying.
Advertisements, promotional materials, press releases, reports filed with government agencies, annual reports, want
ads, newspaper reports, and industry studies are examples of readily accessible sources of information.
Many firms regularly buy competitors‘ products and have their own engineers study them (through a process called
reverse engineering) to learn about new technical innovations.
Global Scanning.
One important type of environmental scanning is global scanning. Because world markets are complex and dynamic, it
is important to gain information on global forces that might affect their organizations. The value of global scanning to
managers depends on the extent of the organization‘s global activities. For a company that has significant global
interests, global scanning can be quite valuable.
For example, company managers found that as countries move from agriculture- based societies to industrial ones, the
population tends to eat out more and favor prepackaged foods, which translates to more sales of its food packaging
products.
2. Forecasting
The second technique managers can use to assess the environment is forecasting. Forecasting is an important part of
planning and managers need forecasts that will allow them to predict future events effectively and in a timely manner.
Environmental scanning establishes the basis for forecasts, which are predictions of outcomes.
Forecasting Techniques.
Forecasting techniques fall into two categories:

 quantitative and
 qualitative.

(i) Quantitative forecasting

It applies a set of mathematical rules to a series of past data to predict outcomes. These techniques are preferred when
managers have sufficient hard data that can be used.
(ii) Qualitative forecasting,
It uses the judgment and opinions of knowledgeable individuals to predict outcomes. Qualitative techniques typically
are used when precise data are limited or hard to obtain.
 Table: Forecasting Techniques
Today many organizations forecasts using an approach known as CPFR, which stands for collaborative planning,
forecasting, and replenishment. CPFR provides a framework for the flow of information, goods, and services
between retailers and manufacturers. Each organization relies on its own data to calculate a demand forecast for a
particular product. If their respective forecasts differ by a certain amount (say 10%), the retailer and manufacturer
exchange data and written comments until they arrive at a more accurate forecast. Such collaborative forecasting helps
both organizations do a better job of planning.
Making Forecasting More Effective
(i) Forecasting techniques are most accurate when the environment is not rapidly changing. The more dynamic
the environment, the more likely managers are to forecast ineffectively. Also, forecasting is relatively
ineffective in predicting non-seasonal events such as recessions, unusual occurrences, discontinued
operations, and the actions or reactions of competitors.
(ii) Use simple forecasting methods. They are better than complex methods that may mistakenly confuse random
data for meaningful information.
(iii) Look at involving more people in the process The more people are involved in the process, the more the
reliability of the outcomes improves.
(iv) Compare every forecast with ―no change.‖ A no change forecast is accurate approximately half the time.
(v) Use rolling forecasts that look 12 to 18 months ahead, instead of using a single, static forecast.
(vi) Do not rely on a single forecasting method. Make forecasts with several models and average them, especially
when making longer-range forecasts.
(vii) Forecasting is a managerial skill and as such can be practiced and improved. Forecasting software has made
the task somewhat less mathematically challenging.
3. Benchmarking
The final technique for assessing the environment is benchmarking. It is the search for the best practices among
competitors or noncompetitors that lead to their superior performance. Studies show that users have achieved 69
percent faster growth and 45 percent greater productivity
Benchmarking can improve performance by analyzing and then copying the methods of the leaders in various fields.
Organizations such as Nissan, Payless Shoe Source, the U.S. military, General Mills, United Airlines, and Volvo
Construction Equipment have used benchmarking as a tool in improving performance. The below figure shows the
steps involved in benchmarking.

Steps in benchmarking
Techniques for allocating resources
Once an organization‘s goals have been established, they must have resources (financial, physical, human, and
intangible) for implementing the goals. There are four techniques:
o budgeting,
o scheduling,
o breakeven analysis, and
o linear programming
1. Budgeting
A budget is a numerical plan for allocating resources to specific activities. Managers typically prepare budgets for
revenues, expenses, and large capital expenditures such as equipment.
Person-hours, capacity utilization, or units of production can be budgeted for daily, weekly, or monthly activities. The
below figure shows different types of budgets.

