Planning & Decision Making

Planning: An Overview
• Planning is a particular kind of decision making that addresses
the specific future that managers desire for their organizations.
• Planning is the major activity in the management process. It is a
locomotive that drives a train of organizing, leading and
controlling activities.
• Planning is not a single event, with a clear beginning and end. It
is an ongoing process that reflects and adapts to changes in the
environment surrounding each organization.
• Deciding on actions and responses to others’ actions is the
continual planning challenge for the managers.
• Strategic management is an ongoing practice of establishing a
broad program of organizational goals and the means to
achieve them.
 Planning: An Overview
Goals in an organization are important for four
reasons:
• Goals provide a sense of direction
• Goals focus our efforts
• Goals guide our plans and decisions
• Goals help us evaluate our process
 The Importance of Planning at Organizations
• In organizations, planning is the process of setting goals and
choosing the means to achieve those goals.
• Without a plan;
Managers cannot know how to organize people and resources
effectively.
They may not even have a clear idea of what they need to
organize.
They cannot lead with confidence or expect others to follow them.
Managers and their followers have little chance of achieving their
goals or knowing when and where they stray from their path.
• Too often, faulty plans affect the future of the entire organization.
 The Hierarchy of Organization Plans
Organizations are typically managed according to two types of
plans.
• Strategic plans are designed by high-ranking managers and
define the broad goals for the organization. They deal with
relationships between people at an organization and people
acting at other organizations.
• Operational plans contain details for carrying out, or
implementing, those strategic plans in day-to-day activities.
They deal with people within one organization.
Mission statement is a broad goal based on manager’s
assumptions about the organization’s purpose, competencies,
and place in the world. It is a relatively permanent part of an
organization’s identity and can do much to unify and motivate
members of the organization.
 Strategic & Operational Plan
Strategic and operational plans differ in three major ways:
 Time Horizons
• Strategic plans tend to look ahead several years or even decades.
• For operational plans, a year is often the relevant time period.
 Scope
• Strategic plans affect a wide range of organizational activities,
whereas operational plans have a narrow and more limited scope.
• The number of relationships involved is the key difference here.
Hence it is distinguished as strategic goals and operational objectives.
 Degree of Detail
• Often strategic goals are stated in terms that look simplistic and
generic. But this breadth is necessary to direct people at organizations
to think of the whole of their organization’s operations.
• On the other hand, operational plans, as derivatives of strategic plans,
are stated in relatively finer detail.
The Evolution of the Concept of Strategy
Strategy as the Grand Plan
• The concept of strategy is ancient. The word itself comes from the
Greek strategeia, which means the art or science of being a General.
• Effective Greek generals needed to lead an army, win and hold
territory, protect cities from invasion, wipe out the enemy and so
forth.
• Each kind of objective required a different deployment of resources.
Likewise, an army’s strategy could be defined as the pattern of actual
actions that it took in response to the enemy.
• Effective Generals had to determine the right liens of supply, decide
when to fight and when not to fight, and manage the army’s
relationship with citizens, politicians and diplomats.
• Effective Generals not only had to plan but had to act as well. The
concept of strategy had both a planning component and a decision
making or action component. Taken together these two concepts
form the basis of the ‘grand’ strategy plan.
 The Evolution of the Concept of Strategy
The Rise of Strategic Management
• Since War II, the idea emerged that strategic planning and acting on
those plans constitute a separate management process, the process
called as strategic management.
• In 1962, business historian Alfred D Chandler proposed that
‘strategy’ be defined as: The determination of the basic long term
goals and objective of an enterprise, and the adoption of courses of
action and the allocation of resources necessary or carrying out
these goals.
Chandler stressed three key elements:
• Courses of action for attaining objectives;
• The process of seeking key ideas (rather than routinely
implementing existing policy); and
• How strategy is formulated, not just what that strategy turns out to
be.
The Evolution of the Concept of Strategy
The Strategic Management Approach
 In 1978, Dan Schendel and Charles Hofer created a composite definition of
strategic management. This was based on the principle that the overall
design of an organization can be described only if the attainment of
objectives is added to policy and strategy as key factors in the strategic
management process.
 In their synthesis, Hofer and Schendel focused on four key aspects of
strategic management.
• The first is, Goal Setting.
• The next step is Strategy Formulation based on these goals.
• Then to implement the strategy, there is a shift from analysis to
Administration - the task of achieving predetermined goals. Key factors at
this stage are the organization’s internal “political” processes and
individual reactions, which can force the revision of strategy.
• The final task, Strategic control, gives managers feedback on their
progress. Negative feedback of course, can touch off a new cycle of
strategic planning.
 The Evolution of the Concept of Strategy
The Strategic Management Process
Strategic management provides a disciplined way for
managers to make sense of the environment in which
their organization operates, and then to act. In broad
terms, two phases are involved:
• Strategic planning is the name we customarily give to
the sense making activity. This includes both the goal
setting and the strategy formulation processes.
• Strategy implementation is the name we customarily
give to actions based on that kind of planning. This stage
includes administration and strategic control stages.
 The Evolution of the Concept of Strategy

