UNIT 2: PLANNING

Planning is the fundamental management function, which involves deciding beforehand

what is to be done, when is it to be done, how it is to be done and who is going to do it. It
is an intellectual process which lays down an organisation’s objectives and develops
various courses of action by which the organisation can achieve those objectives. It
chalks out exactly how to attain the specific goal.

According to Koontz and O’ Donnell, “Planning is an intellectual process, conscious

determination of course of action, the basing of decision on purpose, facts and considered
estimates.”

Characteristics of Planning

1. Managerial function: Planning is a first and foremost managerial function provides the
base for other functions of the management, i.e. organising, staffing, directing and
controlling, as they are performed within the periphery of the plans made. (periphery:
limits)
2. Goal oriented: It focuses on defining the goals of the organisation, identifying
alternative courses of action and deciding the appropriate action plan, which is to be
undertaken for reaching the goals.
3. Pervasive: It is pervasive in the sense that it is present in all the segments and is required
at all the levels of the organisation. Although the scope of planning varies at different
levels and departments. (pervasive: widespread)
4. Continuous Process: Plans are made for a specific term, say for a month, quarter, year
and so on. Once that period is over, new plans are drawn, considering the organisation’s
present and future requirements and conditions. Therefore, it is an ongoing process, as the
plans are framed, executed and followed by another plan.
5. Intellectual Process: It is a mental exercise at it involves the application of mind, to
think, forecast, imagine intelligently and innovate etc.
6. Futuristic: In the process of planning we take a sneak peek of the future. It encompasses
looking into the future, to analyse and predict it so that the organisation can face future
challenges effectively.
7. Planning involves Decision making: Decisions are made regarding the choice of
alternative courses of action that can be undertaken to reach the goal. The alternative
chosen should be best among all, with the least number of negative and highest number
of positive outcomes.
8. A process: Planning is a process. In this process, managers anticipate future b y
analysing environmental factors to set goals or objectives, formulate plans (I.e., policies,
procedures, methods, rules) to achieve objectives.
9. Time bound: lanning is time-bound as it establishes specific deadlines and timeframes
for achieving goals. This temporal aspect ensures accountability, facilitates progress
 tracking through milestones, and helps prioritize tasks effectively. Additionally, having a
set timeline allows for better resource allocation and evaluation of outcomes.
10. Planning and action are twins: Planning and action are intrinsically linked, as effective
planning provides a roadmap for action. While planning outlines goals and strategies,
action is the execution that brings those plans to life. Together, they ensure that ideas are
transformed into tangible results, highlighting the necessity of both in achieving success.
11. Planning and controlling are inseparable: Planning and controlling are inseparable
processes, as planning sets the objectives and guidelines, while controlling ensures that
those plans are being followed and goals are met. Control mechanisms allow for
monitoring progress, making adjustments, and assessing outcomes, thus providing
feedback that informs future planning. Together, they create a dynamic system that
enhances organizational effectiveness.

Importance of Planning in Management

Planning is the first and most important function of management. It is needed at every
level of management. In the absence of planning all the business activities of the
organisation will become meaningless. The importance of planning has increased all the
more in view of the increasing size of organisations and their complexities.
Planning has again gained importance because of uncertain and constantly changing
business environment. In the absence of planning, it may not be impossible but certainly
difficult to guess the uncertain events of future.

The following facts show the advantages of planning and its importance for a business
organisation:
(1) Planning Provides Direction: Under the process of planning the objectives of the
organisation are defined in simple and clear words. The obvious outcome of this is that
all the employees get a direction and all their efforts are focused towards a particular
end. In this way, planning has an important role in the attainment of the objectives of
the organisation.
For example, suppose a company fixes a sales target under the process of planning.
Now all the departments, e.g., purchase, personnel, finance, etc., will decide their
objectives in view of the sales target.
In this way, the attention of all the managers will get focused on the attainment of
their objectives. This will make the achievement of sales target a certainty. Thus, in
the absence of objectives an organisation gets disabled and the objectives are laid
down under planning.

(2) Planning Reduces Risks of Uncertainty: Planning is always done for future and future
is uncertain. With the help of planning possible changes in future are anticipated and
various activities are planned in the best possible way. In this way, the risk of future
uncertainties can be minimised.
For example, in order to fix a sales target a survey can be undertaken to find out the
number of new companies likely to enter the market. By keeping these facts in mind
and planning the future activities, the possible difficulties can be avoided.

(3) Planning Reduces Overlapping and Wasteful Activities:

Under planning, future activities are planned in order to achieve objectives.
Consequently, the problems of when, where, what and why are almost decided. This puts
an end to disorder and suspicion. In such a situation coordination is established among
different activities and departments. It puts an end to overlapping and wasteful activities.
Consequently, wastages moves towards nil, efficiency increases and costs get to the
lowest level.
For example, if it is decided that a particular amount of money will be required in a
particular month, the finance manager will arrange for it in time. In the absence of
this information, the amount of money can be more or less than the requirement in
that particular month. Both these situations are undesirable. In case, the money is
less than the requirement, the work will not be completed and in case it is more than
the requirement, the amount will remain unused and thus cause a loss of interest.

(4) Planning Promotes Innovative Ideas:

It is clear that planning selects the best alternative out of the many available. All these
alternatives do not come to the manager on their own, but they have to be discovered.
While making such an effort of discovery, many new ideas emerge and they are studied
intensively in order to determine the best out of them.

(5) Planning Facilitates Decision Making:

Decision making means the process of taking decisions. Under it, a variety of alternatives
are discovered and the best alternative is chosen. The planning sets the target for decision
making. It also lays down the criteria for evaluating courses of action. In this way,
planning facilitates decision making.

(6) Planning Establishes Standards for Controlling:

By determining the objectives of the organisation through planning all the people
working in the organisation and all the departments are informed about ‘when’, ‘what’
and ‘how’ to do things.
Standards are laid down about their work, time and cost, etc. Under controlling, at the
time of completing the work, the actual work done is compared with the standard work
and deviations are found out and if the work has not been done as desired the person
concerned are held responsible.
For example, a labourer is to do 10 units of work in a day (it is a matter of
planning), but actually he completes 8 units. Thus there is a negative deviation of 2
units. For this, he is held responsible. (Measurement of actual work, knowledge of
deviation and holding the labourer responsible falls under controlling.) Thus, in the
absence of planning controlling is not possible.
(7) Helps capitalise opportunites: Planning is essential for capitalizing on opportunities,
as it clarifies goals, allocates resources effectively, and anticipates potential challenges.
By having a structured approach, you can quickly adapt to changes and measure progress,
ensuring you make the most of each opportunity that arises.