Types of Budgets
Budgets are one planning technique that managers at all organizational levels use. It‘s an important managerial activity
because it forces financial discipline and structure throughout the organization. However many managers don‘t like
preparing budgets because they feel the process is time consuming, inflexible, inefficient, and ineffective
To make Budgeting Effective

2. Scheduling
Scheduling is the process of allocating 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. Some useful scheduling devices including
Gantt charts, load charts, and PERT network analysis
Gantt Charts.
The Gantt chart was developed during the early 1900s by Henry Gantt, an associate of Frederick Taylor, the scientific
management expert.
It‘s a bar graph with time on the horizontal axis and the activities to be scheduled on the vertical axis. The bars show
output, both planned and actual, over a period of time. The Gantt chart visually shows when tasks are supposed to be
done and compares those with the actual progress on each task. It‘s a simple but important device that lets managers to
know what is to be done to complete a job and to assess whether an activity is ahead of, behind, or on schedule.

A Gantt Chart
The figure shows a simplified Gantt chart for book production developed by a manager in a publishing company.
Load Charts.
A load chart is a modified Gantt chart. Instead of listing activities on the vertical axis, load charts list either entire
departments or specific resources. This arrangement allows managers to plan and control capacity utilization. In other
words, load charts schedule capacity by work areas.
 A load chart
For example, figure shows a load chart for six production editors at the same publishing company.
Pert Network Analysis.
Gantt and load charts are useful as long as the activities being scheduled are few in number. But for a large project
such as a departmental reorganization, the implementation of a cost-reduction program, or the development of a new
product, requires coordinating hundreds and even thousands of activities. The program evaluation and review
technique (PERT) is highly appropriate for such projects.
A PERT network is a flowchart diagram that depicts the sequence of activities needed to complete a project and the
time or costs associated with each activity. With a PERT network, a manager must think through what has to be done,
determine which events depend on one another. Thus, PERT allows managers to monitor a project‘s progress, identify
possible bottlenecks, and shift resources as necessary to keep the project on schedule.
There are four elements in PERT analysis:
Events are end points that represent the completion of major activities.
Activities represent the time or resources required to progress from one event to another.
Slack time is the amount of time an individual activity can be delayed without delaying the whole project.
Critical path is the longest or most time-consuming sequence of events and activities in a PERT network. Any delay
in completing events on this path would delay completion of the entire project. In other words, activities on the critical
path have zero slack time.
Steps in Developing a PERT Network
Most PERT projects are complicated and include numerous activities. Such complicated computations can be done
with specialized PERT software.
Assume that you‘re the superintendent at a construction company and have been assigned to oversee the construction
of an office building. Because time really is money in your business, you must determine how long it will take to get
the building completed. You‘ve determined the specific activities and events.

Table: Events and Activities in Constructing an Office Building

The table outlines the major events in the construction project and your estimate of the expected time to complete each.

Figure: PERT Network for Constructing an Office Building

Figure shows the actual PERT network based on the data in above table.
The length of time that each path of activities will take:
A-B-C-D-I-J-K (44 weeks)
A-B-C-D-G-H-J-K (50 weeks)
A-B-C-E-G-H-J-K (47 weeks)
A-B-C-F-G-H-J-K (47 weeks)
PERT network shows that if everything goes as planned, the total project completion time will be 50 weeks. This is
calculated by tracing the project‘s critical path (the longest sequence of activities): A-B-C-D-G-H-J-K and adding up
the times. Any delay in completing the events on this path would delay the completion of the entire project. Taking six
weeks instead of four to put in the floor covering and paneling (Event I) would have no effect on the final completion
date. Because that event isn‘t on the critical path. However, taking seven weeks instead of six to dig the subterranean
garage (Event B) would delay the total project.
3. Breakeven Analysis
Breakeven analysis is a widely used resource allocation technique to help managers determine breakeven point.
Breakeven analysis is a simple calculation, but it‘s important to managers because it points out the relationship
between revenues, costs, and profits.
To compute breakeven point (BE), a manager needs to know the unit price of the product being sold (P), the variable
cost per unit (VC), and total fixed costs (TFC). An organization breaks even when its total revenue is just enough to
equal its total costs.
But total cost has two parts: fixed and variable. Fixed costs are expenses that do not change regardless of volume.
Examples include insurance premiums, rent, and property taxes. Variable costs change in proportion to output and
include raw materials, labor costs, and energy costs.
Breakeven point can be computed graphically or by using the following formula:

This formula tells us that (1) total revenue will equal total cost when we sell enough units at a price that covers all
variable unit costs, and (2) the difference between price and variable costs, when multiplied by the number of units
sold, equals the fixed costs.