STRATEGIC MANAGEMENT PROCESS

GOAL SETTING

Strategi
c
Plannin STRATEGY FORMULATION
g

ADMINISTRATION
Strategy
Implementatio
n STRATEGIC CONTROL
 Levels of Strategy
Corporate Level Strategy
• Corporate level strategy is formulated by top
management to oversee the interests and operations of
organizations made up of more than one line of business.
The major questions at this level are these:
• What kinds of business should the company be engaged
in?
• What are the goals and expectations for each business?
• How should resources be allocated to reach these goals?
 Levels of Strategy
Business Unit Strategy
• Business unit strategy (also called line of business strategy) is concerned with
managing the interest and operations of a particular line of business.
It deals with questions such as:
• How will the business compete within its market? What products/services should it
offer?
• Which customers does it seek to serve?
• How will resources be distributed within the business?
• Business unit strategy attempts to determine what approach to its market the
business should take, and how it should conduct itself, given its resources and the
conditions of the market.
• One approach to dealing with this problem is to create strategic business units
(SBUs).
• In this system of organizations various business activities that produce a particular
type of product or service are grouped and treated as a single business unit.
• The corporate level provides a set of guidelines for the SBUs which develop their
own strategies on the business unit level.
• The corporate level then reviews the SBU plans and negotiates changes if necessary.
 Levels of Strategy
Functional Level Strategy
• Functional - level strategies create a framework for
managers in each function - such as marketing or
production to carry out business unit strategies and
corporate strategies.
• This functional - level strategy completes the hierarchy of
strategies. Operational plans follow from functional level
strategies.
 Three levels of
strategy
MULTIBUSINESS
CORPORATION

STRATEGIC STRATEGIC STRATEGIC

BUSINESS BUSINESS BUSINESS
UNIT UNIT UNIT

RESEARCH & PRODUCTIVITY

MARKETING FINANCE
DEVELOPMENT / OPERATIONS

Corporate – level Strategy Business unit Strategy Functional – level Strategy

 Hierarchy of strategic and operational
plans at a Multi – Business Organization

CORPORATE STRATEGY

BUSINESS UNIT STRATEGY

FUNCTIONAL – LEVEL STRATEGY

STRATEGIC CONTROL
 The Content of Corporate Strategy
• Corporate strategy is an idea about how people at an
organization will interact with people at other
organizations overtime.
• It is very important to understand that a corporate
strategy says something of substance that guides people
in their day-to-day work over an extended period of
time.
• Quality is a part of corporate strategy – Linking Total
Quality Management program to a clear strategic goal.
 The Corporate Portfolio Approach
• In this approach, top management evaluates each of the corporation’s various
business units with respect to the marketplace and the corporation’s internal makeup.
• When all the business units have been evaluated, an appropriated strategic role is
developed for each unit with the goal of improving the overall performance of the
organization.
• The corporate portfolio approach is rational and analytical, is guided primarily by
market opportunities, and tends to be initiated and controlled by top management
only.
• One of the best-known examples of the corporate portfolio approach is the portfolio
framework advocated by the Boston consulting Group. This frame work is also known
as the BCG Matrix.
• The BCG approach to analyzing a corporate portfolio of businesses focuses on three
aspects of each particular businesses unit: its sales, the growth of its market, and
whether it absorbs or produces cash in its operations.
• Its goal is to develop a balance among business units that use up cash and those that
supply cash.
 The Corporate Portfolio Approach
THE BCG MATRIX

STAR QUESTION MARK

HIGH Modest Large
+ or – Negative
Cash flow Cash flow
MARKET
GROWTH
RATE
CASH COW DOG
LOW Large Modest
Positive + or –
Cash flow Cash flow