(8) Helps in optimum utilisation of resources: Effective planning helps ensure the
optimum utilization of resources by clearly identifying what is needed and when. It
allows for better allocation, reducing waste and maximizing efficiency. By aligning
resources with priorities, organizations can enhance productivity and achieve their goals
more effectively.

(9) Provides competitive strength: Planning provides competitive strength by allowing

organizations to identify market trends, anticipate customer needs, and strategically
position themselves ahead of competitors. It enables informed decision-making, fosters
innovation, and ensures efficient resource allocation, all of which contribute to a stronger
market presence and greater adaptability in a dynamic environment.

(10) Facilitates cooperation and coordination: Planning facilitates cooperation and

coordination by establishing clear goals and expectations among team members. It fosters
communication, aligns efforts, and encourages collaboration across departments. This
cohesive approach not only enhances teamwork but also streamlines processes, ensuring
everyone is working towards a common objective.

(11) Prevents hasty decisions: Planning prevents hasty decisions by providing a

structured framework for evaluating options and outcomes. It encourages thoughtful
analysis, allowing for informed choices rather than impulsive reactions. By considering
various scenarios and potential impacts, planning helps ensure decisions are well-
considered and aligned with long-term goals.

Types of Planning
The process of planning may be classified into different categories on the following
basis:
A.Nature of Planning:
a. Formal Planning:
Planning is formal when it is reduced to writing. When the numbers of actions are large it
is good to have a formal plan since it will help adequate control.

The term formal means official and recognised. Any planning can be done officially to be
followed or implemented. Formal planning aims to determine and objectives of planning.
It is the action that determine in advance what should be done.
b. Informal Planning:
An informal plan is one, which is not in writing, but it is conceived in the mind of the
manager. Informal planning will be effective when the number of actions is less and
actions have to be taken in short period.

B. Duration of Planning:
a. Short term Planning:
Short term planning is the planning which covers less than two years. It must be
formulated in a manner consistent with long-term plans. It is considered as tactical
planning. Short-term plans are concerned with immediate future; it takes into account
the available resources only and is concerned with the current operations of the
business.
These may include plans concerning inventory planning and control, employee
training, work methods etc.

b. Long-Term Planning:
Long-term planning usually covers a period of more than five years, mostly between
five and fifteen years. It deals with broader technological and competitive aspects of the
organisation as well as allocation of resources over a relatively long time period. Long-
term planning is considered as strategic planning.

C. Medium- Term Planning: Medium term plans are focusing on between two and
five years. These may include plan for opening a new branch in another city or
introducing a new product to the market.

C. Levels of Management:
a. Strategic Planning:
The strategic planning is the process of determining overall objectives of the organisation
and the policies and strategies adopted to achieve those objective. It is conducted by the
top management, which include chief executive officer, president, vice-presidents,
General Manger etc. It is a long range planning and may cover a time period of up to 10
years.

It basically deals with the total assessment of the organisation’s capabilities, its strengths
and its weaknesses and an objective evaluation of the dynamic environment. The
planning also determines the direction the company will be taking in achieving these
goals.

b. Intermediate Planning:
Intermediate planning cover time frames of about 6 months to 2 years and is
contemplated by middle management, which includes functional managers, department
heads and product line mangers. They also have the task of polishing the top
managements strategic plans.

The middle management will have a critical look at the resources available and they will
determine the most effective and efficient mix of human, financial and material factors.
They refine the broad strategic plans into more workable and realistic plans.

c. Operational Planning:
Operational planning deals with only current activities. It keeps the business running.
These plans are the responsibility of the lower management and are conducted by unit
supervisors, foremen etc. These are short-range plans covering a time span from one
week to one year.

These are more specific and they determine how a specific job is to be completed in the
best possible way. Most operational plans are divided into functional areas such as
production, finance, marketing, personnel etc.

D. Use:
a. Standing Plan:
Standing plan is one, which is designed to be used over and over again. Objectives,
policies procedures, methods, rules and strategies are included in standing plans. Its
nature is mechanical. It helps executives to reduce their workload. Standing plan is also
called routine plan. Standing or routine plan is generally long range.

b. Single Use Plan:

Single use plan is one, which sets a course of action for a particular set of circumstances
and is used up once the particular goal is achieved. They may include programme,
budgets, projects and schedules. It is also called specific planning. Single use plan is
short range.

D. According to approach adopted:

1. Proactive planning: This approach involves anticipating future trends, challenges, and
opportunities. It focuses on setting clear objectives and developing strategies to achieve
them before issues arise. Proactive planning enables organizations to be prepared and
responsive, fostering innovation and long-term success.

2. Reactive planning: This approach responds to events after they occur. It involves
making decisions based on immediate circumstances or crises. While it can be necessary
in urgent situations, reactive planning often leads to short-term fixes rather than long-
term solutions, potentially resulting in missed opportunities and increased risks.