Figure: Breakeven Analysis

4. Linear Programming
Linear programming is used to solve the resource allocation problem. But it can‘t be applied to all resource allocation
problems because it requires that resources be limited, that the goal be outcome optimization, that resources can be
combined in alternative ways to produce a number of output mixes, and that a linear relationship exist between
variables (a change in one variable must be accompanied by an exactly proportional change in the other).
Some applications include selecting transportation routes that minimize shipping costs, allocating a limited advertising
budget among various product brands, making the optimal assignment of people among projects, and determining how
much of each product to make with a limited number of resources
Contemporary planning techniques
Two planning techniques are
o project management and
o scenarios.
1. Project Management
Different types of organizations, from manufacturers to software design firms use projects. A project is a one-time
only set of activities that has a definite beginning and ending point in time.
Project management is the task of getting a project‘s activities done on time, within budget, and according to
specifications. Many organizations are using project management because the approach fits with the need for flexibility
and rapid response to perceived market opportunities.
Project Management Process.
In the typical project, work is done by a project team whose members are assigned their respective work areas. The
project manager coordinates the project‘s activities with other departments. When the project team accomplishes its
goals, it disperse and members move on to other projects or back to their permanent work area.
The project planning process is shown in Figure.

The process begins by clearly defining the project‘s goals. This step is necessary because the manager and the team
members need to know what‘s expected.
All activities in the project and the resources needed to do them must then be identified. This step may be time-
consuming and complex, particularly if the project is unique and the managers have no history or experience with
similar projects.
Once the activities have been identified, the sequence of completion needs to be determined. What activities must be
completed before others can begin? Which can be done simultaneously? This step often uses flowchart diagrams such
as a Gantt chart, a load chart, or a PERT network.
Next, the project activities need to be scheduled. Time estimates for each activity are done, and these estimates are
used to develop an overall project schedule and completion date.
Then the project schedule is compared to the goals, and any necessary adjustments are made. If the project completion
time is too long, the manager might assign more resources to critical activities so they can be completed faster.
Today, the project management process can take place online as a number of Web-based software packages are
available. These packages cover aspects from project accounting and estimating to project scheduling and bug and
defect tracking
2. Scenario Planning
A scenario is a consistent view of what the future is likely to be.
The aim of scenario planning is not to try to predict the future but to reduce uncertainty by playing out potential
situations under different specified conditions. It would then be prepared to implement new strategies to get and keep a
competitive advantage. The process of doing scenarios makes executives to rethink and clarify the essence of the
business environment in ways they almost certainly have never done before.‖
DECISION-MAKING
Decision-making is defined as the process of choosing a course of action from among alternatives to achieve a desired
goal. It is one of the functions of management and also a core process of planning. The management executive takes a
number of decisions every day. A decision may be a direction to other to do or not to do. Thus, a decision may be
rational or irrational. There are numbers of alternatives available to the management. The best one is selected among
the available alternatives.
Knootz and Weihrich, "Decision-making is defined as the selection of a course of action from among alternatives".
Features of Decision-Making
(i) Decision-making is a selection process. The best alternative is selected among many available alternatives.
(ii) Decision-making is a goal-oriented process. Decisions are made to achieve some goal or objective.
(iii) Decision-making is the end process. It is preceded by a detailed discussion and selection of alternatives.
(iv) Decision-making is a human and rational process involving the application of intellectual abilities. It
involves deep thinking and foreseeing things.
(v) Decision-making is a dynamic process. An individual takes a number of decisions each day.
(vi) Decision-making is situational. A particular problem may have different decisions at different times,
depending upon the situation.
(vii) Decision-making is a continuous or ongoing process. Managers have to take a series of decision on a
particular problem.
 (viii) Decision-making implies freedom to the decision maker regarding the final choice. It also involves the
using of resources in specified ways.
(ix) Decision may be positive or negative. A decision may direct others to do or not to do.
(x) Decision-making gives happiness to an endeavor who takes various steps to collect all the information
which is likely to affect a decision.
The Decision-Making Process
Decision-making is not as easy as which involves many steps to follow. It requires a lot of skill. Every decision is the
outcome of a dynamic process which is influenced by multiple forces. In order to make good decisions, managers
should follow a sequential set of steps. The decision making process depends upon the nature of problem and the
nature of organization. Figure illustrates the simple process followed while taking a decision in normal situation.