HIGH LOW

RELATIVE MARKET SHARE

 Five Forces Model
• Another well known approach to corporate strategy is Michael Porter’s “five
forces” model.
• In porter’s view, an organization’s ability to compete in a given market is
determined by that organization’s technical and economic resources, as well as
by five environmental “forces”, each of which threatens the organization’s
venture into a new market.
• Porter’s five forces exhibits all relationships between the managers at a given
organization and people acting at other organizations.
These five forces are:
1. Threat of new entrants
2. Bargaining power of buyers (customers)
3. Bargaining power of suppliers
4. Threat of substitute products
5. Rivalry among competitors
 Threat of new
entrants

THE
Bargaining power of INDUSTRY Bargaining power of
suppliers Jockeying for customers
position among
current
competitors

Threat of Substitute
products or services
 Matching Structure and Strategy
• Successful implementation depends in part on how the
organization’s activities are divided, organized and
coordinated – in short, on the structures of the
organization.
• The chances that an organization’s strategy will succeed are
far greater when its structure matches its strategy.
Chandler’s Thesis
• Although, the organizations changed their growth
strategies to suit technological, economic, and
demographic changes; new strategies created
administrative problems and economic inefficiencies.
• Structural changes were needed to solve those problems
and to maximize economic performance. Thus, Chandler
concluded that organizational structure followed and
reflected the growth strategy of the firm.
 Matching Structure and Strategy
• According to Chandler, organizations pass through three stages of development,
moving from a unit structure, to a functional structure, and then to a multidivisional
structure.
• At first, organizations are small. There is usually a single location, a single product, and
a single entrepreneurial decision maker.
• As an organization grows, however, increased volume and additional locations
eventually create new challenges. The organization then becomes a unit firm, with
several field units and an administrative office to handle coordination, specialization,
and standardization among the units.
• The next step is vertical integration. The organization keeps the original product but
broadens its scope and strives for economies of scale by acquiring a supplier of raw
materials and components or a distributor of finished goods.
• However, vertical integration creates new problems in moving goods and materials
through the organization’s various functions. Therefore, the organization evolves into
a functional organization, with finance, marketing, production, and other subdivisions
and formalized budgeting and planning systems.
• In the third stage, an organization expands into different industries and diversifies its
products. This phenomenon poses a significant new challenge: selecting products and
industries in which to invest the organization’s capital. The result is the
multidivisional firm, which operates almost as a collection of smaller businesses.
 The Seven – S Model
The consulting firm of McKinsey & Co proposed the Seven-S
Model for successful strategy implementation. Each of these
factors is equally important and interacts with all other factors.
Any number of circumstances may dictate, which of the factors
will be the driving force in the execution of any particular
strategy.
• Structure
• Strategy
• Systems
• Style
• Staff
• Skills
• Superordinate Goals
 Structure