Steps in Planning
1. Setting Objectives : The overall organizational objectives are set in the key areas
of operations. The objectives should be clear and measurable. These should be
based on mission of the organization, values & beliefs of managers and available
organizational resources. Objectives provide the guidelines for the preparation of
strategic and procedural plans. Objectives set the pattern of future course of action.
Major objectives should be broken down into departmental, sectional and
individual objectives.
2. Developing Planning Premises:The planning premises (estimate for the future
factors affecting planning) (assumptions & conditions underlying the plans) must
be clearly defined. The assumption & conditions of future events which are
forecast, will generally be made for the following: ( a) Expectation of demand for
the products, (b) Likely volume of production, (c) Anticipation of costs & likely
prices at which products will be marketed, (d) The supply of labour , raw
materials, etc. (e) The economic policies of the government, (f) The changing
pattern of consumer preferences, (g) The impact of technological changes on
production processes & (h) the sources of supply for funds.
3. Examining Alternative Course of Action:The next step in planning will be
choosing the best course of action. The planner should study all the alternatives
and then a final selection should be made. Best results will be achieved only when
best way of doing a work is selected. All the pros and cons of methods should be
weighed before a final selection.
4. Deciding the work-in-progress period:The planning period should be long
enough to permit the fulfilment of the commitments involved in a decision. The
planning period depends on several factors: Future that can be reasonably
anticipated, Time required to receive capital investments, Expected future
availability of raw materials, Lead time in development and
commercialization of a new product, etc.
5. Formulation of Policies &Strategies : Formulation of policies and strategies is
made for the accomplishment of desired results. The responsibility for laying
down policies and strategies lies usually with the management. Alternative plans
of action should be developed and evaluated carefully so as to select the most
appropriate policy for the organization. Available alternatives should be evaluated
in the light of objectives and planning premises.
6. Preparing Operating Plans:After the formulation of overall operating plans, the
derivative or supporting plans are prepared. Several medium range and short-
range plans are required to implement policies and strategies. These plans consist
of procedures, programmes, schedules, budgets and rules. Operational plans reflect
commitments as to methods, time, money, etc. These plans are helpful in the
implementation of long range plans.
 7. Integration & Implementation of Plans: The last step in planning process is the
implementation. Different plans must be properly balanced so that they
support one another. The various plans must be communicated and explained
to those responsible for putting them into practice. The participation and
cooperation of subordinates is necessary for successful implementation of plans.
Established plans should be reviewed periodically so as to modify and change
them whenever necessary. A system of continuous evaluation and appraisal of
plans should be devised to identify any shortcomings or pitfalls of the plans under
changing situations

Elements of Planning
Planning as a managerial process consists of the following elements or
components:
1. Objectives: The important task of planning is to determine the objectives of the
enterprise. Objectives are the goals towards which all managerial activities are
aimed at. All planning work must spell out in clear terms the objectives to be
realised from the proposed business activities. When planning action is taken,
these objectives are made more concrete and meaningful. For example, if the
organisational objective is profit earning, planning activity will specify how
much profit is to be earned looking into all facilitating and constraining factors.
2. Forecasting:It is the analysis and interpretation of future in relation to the
activities and working of an enterprise. Business forecasting refers to analysing
the statistical data and other economic, political and market information for
the purpose of reducing the risks involved in making business decisions and
long range plans. Forecasting provides a logical basis for anticipating the shape of
the future business transactions and their requirements as to man and material.
3. Policies: Planning also requires laying down of policies for the easy realisation of
the -objectives of business. Policies are statements or principles that guide and
direct different managers at various levels in making decisions. Policies provide
the necessary basis for executive operation. They set forth overall boundaries
within which the decision-makers are expected to operate while making
decisions. Policies act as guidelines for taking administrative decisions.
4. Procedures:The manner in which each work has to be done is indicated by the
procedures laid down. Procedures outline a series of tasks for a specified course
of action. There may be some confusion between policies and procedures.
Policies provide guidelines to thinking and action, but procedures are definite
and specific steps to thinking and action. For example, the policy may be the
 recruitment of personnel from all parts of the country; but procedures may be to
advertise and invite applications, to take interviews and offer appointment to the
selected personnel.
5. Budgets: Budget means an estimate of men, money, materials and equipment in
numerical terms required for implementation of plans and programmes. Thus,
planning and budgeting are inter-linked. Budget indicates the size of the
programme and involves income and outgo, input and output. It also serves as a
very important control device by measuring the performance in relation to the
set goals. There may be several departmental budgets which are again integrated
into the master budget.
6. Strategies:Strategies are the devices formulated and adopted from the
competitive standpoint as well as from the point of view of the employees,
customers, suppliers and government. Strategies thus may be internal and
external. Whether internal or external, the success of the plans demands that it
should be strategy-oriented.
7. Schedules
8. Programmes
Basic Principles of Planning
1. Principle of the Limiting Factor:A plan involves varied factors of different
importance. This principle implies that more emphasis has to be put on that factor
which is scarce or limited in supply or extremely costly. This will help in selecting
the most favourable alternative.
2. Principle of Reflective Thinking: Planning, being an intellectual activity is based
on rational considerations. These involve reflective thinking which signifies
problem-solving thought process—a process by which past experiences are
superimposed on the facts of the present situation and possible future trends. None
can be a planner whose mind is not active, who does not possess any deliberate
power and whose sense of judgement is not strong.
3. Principle of Flexibility: Though a plan is prepared after reflective thinking, this
does not mean that no departure can be made in the course of its operation. The
plan should be so prepared that there is sufficient scope for changing it from time to
time. Changes must necessarily be effected in the plan for taking into account new
developments that may take place in the course of the operation of the plan.
4. Principle of Efficiency:A plan should be made efficient to attain the objectives of
the enterprise at the minimum cost and least effort. It must also achieve better
results with the minimum of unexpected happenings. Therefore, it is to be seen that
what is expected is likely to be achieved.
5. Principle of Selection of Alternatives:Planning is basically a problem of choosing.
The essence of planning is the choice among alternative courses of action. There is
no need for planning if there is only one way for doing something. In choosing from
alternatives, the best alternative will be that which contributes most efficiently and
effectively to the accomplishment of a desired goal.
6. Principle of Timing and Sequence of Operations: Timing and sequence of
operations determine the starting and finishing time for each piece of work
according to some definite schedule and give practical and concrete shape and form
to work performance.
7. Principle of Securing Participation:To secure participation of the employees with
whole-hearted co-operation in execution of the plan, it is necessary that the plan
must be communicated and explained to them for their full understanding. This
understanding provides the basis for additional knowledge about new facts and
matters to the employees. This is needed for improvement in the quality of planning.
It also ensures an obligation of the personnel of the enterprise to execute the plan
by individual and joint participation.
8. Principle of Pervasiveness (widespread): Though major planning function is
entrusted to the top management, it is not restricted to the top level only. It is a
function of every manager at every level in the organisation.
9. Principle of Follow-up:In the course of execution of a plan, certain obstacles
may crop up in midway and planning may require revision, alteration or
correction. This is why there must be a follow-up system in the planning
process itself. This allows timely changes in the planning and makes it more
effective.