Step 1: Identifying a Problem

Every decision starts with a problem, a discrepancy between an existing and a desired condition. Amanda is a sales
manager whose reps need new laptops because their old ones are outdated and inadequate for doing their job. Assume
it‘s not economical to add memory to the old computers and it‘s the company‘s policy to purchase, not lease. Now the
problem is a disparity between the sales reps‘ current computers (existing condition) and their need to have more
efficient ones (desired condition). Amanda has a decision to make. How do managers identify problems? In the real
world, most problems don‘t come with neon signs flashing ―problem.‖ When her reps started complaining about their
computers, it was pretty clear to Amanda that something needed to be done, but few problems are that obvious.
Managers also have to be cautious not to confuse problems with symptoms of the problem. Is a 5 percent drop in sales
a problem? Or are declining sales merely a symptom of the real problem, such as poor-quality products, high prices, or
bad advertising? Also, keep in mind that problem identification is subjective. What one manager considers a problem
might not be considered a problem by another manager. In addition, a manager who resolves the wrong problem
perfectly is likely to perform just as poorly as the manager who doesn‘t even recognize a problem and does nothing. As
you can see, effectively identifying problems is important, but not easy.
Step 2: Identifying Decision Criteria
Once a manager has identified a problem, he or she must identify the decision criteria that are important or relevant to
resolving the problem. Every decision maker has criteria guiding his or her decisions even if they‘re not explicitly
stated. In our example, Amanda decides after careful consideration that memory and storage capabilities, display
quality, battery life, warranty, and carrying weight are the relevant criteria in her decision.
Step 3: Allocating Weights to the Criteria
If the relevant criteria aren‘t equally important, the decision maker must weight the items in order to give them the
correct priority in the decision. How? A simple way is to give the most important criterion a weight of 10 and then
assign weights to the rest using that standard.
The weighted criteria for our example are shown in figure.

Figure Important Decision Criteria

Step 4: Developing Alternatives
The fourth step in the decision-making process requires the decision maker to list viable alternatives that could resolve
the problem. In this step, a decision maker needs to be creative. And the alternatives are only listed, not evaluated just
yet. Our sales manager, Amanda, identifies eight laptops as possible choices.