Strategy
Syatems

Superordinate
Goals

Skills
Style

Staff
 Institutionalizing Strategy
• To institutionalize a business strategy, business leaders must also
develop a system of values, norms, roles and groups that will
support the accomplishment of strategic goals.
• So, strategy is institutionalized if it is connected to the culture, the
quality system, and the other driving forces in the organization.
• Another aspect of organizational life that is also undergoing
increasing institutionalization is an emphasis on ethics
development.
• Both shift organizational attention from detection and control to
coordination and strategic impact.
• The ultimate outcome of this shift in focus is an enhanced quality
of work environment for employees and increased quality of
products and services for customers.
 Institutionalizing Strategy
The Role of the CEO
• Chief Executive Officers (CEOs) spend most of their time
developing and guiding strategy; their personal goals and values
inevitably shape organizational strategy.
• Their role in strategy formulation makes CEOs especially important
to strategy implementation. First, they interpret strategy, acting as
final judges when managers disagree on implementation.
• Second, CEOs enact through their words and actions - the
seriousness of an organization’s commitment to a strategy.
• Third, CEOs motivate, providing intangible incentives beyond pay
or bonuses. By appealing to members’ values, beliefs, and
loyalties, CEOs can mobilize support for a strategy.
 Institutionalizing Strategy
Culture and Strategy
• When an organization’s culture is consistent with its strategy, the
implementation of strategy is eased considerably.
• The concept of “adaptable cultures” is an attempt to build
organizational culture on a foundation of paying attention to key
stakeholders such as employees and customers, thus ensuring that
the culture can change when the organization’s strategy must
change.
• It is impossible to successfully implement a strategy that
contradicts the organization’s culture.
 Operationalizing Strategy
• If strategies set the general goal and course of action for
organizations, operational plans provide the details
needed to incorporate strategic plans into the
organization’s day to day operations.
Operational plans fall into two general classes:
• Single use plans are detailed course of action used once
or only occasionally to solve a problem that does not
occur repeatedly.
• Standing plans, in contrast, are standardized approaches
or set of decisions used by managers to deal with
recurring or organizational activities.
 Single Use Plans
• Program: A single use plan that covers a relatively large
set of organizational activities and specifies major steps,
their order and timing, and the unit responsible for each
step.
• Project: The smaller and separate portions of the
programs; they are limited in scope and contain distinct
directives concerning assignments and time.
• Budgets: Formal quantitative statements of the
resources allocated to specific programs or projects for a
given period.
 Standing Plans
• Policy: Establishes general guidelines for decision
making.
• Procedure: Contains detailed guidelines for handling
organizational actions that occur regularly.
• Rules: Details specific actions to be taken in a given
situation.
 Management By Objectives
• Management by objectives (MBO) goes beyond setting annual
objectives for organizational units to setting performance goals for
individual employees.
• MBO refers to a formal set of procedures that begins with goal
setting and continues through performance review.
• Managers and those they supervise act together to set common
goals.
• Each person’s major areas of responsibility are clearly defined in
terms of measurable expected results or “objectives” used by staff
members in planning their work, and by both staff members and
their managers for monitoring progress.
• Performance appraisals are conducted jointly on a continuous
basis, with provisions for regular periodic reviews.
 Management By Objectives
• The heart of MBO is the objectives, which spell out the individual
action needed to fulfill the unit’s functional strategy and annual
objectives.
• MBO provides a way to integrate and focus the efforts of all
organization members on the goals of higher management and
overall organizational strategy.
• Another key to MBO is its insistence on the active involvement of
managers and staff members at every organizational level.
• Managers at every level help set objectives for those at levels
higher than their own, in the belief that this would give them a
better understanding of the broader strategy of the company and
how their own specific objectives relate to the overall picture.
 Elements of the MBO System

1. Commitment to the program

2. Top level goal setting
3. Individual goals
4. Participation
5. Autonomy in implementation of plans
6. Performance review
 Evaluation of MBO
• This focuses on three key concepts: specific goal setting,
feedback on performance, and participation, to
determine whether the optimism about MBO was
justified.
• Individuals, who are successful in achieving the goals
they have set, tend to aim for increased performance.
• Employees who receive specific and timely feedback
perform better, and those who participate in goal setting
show higher performance levels.
• The very process of participation leads to increased
communication and understanding between managers
and those they supervise.
 Reward Systems
• Rewards and incentives contribute to strategy
implementation by shaping individual and group
behavior.
• Well designed incentive plans are consistent with an
organization’s objectives and structures.
• They motivate employees to direct their performance
toward the organization’s goals.
 Nature of Managerial Decision Making
• Different problems require different types of decision
making.
• Routine or minor matters such as return of merchandise
can be handled by a set procedure, a type of
programmed decision.
• More important decisions, such as the location of a new
retail outlet, require a non-programmed decision, a
specific solution created through a less structured
process of decision making and problem solving.
• Because all decisions involve future events, managers
must also learn to analyze the certainty, risk and
uncertainty associated with alternative courses of
action.
 Nature of Managerial Decision Making
Programmed Decisions
• Programmed decisions are made in accordance with written or unwritten
policies, procedures, or rules that simplify decision making in recurring
situations by limiting or excluding alternatives.
• Programmed decisions are used for dealing with recurring problems,
whether complex or uncomplicated.
• Buying television advertising time is a programmed decision.
Nonprogrammed Decisions
• Non-programmed decisions deal with unusual or exceptional problems.
• If a problem has not come up often enough to be covered by a policy or is
so important that it deserves social treatment it must be handled as a
non-programmed decision.
• Problems such as how to allocate an organization’s resources, what to do
about a failing product line, how community relations should be
improved.
• How to design and market newer, more advanced basketball shoes is an
 Nature of Managerial Decision Making
The continuum of Decision - Making
conditions

Certainty Risk Uncertainty

HIGH LOW

MANAGERIAL CONTROL
 Nature of Managerial Decision Making
• Certainty: Decision making condition in which managers
have accurate, measurable and reliable information
about the outcome of various alternatives under
consideration.
• Risk: Decision making condition in which mangers know
the probability a given alternative will lead to a desired
goal or outcome.
• Uncertainty: Decision making condition in which
managers face unpredictable external conditions or lack
the information needed to establish the probability of
certain events.