Main Limitations of Planning in Any Organization

(1) Planning Creates Rigidity: Although the quality of flexibility is inherent in

planning, meaning thereby that in case of need changes can be brought in, but it must be
admitted that only small changes are possible. Big changes are neither possible nor in the
interest of the organisation.

Since it is not possible to introduce desired changes according to the changed situations,
the organisation loses many chances of earning profits. For this limited flexibility in
planning, both the internal as well as external factors are responsible. These facts are
called internal and external inflexibility.

They are the following:

(i) Internal Inflexibility:At the time of planning the objectives of the organisation, its
policies, procedures, rules, programmes, etc. are determined. It is very difficult to bring
in changes time and again. It is known as internal inflexibility,

(ii) External Inflexibility:External inflexibility means various external factors that cause
limited flexibility in planning.These factors are beyond the control of the planners. The
chief among them are: political climate, economic changes, technical changes, natural
calamities, policies of the competitors, etc.

For example, in political context, as a result of change, a new government brings up a

new trade policy, policy of taxation, import policy, etc. All these changes make every sort
of planning a meaningless waste. Similarly, a change in the policies of the competitors
suddenly makes all types of planning ineffective.

(2) Planning Does Not Work in a Dynamic Environment: Planning is based on the
anticipation of future happenings. Since future is uncertain and dynamic, therefore, the
future anticipations are not always true. Therefore, to consider planning as the basis of
success is like a leap in the dark. Generally, a longer period of planning makes it less
effective. Therefore, it can be said that planning does not work in dynamic environment.

For example, a company anticipated that the government was thinking about allowing the
export of some particular product. With this hope the same company started
manufacturing that product. But the government did not allow the export of this product.
In this way, the wrong anticipation proved all planning wrong or incorrect. It brought loss
instead of profit

(3) Planning Reduces Creativity: Under planning all the activities connected with the
attainment of objectives of the organisation are pre-determined. Consequently, everybody
works as they have been directed to do and as it has been made clear in the plans.
Therefore, it checks their incisiveness. It means that they do not think about appropriate
ways of discovering new alternatives. According to Terry, “Planning strangulates the
initiative of the employees and compels them to work in an inflexible manner.”

(4) Planning Involves Huge Costs:Planning is a small work but its process is really big.
Planning becomes meaningful only after traversing a long path. It takes a lot of time to
cover this path.During this entire period the managers remain busy in collecting a lot of
information and analysing it. In this way, when so many people remain busy in the same
activity, the organisation is bound to face huge costs.

(5) Planning is a Time-consuming Process:Planning is a blessing in facing a definite

situation but because of its long process it cannot face sudden emergencies. Sudden
emergencies can be in the form of some unforeseen problem or some opportunity of
profits and there has been no planning for all these situations beforehand and which now
requires immediate decision.

In such a situation, if the manager thinks of completing the planning process before
taking some decision, it may be possible that the situations may worsen or the chance of
earning profit may slip away. Thus, planning is time consuming and it delays action.

(6) Planning Does Not Guarantee Success:Sometimes the managers think that planning
solves all their problems. Such thinking makes them neglect their real work and the
adverse effect of such an attitude has to be faced by the organisation.In this way,
planning offers the managers a false sense of security and makes them careless. Hence,
we can say that mere planning does not ensure success; rather efforts have to be made for
it.
MANAGEMENT BY OBJECTIVES

Management by objectives is a planning and controlling system, in which the superior

and subordinates work together in order to define business objectives and establish
targets that are to be achieved by the subordinates, and also determine each individuals
key area of responsibility as regards the results expected. Further, these measures are
considered as yardstick to run the unit and also assess the contribution of each individual.

Management by objectives. Management by objectives (MBO), also known as

management by results (MBR), Management by Planning(MBP), Goal Mangement
was first popularized by Peter Drucker in his 1954 book The Practice
of Management.

Assumption of Management by Objectives

MBO relies on the premise that people tend to perform better when they are known about
what is expected from them and when they can associate their personal goals with that of
the objectives of the organization. In addition to this, it also proposes that people have
interest in establishing goals and comparing the performance against the set target.

6 Stages of MBO

1. Define Organizational Goals: Goals are critical issues to organizational

effectiveness, and they serve a number of purposes. Organizations can also have
several different kinds of goals, all of which must be appropriately managed. And
a number of different kinds of managers must be involved in setting goals. The
goals set by the superiors are preliminary, based on an analysis and judgment as to
what can and what should be accomplished by the organization within a certain
period.
2. Define Employees Objectives: After making sure that employees’ managers have
informed of pertinent general objectives, strategies and planning premises, the
manager can then proceed to work with employees in setting their objectives. The
manager asks what goals the employees believe they can accomplish in what time
period, and with what resources. They will then discuss some preliminary thoughts
about what goals seem feasible for the company or department.
 3. Continuous Monitoring Performance and Progress: MBO process is not only
essential for making line managers in business organizations more effective but
also equally important for monitoring the performance and progress of employees.
4. Performance Evaluation: Under this MBO process performance review are made
by the participation of the concerned managers.
5. Providing Feedback: The final ingredient in an MBO program is continuous
feedback on performance and goals that allow individuals to monitor and correct
their own actions. This continuous feedback is supplemented by periodic formal
appraisal meetings which superiors and subordinates can review progress toward
goals, which lead to further feedback.

Need for Management by Objectives (MBO)

 The Management by Objectives process helps the employees to understand their

duties at the workplace.
 KRAs are designed for each employee as per their interest, specialization and
educational qualification. (Key Responsibility Area)
 The employees are clear as to what is expected out of them.
 Management by Objectives process leads to satisfied employees. It avoids job
mismatch and unnecessary confusions later on.
 Employees in their own way contribute to the achievement of the goals and
objectives of the organization. Every employee has his own role at the workplace.
Each one feels indispensable for the organization and eventually develops a
feeling of loyalty towards the organization. They tend to stick to the organization
for a longer span of time and contribute effectively. They enjoy at the workplace
and do not treat work as a burden.
 Management by Objectives ensures effective communication amongst the
employees. It leads to a positive ambience at the workplace.
 Management by Objectives leads to well defined hierarchies at the workplace. It
ensures transparency at all levels. A supervisor of any organization would never
directly interact with the Managing Director in case of queries. He would first
meet his reporting boss who would then pass on the message to his senior and so
on. Every one is clear about his position in the organization.
 The MBO Process leads to highly motivated and committed employees.
 The MBO Process sets a benchmark for every employee. The superiors set targets
for each of the team members. Each employee is given a list of specific tasks.