Figure Possible Alternatives

Step 5: Analyzing Alternatives (Evaluation)
Once alternatives have been identified, a decision maker must evaluate each one by using the criteria established in
Step 2. Figure shows the assessed values that Amanda gave each alternative after doing some research on them. Keep
in mind that these data represent an assessment of the eight alternatives using the decision criteria, but not the
weighting. When you multiply each alternative by the assigned weight, you get the weighted alternatives as shown in
Figure below. The total score for each alternative is the sum of its weighted criteria.
Sometimes a decision maker might be able to skip this step. If one alternative scores highest on every criterion, you
wouldn‘t need to consider the weights because that alternative would already be the top choice. Or if the weights were
all equal, you could evaluate an alternative merely by summing up the assessed values for each one. For example, the
score for the HP Pro Book would be 36 and the score for the Sony NW would be 35.
 Figure Evaluation of Alternatives
Step 6: Selecting an Alternative
The sixth step in the decision-making process is choosing the best alternative or the one that generated the highest total
in Step 5. In our example, Amanda would choose the Dell Inspiron because it scored higher than all other alternatives
(249 total).
Step 7: Implementing the Alternative
In step 7 in the decision-making process, you put the decision into action by conveying it to those affected and getting
their commitment to it. We know that if the people who must implement a decision participate in the process, they‘re
more likely to support it than if you just tell them what to do. Another thing managers may need to do during
implementation is reassess the environment for any changes, especially if it‘s a long-term decision. Are the criteria,
alternatives, and choice still the best ones, or has the environment changed in such a way that we need to reevaluate?
Step 8: Evaluating Decision Effectiveness
The last step in the decision-making process involves evaluating the outcome or result of the decision to see whether
the problem was resolved. If the evaluation shows that the problem still exists, then the manager needs to assess what
went wrong. Was the problem incorrectly defined? Were errors made when evaluating alternatives? Was the right
alternative selected but poorly implemented? The answers might lead you to redo an earlier step or might even require
starting the whole process over.
Evaluation of Alternatives
Evaluation is the process of measuring the positive and negative consequences of each alternative. The following
techniques are more useful while evaluating alternatives.
(i) Quantitative and Qualitative analysis
Quantitative factors are very important while comparing alternatives for achieving an objective. These are the factors
which can be measured in numerical units, such as fixed and operating costs, no of units of production, number of
labours available etc.
The success of the organization largely depends on qualitative or intangible factors. These are the factors which are
difficult to measure numerically, such as the quality of labour relations, reputation of the company, public relations,
employee morale, motivations etc.
The following illustrates the importance of giving attention to both quantitative and qualitative factors.
For quantitative, plan was destroyed by an unforeseen war.
A fine marketing plan was made inoperable by a long transportation strike
A rational borrowing plan was hampered by an economic recession
Recognition of tangible factors by the manager is important to evaluate and compare it in a planning problem and make
decisions. Then it is to determine whether reasonable quantitative measurements can be given them. If not, he should
find out more details about the factors, compare their possible influence on the outcome with that of qualitative factors,
then come to a decision.
(ii) Marginal analysis
Marginal analysis involves the comparison of additional revenues arising from additional costs. The objective or an
alternative gives a maximum profit when the additional revenues and additional costs are equal. Cost and revenues are
interpreted comprehensively to include both tangible and intangible factors. The following illustration clears the
concept of marginal analysis.
Let us consider, there are three alternatives with additional cost and additional revenues as follows.
Additional cost Additional revenue
Alternative ‗A‘ 5 4
Alternative ‗B‘ 5 5
Alternative ‗C‘ 3 5
Alternative ‗B‘ is the best alternative among A,B,C, because additional cost and additional revenue are equal.
Marginal analysis can be used to compare factors other than costs and revenues. For example, to find the best output
until the additional input could be varied against output or until the additional input equals the additional output. This
point gives the maximum efficiency of the machine. Breakeven analysis is a modification of marginal analysis.
(iii) Cost effectiveness analysis
Cost effectiveness analysis is an improvement of marginal analysis. In this approach, alternatives are evaluated in
terms of costs and benefits. The alternative with the higher net benefit or minimum cost is selected as the best.
Therefore, this approach is also called cost-benefit analysis. This approach is widely applied in situation where
investments are involved.
Selecting an Alternative

The following three basic approaches are more helpful while selecting an alternative. Figure shows the process of
selecting an alternative form among alternative course of action.
(i) Experience
Managers can use their past experience for choosing an alternative, if they have solved or faced similar problems
earlier. Reliance on past experience plays a larger part that it deserves in decision-making. Generally, the manager rely
more on experience than alternative methods of choice. To some extent, experience is the best teacher. But no decision
situation is a prototype of the past. Therefore, past example experience must be used with carefulness and judgment.
Sometimes blind dependence on past experience, as a guide for future can be dangerous, because of two reasons:
Most of the people do not recognize the underlying reasons for their failures
Lessons of experience may be entirely inapplicable to new problems.
(ii) Experimentation
This is one kind of trial and error method. It involves trying or testing different alternatives. A particular alternative is
put in practice, results are observed. Similarly, all alternatives are put into action for some time and the alternative
giving the best result is selected. For example, many organizations go for test marketing of their products before the
products are launched in the market. During test marketing, the feedback from customers is collected to change the
feature of the product.
Drawbacks
This method cannot be used where a decision is irreversible and cannot be tested on pilot basis.
It is more expensive. When a program requires heavy expenditure in capital and personnel.
It does not yield optimum results
Time-consuming
There is no guarantee that the results of the experiment will be valid in the whole field of operation or in
future.
Therefore, this method has limited applications only.
(iii) Research and Analysis
An important step in the research and analysis approach is to develop a model similarity the problem. For example,
engineers test models of airplane wings and missiles in a wind tunnel. Since, this requires lot of calculations, often the
help of computer is taken.
This method is cheaper than experimentation. Time and cost involved in this method are very less. However, this
method suffers from the following limitations:
It is sometimes difficult to collect all data with the required degree of precision.
Great deal of subjective judgment is involved in quantification of inter-relationship between variables.
Many intangible factors are not considered during analysis that also affects selection process
This method is only theoretical approach and it may not coincide with real life.
Types of Decisions
a) Programmed and Non-Programmed Decisions: Herbert Simon has grouped organizational decisions into two
categories based on the procedure followed. They are:
i) Programmed decisions:
Programmed decisions are routine and repetitive and are made within the framework of organizational policies and
rules. These policies and rules are established well in advance to solve recurring problems in the organization.
Programmed decisions have short-run impact. They are, generally, taken at the lower level of management.
ii) Non-Programmed Decisions:
Non-programmed decisions are decisions taken to meet non-repetitive problems. Non-programmed decisions are
relevant for solving unique/ unusual problems in which various alternatives cannot be decided in advance. A common
feature of non-programmed decisions is that they are novel and non-recurring and therefore, readymade solutions are
not available. Since these decisions are of high importance and have long-term consequences, they are made by top
level management.
b) Strategic and Tactical Decisions: Organizational decisions may also be classified as strategic or tactical.
i) Strategic Decisions:
Basic decisions or strategic decisions are decisions which are of crucial importance. Strategic decisions a major choice
of actions concerning allocation of resources and contribution to the achievement of organizational objectives.
Decisions like plant location, product diversification, entering into new markets, selection of channels of distribution,
capital expenditure etc are examples of basic or strategic decisions.
ii) Tactical Decisions:
Routine decisions or tactical decisions are decisions which are routine and repetitive. They are derived out of strategic
decisions. The various features of a tactical decision are as follows:
 Tactical decision relates to day-to-day operation of the organization and has to be taken very frequently.
 Tactical decision is mostly a programmed one. Therefore, the decision can be made within the context of
these variables.
 The outcome of tactical decision is of short-term nature and affects a narrow part of the organization.
 The authority for making tactical decisions can be delegated to lower level managers because: first, the impact
of tactical decision is narrow and of short term nature and Second, by delegating authority for such decisions
to lower-level managers, higher level managers are free to devote more time on strategic decisions.
Decision-Making Under Different Conditions
A decision maker may not have complete knowledge about alternative decisions or the outcome of a chosen
alternative. They are known as conditions of knowledge. The following are the different conditions.
1. Decision making under certainty
2. Decision making under risk
3. Decision making uncertainty.

Fig. Three decision making conditions

Fig shows the following three decision making conditions depending on the availability of information either about
the outcome or the relative chances for any outcome.
1 .Decision making under certainty
Certainty means all the facts are known for sure. If a decision is made under conditions of certainty, the manager
knows precise outcome associated with each possible alternative or course of action.
Under such conditions, there is perfect knowledge about alternatives and their consequences. Exact results are
known in advance with complete knowledge (100% certainty). The probability of 1.0 can be assigned to specific out
comes. A decision maker will be able to make perfectly accurate decisions all the times.
A manager is simply faced with identifying the consequences of available alternatives and selecting the outcome
with the highest pay-off or benefit.
The meaning of certainty is that for each alternative there is one and only one value of pay-off. One has to find the
alternative with best pay-off and this is the alternative which should be selected. The decision criterion is simply to
select the alternative with the best pay-off.
 Consider the following pay-off matrix.
Pay-off in (Rs.) Situations
Plan
S1 S2 S3
Plan-1 2000 5000 4000

Plan-2 5000 7000 5000

Plan-3 8000 9000 5500

The rows represent plans, strategies or alternative courses of action. The columns represent the status of situations like
economic recession period, economic boom period or normal period.
Pay-off matrix is a logical grouping of possible outcomes in a problem. Outcomes can be expressed in rupees, units
or some other appropriate measure. In a pay-off matrix, the intersection of each row and column gives a specific
outcome.
The maximum pay-off is with plan 3 and under the situation 2 i.e Rs. 9000. So select the plan 3.
2. Decision making under risk
A decision is made under conditions of risk when a single action may result in more than one potential outcome and
the decision maker knows the probability of occurrence of each outcome.
Decision making under conditions of risk are perhaps the most common. Under such conditions, alternatives are
reorganised but their resulting consequences are probabilistic and doubtful.
Most of the organisational decisions are made under conditions of risk, i.e. some information is available but this is
not sufficient to answer all questions about the outcome of a decision. In such a situation, manager develops
probability estimates for various outcomes.
The probability estimates are developed based on experience, intelligence or past data. There are three methods of
estimating probability under conditions of risk.
(i) Priori probability: A priori probability is obtained through inferences from assured conditions.
(ii) Empirical probability: Empirical probability in based on recording actual experience over a period of time and
computing the percentage of time each event has occurred.
(iii) Subjective probability: When the manager does not have sufficient data to calculate either a prior or empirical
probability, he may estimate probability on his own judgement. This probability is likely to the less exact as compared
to others and may vary from manager to manager.
The assignment of probability is never so simple as it might appear. The manager finalises the assignment of
probability.
It is possible to anticipate the probability of occurrence of economic recession, economic boom or normal period
based on past data. The pay-off matrix for such type of decision under risk is given below.