ADVANTAGES OF MBO
1 .Result Oriented Process: Since Management by objectives (MBO) is a result-oriented
process and focuses on setting and controlling goals, it encourages managers to do
detailed planning.
2. No ambiguity: Both the manager and the subordinates know what is expected of
them and hence there is no role ambiguity or confusion.
3. Helps in establishing measurable targets: The managers are required to establish
measurable targets and standards of performance and priorities for these targets. In
addition, the responsibilities and authority of the personnel is clearly established.
4. Makes employees aware about company goals: It makes individuals more aware of
the company goals. Most often the subordinates are concerned with their own objectives
and the environment surrounding them. But with MBO, the subordinates feel proud of
being involved in the organizational goals. This improves their morale and commitment.
5. Highlights area of improvement: Management by objectives (MBO) often highlights
the area in which the employees need further training, leading to career development.
6. Creates system of periodic evaluation: It lets the subordinates know how well they
are doing. Since MBO puts strong emphasis on quantifiable objectives, the
measurement and appraisal can be more objective, specific and equitable.

Disadvantages of Management by Objectives

1. Less success guarantee: MBO can only succeed if it has the complete support of the
top management.
2. Goals set may be unrealistic: Management by Objectives (MBO) may be resented by
subordinates. They may be under pressure to get along with the management when
setting goals and objectives and these goals may be set unrealistically high. This may
lower their morale and they may become suspicious about the philosophy behind MBO.
They may seriously believe that MBO is just another of the management’s ploys to make
the subordinates work harder and become more dedicated and involved. The emphasis in
the MBO system is on quantifying the goals and objectives. It does not leave any ground
for subjective goals. Some areas are difficult to quantify and even more difficult to
evaluate.

3. More paperwork and consumption of time: There is considerable paperwork

involved and it takes too much of the manager’s time. Too many meetings and too many
reports add to the manager’s responsibility and burden. Some managers may resist the
program because of this increased paperwork.
4. Harmful when lacking in expertise: Most managers may not be sufficiently skilled in
interpersonal interaction such as coaching and counseling, which is extensively required.
5. Group goal achievement is difficult: When the goals of one department depend on
the goals of another department, cohesion is more difficult to obtain. For example, the
production department cannot produce a set quota if it is not sufficiently supplied with
raw materials and personnel.
Suggestions for Improving the Effectiveness of MBO
1. It is important to secure top management support and commitment. Without this
commitment, MBO can never really be a success. The top managers and their
subordinates should all consider themselves as players of the same team. This
means that the superiors must be willing to relinquish and shore the necessary
authority with subordinates.
2. The objectives should be clearly formulated, should be realistic and achievable.
For example, it is not realistic for the R&D department of on organization to set a
goal of, say, 10 inventions per year. These goals should be set with the
participation of the subordinates. They must be properly communicated, clearly
understood and accepted by all. MBO works best when goals are accepted.
3. MBO should be on overall philosophy of management and the entire
organization, rather than simply a divisional process or a performance appraisal
technique. MBO is a major undertaking and should replace old systems rather
than just being added to it. Felix M.Lopex has observed, when an organization is
managed by objectives, it becomes performance oriented. It grows and it
develops and it becomes socially useful.
4. The goals must be continuously reviewed and modified, as the changed conditions
require. The review technique should be such that any deviations are caught early
and corrected.
5. All personnel involved should be given formal training in understanding the
basics as well as the contents of the programme. Such education should include
as to how to set goals, the methods to achieve these goals, methods of reviews
and evaluation of performance and provisions to include any feedback that may
be given.
6. Management by Objectives (MBO) system is a major undertaking based upon
sound organizational and psychological principles. Hence it should be totally
accepted as a style of managing and should be totally synthesized with the
organizational climate. All personnel involved must have a clear understanding of
their role authority and their expectations. The system should be absorbed
totally by all members of the organization.

STRATEGY

Strategy is an action that managers take to attain one or more of the organization’s goals.
Strategy can also be defined as “A general direction set for the company and its various
components to achieve a desired state in the future. Strategy results from the detailed
strategic planning process”.

A strategy is all about integrating organizational activities and utilizing and allocating the
scarce resources within the organizational environment so as to meet the present
objectives. While planning a strategy it is essential to consider that decisions are not
taken in a vacuum and that any act taken by a firm is likely to be met by a reaction from
those affected, competitors, customers, employees or suppliers.

Features of Strategy

1. Strategy is a dynamic concept as it is designed to meet the demands of a particular

situation. Every situation requires a different strategy. Strategies may have to be revised
frequently because of changes in the situation.

2. Strategies are a complex plan encompassing other plans in order to achieve

organisational objectives.

3. Strategy is forward looking: It has to do orientation towards the future. Strategic action
is required in a new situation, nothing new requiring solutions can exist in the past so
strategy is relevant only to future. It may take advantages of the past analysis.

4. Strategy provides the direction in which human and physical resources will be
allocated and deployed for achieving organisational goals in the face of environmental
pressure and constraints.

5. Strategy is the right combination of factors both external and internal. In relating an
organisation to its environment, management must also consider the internal factors too,
particularly in terms of its strengths and weakness, that is, what it can do and what it
cannot do.

6. Strategy may involve even contradictory action. Since, strategic action depends on
environmental variables, a manager may take an action today and may revise or reverse
his steps tomorrow depending on the situation.

Types of Strategy

1. Stability Strategy: It refers to a strategy by a company where the company stops the
expenditure on expansion, in other words it refers to the situation where the company do
not venture into new markets or introduce new products.
Stability strategy implies, “to leave the well enough along”. If the environment is stable
and the organisation is doing well, then it is better to make no changes. This strategy is
exercised most often and is less risky as a course of action.

2. Growth Strategy: Growth means expansion of the operations of the company and
addition of new areas of operations. Growth strategy can be very risky and involves
forecasting and analysis of many factors that affect expansion like resource availability
and market availability. However, growth is necessary due to volatility of business and
industries. For the success of an organisation, growth must be properly planned and
controlled.

3. Retrenchment Strategy: Retrenchment primarily means reduction in product,

services and personnel. This strategy is many times useful in the face of tough
competition, scarcity of resources and re-organisation of the company to reduce waste.
Retrenchment strategy, though reflecting failure of the company to some degree becomes
highly necessary for the very survival of the company.

4. Combination Strategy: Combination strategy means using a combination of other

strategies and is primarily used by large complex organisations who may want to cut back
in some areas and expand in others. Also, in time of financial difficulties, a company may
employ retrenchment strategy and resort to growth strategy, if the economic situation
improves.

Implementation of Strategies

Implementation of strategy is the process through which a chosen strategy is put into
action. It involves the design and management of systems, it achieve the best integration
of people, structure, processes and resources in achieving organisational objectives.

Important factors in strategy implementation are given below:

1. Setting Proper Organisational Climate:It is important in making strategy to

work. Organisational climate refers to the characteristics of internal environment,
which conditions the corporation, the development of the individuals, the extent of
commitment and dedication of people in the organisation and the efficiency with
which the purpose is translated into results.
2. Developing Appropriate Operating Plans: Operating plans means action plans,
operational programmes and decisions. If they are made to reflect desired of
organisational objectives by focusing attention on those factors, which are critical
to the success of the organisation as spelled out during the strategy formulation
process.
 3. Developing Appropriate Organisation Structure: Organisation structure is the
pattern in which parts of the organisation are interrelated or interconnected. It
prescribes relationships among various positions and activities. The organisation
structure should be designed according to the needs of the strategy for the
implementing strategy.
4. Periodic Review of Strategy: There should be periodic review of strategy to find
out whether the given strategy is relevant. This is required because even the
carefully developed strategies might cease to be suitable if events change,
knowledge becomes clearer, or it appears that the environment will not be as
originally thought.

Meaning of Policies:

The term “Policy” is defined by koontz and O ‘Donnel as “policies are general
statements or understandings which guide managers thinking in decision
making”. They ensure that decisions fall within certain boundaries. They usually don’t
require action but are intended to guide managers in their commitment to the decision
they ultimately make.

George R.Terry defined “policy is a verbal written or implied overall guide setting up
boundaries that supply the general limits and direction in which managerial action will
take place”.

From the above definitions the following general characteristics can be identified:
(i) It is a guide to thinking in decision making and action.
(ii) Lays down course of action.
(iii) Lays down the limits within which decisions are made.
(iv) Framed at all levels of management.
(v) Does not become valid for all times. Periodically it is necessary to review and
modifications are made.

Type of Policies
A. On the Basis of Source:
1. Originated Policy:
By originated policy they refer to policy which originates from the top management
itself. These policies are aimed at guiding the managers and their subordinates in their
operations. They flow basically from the organisation’s objectives as defined by top
management. From the broad policy at the top, other derived policies may be developed
at subsequent levels depending upon the extent of decentralization. However all such
policies, whether originated by top management or subordinate managers, are described
as “originated policy”.

2. Appealed Policy:
Appealed policies are formulated at the higher managerial level in response to appeals
made by lower managerial levels. These policies may also exist in the form of precedents
and serve as guides for decisions in future.

3. Implied Policy:
Implied policies are those evolved by themselves when a series of decisions are made by
managers over a period of time. These policies exist in an unwritten form. They are not
consciously formulated but emerge from recurring managerial decisions
4. Externally Imposed Policy:
Policies may be imposed externally that is from outside the organisation on such as by
Government control or regulation, trade associations and trade union etc.

B. On the Basis of different Levels:

1. Basic Policies:
Policies which are followed by top management level are called as basic policies. For
example, the branches will be opened in different place where the sales exceed Rs. Five
Lakhs.

2. General Policies:
These policies affect the middle level management and more specific than basic policies.
Example: Payment will be provided for overtime work only if it is allowed by the
management.

3. Department Policies:
These policies are highly specific and applicable to the lower levels of management.
Example: Tea will be provided free for workers in night shifts.

C. On the Basis of Dissemination:

Policies can be classified into two types on the basis of dissemination:.
1. Explicit Policies-Written statements:
Policies which are in writing or included in the manual or records are called explicit
policies. In case of written statements adequate media should be used.
The following are some of the written media:
(a) Bulletins or notice boards.

(b) News releases.

(c) Company manuals or handbooks.

2. Implicit Policies- Oral dissemination:

Implicit policies are disseminated merely by word of mouth through the key people in an
organisation. Policies which are not in writing or not included in the manuals or records
but which are well understood and practised are called implicit policies.

E. On the Basis of Functions:

1. Marketing Policies:
Basically marketing policies relate to each of the “four Ps in marketing” namely.

(a) Product,
(b) Pricing,
(c) Promotion, and
(d) Physical distribution.
(a) Product Policies:
In connection with product policies for example a policy decision might have to be taken
as to whether to make or buy the product. Policy decisions might have to be laid down
with regard to the nature and extent of diversification, for example whether
diversification in the future will always be in terms of related products or whether new
product ideas can be considered in connection with unrelated products.

(b) Pricing Policies:

Policy decisions have to be taken in the area of pricing. The market segment or segments
aimed at determination of price range. The policy decisions on pricing are also affected
by the type of trade channels and the discounts that might have to be offered.

(c) Promotion Policies:

The promotional policy is also tied in with the pricing policies. The policy to concentrate
on certain advertising media would be dictated in terms of product policies and the
customer segment involved. Policy decisions would also help in arriving at the amount to
be spent on promotional activities.
Certain organisations fix a policy of budgeting a certain percentage, say 5% of the rates
for advertising expenditure. Some organisations adhere the policy of certain fixed return
on investment for arriving at the advertising expenditure to be permitted.
(d) Physical Distribution Policies:
Policy decisions have to be taken in the area of physical distribution of the product which
involves considerations of channels of distribution and logistics. Difficult policy
decisions are involved in arriving at the selection of an appropriate set of distribution
channels for the products of the company. Some organisations prefer to give sole
distribution ships. Some others advocate the policy of direct selling.