Pay-off matrix in (Rs.) situation & probability

Plan
S1 S2 S3
0.1 0.7 0.2
Plan-1 35000 55000 5000
Plan-2 45000 35000 10000
Plan-3 55000 15000 7000

The outcome of each plan with the situations and their probabilities are calculated as
Plan-1 =35000×0.1 + 55000×0.7 + 5000× 0.2
=3500 + 38500+ 1000
 =Rs.43,000
Plan-2 =45000×0.1 + 35000×0.7 + 10000×0.2
=4500 +24500 + 2000
=Rs.31,000
Plan-3 =55000×0.1 + 1500×0.7 + 7000×0.2
=5500 + 10500 + 1400
=Rs.17,400
It is seen that outcome of plan 1 is the highest and hence plan-1 is the best decision.
An inventory decision problem for optimum stocking of machinery replacement parts is an example of decision
making under risk, because historical data on parts replaced can be compiled for certain for certain period of time.
3.Decision making under uncertainty
A decision is made under conditions of uncertainty when a single action may result in more than one potential
outcome and decision maker do not know the probability of occurrence of each outcome.
Decision making under conditions of uncertainty are unquestionably the most difficult. In such situations manager
has no knowledge to estimate the probability of occurrence of various alternatives.
The probability of occurrence of the outcome is not known and hence it is called uncertainty. There is no past
experience for calculating the probability.
There are four criteria in arriving at a decision under uncertainty.
(i) Hurwicz decision criterion based on optimism (or) maximax criterion
The decision maker thinks optimistically about the occurrence of events influencing a decision. If this criterion is
followed the manager will select the alternative under which it is possible to receive most favourable pay-off.
These four criteria are explained with the following example of pay-off matrix
Situations
Plan
S1 S2 S3
Plan-1 5000 1000 500
Plan-2 3000 2500 200
Plan-3 1000 1000 1000

As per Hurwicz criterion, one should prefer to select highest pay-off.

Plan Maximum Pay-off
Plan-1 5000
Plan-2 3000
Plan-3 1000

The maximum of maximum pay off is Rs. 5000. S0 select plan 1.

(ii) Walt decision criterion based on pessimism (or) maximin criterion.
According to the criterion, the pessimistic decision maker should select the maximum of least pay-off. The decision
maker believes that worst possible may occur.
Plan Minimum pay-off
Plan-1 500
Plan-2 200
Plan-3 1000
 Maximum of minimum is 1000. So select plan 3.
(iii) Serege Decision criterion based on minimisation of regret or Minimax criterion
This criterion leads to the minimisation of regret. The decision maker should select the minimum of maximum of
maximum regret pay-off since he will not have to regret, otherwise decision maker regrets after the decision has been
made and the situation has changed.
The regret is measured between the highest pay-off value and the given pay-off value in column-wise.
The regret matrix is arrived below:
Situations
Plan
S1 S2 S3
Plan-1 5000-5000=0 2500-1000=1500 1000-500=500
Plan-2 5000-3000=2000 0 1000-200=800
Plan-3 5000-1000=4000 2500-1000=1500 1000-1000=0
The maximum regret in each plan is
Plan Maximum regret
Plan-1 1500
Plan-2 2000
Plan-3 4000
The minimum of maximum regret is 1500. So select plan 1.
(iv) Laplace Decision criterion based on the assumption that every state of nature occurs with equal probability
(or) Insufficient reason criterion
The three preceding decision criteria assure that without any previous experience it is not possible to assign any
probability to each outcome.
All outcomes will have equal chance of occurring; one can not be discriminated against the other. If there are three
situations, each one has equal probability of occurrence i.e 1/3.
With these probabilities, the pay-off in the above example is written for each plan.
Plan-1 =1/3 × 5000 + 1/3 ×1000 + 1/3 ×500 = 2166.67
Plan-2 = 1/3 ×3000 + 1/3 × 2500 + 1/3 ×200 =1900
Plan-3 = 1/3 × 1000 + 1/3 × 1000 + 1/3 x 1000 = 1000
The more pay off is Rs. 2167 in plan 1 so plan 1 is selected.
QUESTION BANK
PART A
1. Define planning.
Planning is the process of selecting the objectives and determining the course of action required to achieve these
objectives.
2. What is the main objective of planning?
Planning is a primary function of organization It helps in achieving objectives It done to cope with uncertainty and
changeIt helps in facilitating control It helps in coordination Planning increases organization effectiveness. Planning
guides in decision making
3. Define “Mission”
Mission may be defined as ―a statement which defines the role that an organization plays in the society‖
4. Define “objectives”
The term ―objective‖ or ― goals‖ are often used interchangeably. Objective are the end results towards which the
activities of attain its objectives.
5. What is mean by strategy `
Strategy of an organization is the programmers of action and deployment of resources to attain its objectives.
6. What are the factors to be considered while formulating strategies ?
Mission and objectives of an organization, Values, aspiration and prejudices of top level management Opportunities
and threads of the external environment . Strength and weakness of the firm in various aspects such as funds ,
organization structure , human talent , technology etc..
7. Define “policies”
Policies are general statement or understanding which provide guidance in decision making to various managers.
8. What is procedure?
Procedure is a chronological order of action required to implement a policy and to achieve an objectives.
9. What is programme ?
Programme is a broad term which includes goals , polices , procedure , rules , task assignment , step to be taken,
resources to be employed to carryout a given course of action.
10. Define budgets.
A budget is a statement of expected result in numerical terms and therefore , it may be referred as a numerical
programmer.
11. What is objective?
Objectives are the aims, purposes or goals that an organization wants to achieve over varying period of time.
12. What is MBO?
MBO is a process whereby the superior and the superior and the subordinate manager of an enterprise jointly identify
its common goals, define each individuals major areas of responsibility in terms of result expected of him, and use
these measures as guides for operating the unit and the contribution of each of its members is assessed.
13. What is meant by “strategy”?
A strategy may also be defined as a special type of plan prepared for meeting the challenge posted by the activities of
competitors and other environmental forces.
14. What are the major kinds of strategies and policies?
Growth, Finance, organization, personnel, products or service and market.
15. Write down any four factors which lead to fail of strategic planning.
Managers are inadequately prepared for strategic planning. The information for preparing the plans is insufficient for
planning for action. The goals of the Organization are too vague. The business units are not clearly identified.
16. What is planning premises?
The assumptions about future derived from forecasting and used in planning are known as planning premises.
17. What are the practices made in making effective premising?
Selection of premises. Collection of information.. Development of alternative premises for contingency planning.
Verification of the consistency of premises. Communication of planning premises.
18. Explain the term decision and decision making?
A decision may be a direction to other to do or not to do...Decision making is defined as the process of choosing a
course of action from among alternatives to achieve a desired goal. It is one of the functions of management and also a
core process of planning the management executive takes a number of decisions every day. Thus, decisions may be
rational or irrational. The best one is selected out of the available alternatives.
 19. How would you evaluate the importance of a decision?
Decision making is a selection process. The best alternative is selected out of many available alternatives. Decision –
making is a goal –oriented process. Decisions are made to achieve some goal or objective. Decision making is the end
process. It is preceded by detailed discussion and selection of alternatives. Decision making is a human and rational
process involving the application of intellectual ablates. It involves deep thinking and foreseeing things. Decision
making is a dynamic process. An individual takes a number of decisions each day.
20. Mention the three approaches generally adapted by managers in selections an alternative?
Quantitative and Qualitative analysis.
Marginal analysis.
Cost effectiveness analysis.
PART B
1. Define Planning. Explain the steps involved in the planning process
2. Explain the process of MBO.
3. Explain the overall decision making process.
4. Explain in detail about the various forecasting methods.
5. Explain in detail about the TOWS matrix and SWOT analysis.
6. Define policies with its types. Explain the planning premises with types.
7. Explain the relationship of planning and controlling.
8. Discuss the various factors affecting the decision making process.
9. Define decision making process. Explain the process followed while taking a decision in normal situation.
10. Explain briefly about the major kinds of strategies.
11. Mention any four advantages and four limitations of planning
12. Discuss in detail about the performance appraisal.