2. Production Policies:
Production policy decisions involves with the following:
a) The size of the run,
b) Automation,
c) Production stabilisation,
d) Extent of making or buying component, and
e) Inventory levels.
(a) The Size of the Run Policy:
This depend on the backlog or orders as well as the nature of automation introduced. It
will also depend on the type of the market. The temptation is to increase the size of the
run as much as possible. However, these have to be weighed against the cost of heavier
inventories.

(b) Automation Policy:

The automation involves consideration of technical problems apart from economic
aspects. The policy of increasing automation or mechanisation may be merely with a
view to avoid repetitive and uninteresting work or it may be to reduce costs. Policy
decisions, however, have to be taken in this behalf at the top level.

(c) Production Stabilisation Policy:

It is related to the size of the run and the extent of automation. Production has to be
stabilized through proper timing as market demands cannot be overlooked.

(d) Make or Buy Policy:

It is related to both the marketing policy as well as production policy. Policy decisions
have to be taken as to the extent of the product that has to be manufactured within the
organisation itself and the extent, if any of purchases from outside.

(e) Inventory Levels Policy:

This policy involves with the levels of inventory or stocks. These should be maintained in
the exact extent. Higher inventories increase the costs and reduce the ultimate profits.
3. Financial Policies:
Financial policies related to the following:
(a) Sources of capital
(b) Working capital
(c) Profit distribution.

(a) Sources of Capital:

This policy involves the sources of capital, `that is from which ways, an organisation can
accumulate its capital. For example in case of sole trader, he/ she provide the capital form
his/her own money or by loans from individual or bank. In partnership, partners provide
the basic capital. In companies, large capital is possible from large number of
shareholders.

(b) Working Capital Policy:

The difference between the current assets and current liabilities is the working capital.
Since the working capital determines how far the business organisation or business unit
can immediately meet its obligations, the policy decision will have to take in the area of
working capital. These policies are also concerned with the extent of bank borrowings
permissible and allowances of credit facilities that should be extended to the customers.

(c) Profit Distribution Policy:

It involves with regard to how much profits should be distributed by way of dividends to
the shareholders and how much should be kept back for future capital requirements.
Some companies follow a policy of dividend equalization by setting aside profits in good
years to be used for payment of dividend in lean years.
4. Personnel Policies:
This policy decisions have to be taken in connection with personnel administration.

These relate to the following.

(a) Personnel selection.
(b) Training and promotion.
(c) Remuneration and benefits.
(d) Industrial relations.
(a) Personnel Selection Policy:
It involves with the source of recruitment e.g., policy decisions may be taken with regard
to the minimum educational or experience requirements.

(b) Training and Promotion Policy:

Policy decisions have to be taken with regard to manpower planning and filling up higher
vacancies by promotion from within. A policy of promotion from within presupposes the
existence of adequate training policies to develop persons for each higher positions.

(c) Remuneration and Benefit Policy:

These policies regard with the remuneration and other benefits of employees. Other
benefits include sick leave, vacations, canteen facilities and working conditions. In case
of sales force, some organisations prefer to rely merely on salaries, but some other
companies wish to build in a commission component to provide the necessary incentive.

(d) Industrial Relations Policies:

Proper policy decisions must be taken in connection with dealing with labour disputes
and avoiding them in the future.

MANAGERIAL DECISION MAKING

Trewatha& Newport defines decision making process as follows:, “Decision-making

involves the selection of a course of action from among two or more possible
alternatives in order to arrive at a solution for a given problem”

TYPES OF MANAGERIAL DECISION MAKING

1. Programmed and non-programmed decisions:

Programmed decisions are concerned with the problems of repetitive nature or routine
type matters. A standard procedure is followed for tackling such problems. These
decisions are taken generally by lower level managers. Decisions of this type may pertain
to e.g. purchase of raw material, granting leave to an employee and supply of goods and
implements to the employees, etc.

Non-programmed decisions relate to difficult situations for which there is no easy

solution. These matters are very important for the organisation. For example, opening of
a new branch of the organisation or a large number of employees absenting from the
organisation or introducing new product in the market, etc., are the decisions which are
normally taken at the higher level.

2. Routine and strategic decisions:

Routine decisions are related to the general functioning of the organisation. They do not
require much evaluation and analysis and can be taken quickly. Ample powers are
delegated to lower ranks to take these decisions within the broad policy structure of the
organisation.

Strategic decisions are important which affect objectives, organisational goals and other
important policy matters. These decisions usually involve huge investments or funds.
These are non-repetitive in nature and are taken after careful analysis and evaluation of
many alternatives. These decisions are taken at the higher level of management.

3. Tactical (Policy) and operational decisions:

Decisions pertaining to various policy matters of the organisation are policy decisions.
These are taken by the top management and have long term impact on the functioning of
the concern. For example, decisions regarding location of plant, volume of production
and channels of distribution (Tactical) policies, etc. are policy decisions. Operating
decisions relate to day-to-day functioning or operations of business. Middle and lower
level managers take these decisions.
An example may be taken to distinguish these decisions. Decisions concerning payment
of bonus to employees are a policy decision. On the other hand if bonus is to be given to
the employees, calculation of bonus in respect of each employee is an operating decision.

4. Organisational and personal decisions:

When an individual takes decision as an executive in the official capacity, it is known as
organisational decision. If decision is taken by the executive in the personal capacity
(thereby affecting his personal life), it is known as personal decision.

Sometimes these decisions may affect functioning of the organisation also. For example,
if an executive leaves the organisation, it may affect the organisation. The authority of
taking organizational decisions may be delegated, whereas personal decisions cannot be
delegated.

5. Major and minor decisions:

Another classification of decisions is major and minor. Decision pertaining to purchase of
new factory premises is a major decision. Major decisions are taken by top management.
Purchase of office stationery is a minor decision which can be taken by office
superintendent.

6. Individual and group decisions:

When the decision is taken by a single individual, it is known as individual decision.
Usually routine type decisions are taken by individuals within the broad policy
framework of the organisation.

Group decisions are taken by group of individuals constituted in the form of a standing
committee. Generally very important and pertinent matters for the organisation are
referred to this committee. The main aim in taking group decisions is the involvement of
maximum number of individuals in the process of decision- making.
Phases of Decision Making Process

Phase 1 - Identification
This is the first phase in the decision making process. It involves identification and the
clear definition and formulation of the problem. In this phase a written problem statement
is prepared, which specifies the nature and magnitude of the problem. It is necessary to
determine how important and urgent the problem is not well defined, the decision instead
of solving the problem may complicate it. This phase requires the manager to use his
imagination, experience and judgment in order to identify the real nature of the problem.

Phase 2 - Analysis
The second phase of the decision making process involves determining the causes and
scope. The problem should be classified to determine the futurity, periodicity and impact
of the decision required as well as limiting or strategic factor relevant to the decision. The
most important part in this phase is to find out the real cause or source of the problem.
Analyzing the real problem implies knowing the cause of gap between what is and what
should be and understanding the problem in relation to the objectives of organization. In
some cases all the required information might not be available. In such a case, the
manager has to judge the risk involved in the decision.

Phase 3 - Search
After defining and analyzing the problem, the next phase of the decision making
process involves the search for the several possible alternatives. A problem can be solved
in several ways all of which are not equally good. A wide range of alternative should be
prepared this also increase the manager’s freedom of choice. This is done in order to
ensure effective decision making but it is advisable for the manager to limit his
discovery of those alternative which are strategic or critical to the problem.

Phase 4 - Selection
The forth phase of the decision making process deals with comparing and scrutinizing
the various developed alternative to identify the pros and cons of each. Also this phase
requires certain criteria like feasibility, cost, organizational goals, risk, timing, economy
of effort, limitation of sources etc.
Phase 5 – Implementing & verifying
The last phase is the most critical part of the decision making process. A wrong choice
would negate all effort made in the previous steps. The judgment may be influenced by
the intuition and personal value system of the decision maker. The selected solution must
be acceptable to those who must implement it and who are affected by it.

Techniques of Decision Making

1. Experience or Judgement: In this technique manager makes decision on the basis of

his knowledge and experience gained through working in a particular position over the
years.

2. Intuition: Intuition or hunch is the knowledge based on instant inner feeling or

spiritual perception rather than reasoning. It is based on faith.

1. Marginal Analysis: This technique is used in decision-making to figure out how

much extra output will result if one more variable (e.g. raw material, machine, and
worker) is added.

2. Financial Analysis: This decision-making tool is used to estimate the profitability

of an investment, to calculate the payback period and to analyze cash inflows and
cash outflows. Pay-back analysis, inflow-outflow analysis, ratio analysis are some
of the financial techniques of decision making. These techniques serve as useful
methods of analysis and evaluation of alternatives and help in choosing one
appropriate alternative.

3. Break-even Analysis: This tool enables a decision-maker to evaluate the available

alternatives based on price, fixed cost and variable cost per unit. Break-even
analysis is a measure by which the level of sales necessary to cover all fixed costs
can be determined.

4. Ratio Analysis: The purpose of conducting a ratio analysis is to interpret financial

statements to determine the strengths and weaknesses of a firm, as well as its
historical performance and current financial condition.
5. Linear Programming: Linear programming is a quantitative technique used in
decision-making. It involves making an optimum allocation of scarce or limited
resources of an organization to achieve a particular objective. The word ‘linear’
implies that the relationship among different variables is proportionate. The term
‘programming’ implies developing a specific mathematical model to optimize
outputs when the resources are scarce. In order to apply this technique, the
situation must involve two or more activities competing for limited resources and
all relationships in the situation must be linear.

6. Game Theory: This is a systematic and sophisticated technique that enables

competitors to select rational strategies for attainment of goals. Game theory
provides many useful insights into situations involving competition. This decision-
making technique involves selecting the best strategy, taking into consideration
one’s own actions and those of one’s competitors.

The primary aim of game theory is to develop rational criteria for selecting a
strategy. It is based on the assumption that every player (a competitor) in the game
(decision situation) is perfectly rational and seeks to win the game.

In other words, the theory assumes that the opponent will carefully consider what
the decision-maker may do before he selects his own strategy. Minimizing the
maximum loss (minimax) and maximizing the minimum gain (maximin) are the
two concepts used in game theory.

7. Pareto Analysis: Pareto analysis helps in identifying the areas in the business that
will help in raising maximum profits. The basic idea behind Pareto principle is that
80% of the benefits can be achieved by putting 20% of the efforts.

8. Paired Comparison Analysis: Paired comparison analysis helps you work out the
importance of a number of options relative to one another. This makes it easy to
choose the most important problem to solve or to pick the solution that will be
most effective.

9. Forced Field Analysis: This is a technique of weighing all the pros and cons of an
issue I.e., the factors and forces in favour or against a particular decision.

10. Brain Storming: It is a group problem solving method that involves the
spontaneous contribution of creative ideas and solutions. This technique requires
 intensive, freewheeling discussion in which the group is encouraged to think and
suggest as many ideas as possible based on their diverse knowledge.

11. Simulation: Simulation is a technique for studying and analyzing the behavior of
a system under several alternative conditions in an artificial setting. For this
simulation is used to create a model of a real world event., then one or more
variables in the model are manipulated or changed in order to access their impact
on the system. On the basis of the result of the assessment, managers can decide
the need for change in the real system.

RATIONAL DECISION MAKING

The rational model of decision making assumes that people will make choices that
maximize benefits and minimize any costs. The idea of rational choice is easy to see in
economic theory. For example, most people want to get the most useful products at the
lowest price; because of this, they will judge the benefits of a certain object (for example,
how useful is it or how attractive is it) compared to those of similar objects. They will
then compare prices (or costs). In general, people will choose the object that provides the
greatest reward at the lowest cost.

The rational model also assumes:

 An individual has full and perfect information on which to base a choice.

 Measurable criteria exist for which data can be collected and analyzed.
 An individual has the cognitive ability, time, and resources to evaluate each
alternative against the others.

The rational-decision-making model does not consider factors that cannot be quantified,
such as ethical concerns or the value of altruism. It leaves out consideration of personal
feelings, loyalties, or sense of obligation. Its objectivity creates a bias toward the
preference for facts, data and analysis over intuition or desires.