Management Planning Function

PLANNING FUNCTION
Planning is the primary management function. The planning function focuses on answering two questions: -What is to be accomplished? -How should it be accomplished? Planning can occur at all levels in an organization There are several benefits of doing planning

The Importance & Benefits of Planning

There are four specific benefits of planning:
Coordinating effort: An effective plan specifies objectives both for the total organization and for each d department t t in i that th t organization. i ti Preparing for change: An effective plan of action allows room for change and should develop a series of contingencies. Developing performance standards: The objectives and course of action assigned for each department in the organization constitutes a standard. These standards can then be used to assist the manager's manager s performance in that department. Developing managers: The act of planning sharpens managers' ability to think as they consider abstract ideas and possibilities for the future.

Types of Plans
Strategic Plans: Long-Term Plans that positions an organization g in terms of its environment Operational Plans: plans that specify details on how overall objectives are to be achieved. Short-term Plans: plans that cover less than one year Long-term Plans: Plans that extend beyond five years Specific Plans: Plans that are clearly defined and leave no room for interpretation. (Contingency Plans) Directional Plans: Flexible plans that set out general guidelines.

The Planning Function

The Planning Process SWOT Forecast Budgets

Objectives

Actions

Resources

Implementation

Performance Outcomes

THE FOCUS & ELEMENTS OF PLANNING

The planning starts by scanning the internal and external environment of organization and analyzing its strengths, weaknesses, opportunities and threats. A process that involves organizational analysis to understand its Strengths, Weaknesses, eaknesses Opportunities and Threats is called SWOT analysis.

SWOT Analysis (Environmental Scanning)

Weaknesses Strengths
Qualified Technical Staff Good Financial Position Good Product Line Excellent Reputation Dependable Suppliers

Internal Environment

Low staff morale No Marketing Plan Inadequate Product Service Limited Financial Resources

External Environment Opportunities

Investment in New Product Availability of New Market Investment in New Technology New Favourable Regulations

Threats

Change in Economic conditions Change in customer preferences Change in Regulation Change in International Laws

THE FOCUS & ELEMENTS OF PLANNING

After scanning the environment and doing SWOT analysis y the next step p is to make realistic sales forecast. Sales forecast sets the dimension on future availability of resources and achievable objectives. The planning function then requires managers to make decisions about four elements of plans: - Objectives that specify future conditions to be achieved. - Actions A ti are the th means to t achieve hi th the objectives. bj ti - Resources are constraints on the course of action. - Implementation involves the steps to carry out the plan. The elements of planning are interrelated.

Forecasting Models
Forecasting Techniques Qualitative Models Delphi Methods Jury of Executive Opinion Sales Force Composite Consumer Market Survey Time Series Methods Moving Average Exponential Smoothing Trend Projections Causal Methods Regression Analysis Multiple Regression

Forecasting Sales Volume

-

The following Qualitative methods used to forecast sales volume: Delphi Method an iterative group process where (possibly geographically dispersed) respondents provide input to decision makers Jury of Executive Opinion collects opinions of a small group of high-level managers which results in a group estimate of demand Sales Force Composite individual salespersons estimate ti t the th sales l in i th their i region i and d th the d data t i is compiled at a district or national level Consumer Market Survey input is solicited from customers or potential customers regarding their purchasing plans

Forecasting Sales Volume

- The following Quantitative methods used

to forecast sales volume are:

Moving g Average g Forecasts ( (Time-series analysis) - Simple Moving Average - Weighted Moving Average - Exponential Smoothing - Trend Projection Econometric Models: (Causal Method) - Simple Regression Analysis - Multiple Regression Analysis

Decomposition of Time Series

Time series can be decomposed into:
Trend (T): gradual up or down movement over time (S) pattern of fluctuations above Seasonality (S): or below trend line that occurs every year Cycles(C) Cycles(C): patterns in data that occur every several years (R) blipsin the data Random variations (R): caused by chance and unusual situations

Decomposition of a Time-Series
Dema and for Product or Service e Trend Component Seasonal Peaks Actual Demand Line Average Demand over 4 Years

Year 1

Year 2

Time

Year 3

Year 4

Moving Averages
Simple moving average : (demand in period n )

Calculation of Three-Month Moving Average

Month
January February March April May June July 10 12 13 16 19 23 26 (10 + 12 + 13)/3 = 11 2 (12 + 13 + 16)/3 = 13 2 (13 + 16 + 19)/3 = 16 (16 + 19 + 23)/3 = 19 1 3 3 3

Actual Shed Three-Month Moving Sales Average

Weighted Moving Averages

Weighted moving average = (weight for period n )(demand in period n ) weights

Calculating Weighted Moving Averages

Weights Applied 3 2 1 Period Last month Two months ago Three months ago

3*Sales last month + 2*Sales 2 Sales two months ago + 1*Sales three months ago
6 Sum of weights

Month
January February March April May June July

Calculation of Three-Month Wieighted Moving Average

Actual Shed Sales
10 12 13 16 19 23 26 6 [(3 * 16) + (2 * 13) + (1 * 12)]/6 = 14 1 3 [(3 * 19) + (2 * 16) + (1 * 13)]/6 = 17 [(3 * 23) + (2 * 19) + (1 * 16)]/6 = 20 1 2 [(3 * 13) + (2 * 12) + (1 * 10)]/6 = 12 1

Three-Month Moving Average

Exponential Smoothing
New forecast = previous forecast previous forecast) or: + (previous actual

Ft = Ft 1 + (At 1 Ft 1 ) Ft = new forecast Ftt 1 = previous forecast = smoothing constant At 1 = previous period actual

where

Table

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Simple Regression
General regression equation:
Y = a + bX where ) Y = computed value of the variable to
be predicted (dependent variable) a = Y - axis intercept p XY nXY b= X2 nX2 )

Using Regression Analysis to Forecast

Y Triple A' Sales ($100 000' ) ($100,000's) 2.0 3.0 2.5 2.0 20 2.0 3.5 X Local Payroll ($100 000 000) ($100,000,000) 1 3 4 2 1 7

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Using Regression Analysis to Forecast - continued

Sales, Y Payroll, X X2 XY 20 2.0 1 1 20 2.0 3.0 3 9 9.0 2.5 4 16 10.0 2.0 2 4 4.0 2.0 1 1 2.0 3.5 7 49 24.5 Y = 15.0 X = 18 X2 = 80 XY = 51.5

Using Regression Analysis to Forecast - continued

Calculating the required parameters: X = 18 = 3 X=
6 6 Y = 15 = 2.5 Y= 6 6 XY nXY = 51.5 (6 )(3 )(2.5 ) = 0.25 b= 80 (6 ) 3 2 X 2 nX 2 a = Y bX = 2.5 (0.25 )(3 ) = 1.75 = 1.75 + 0.25 X Y

( )

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Standard Error of the Estimate

T r i p le A 's S a le s ( $ 1 0 0 ,0 0 0 ) 4 3 2 1 0 0 1 2 3 4 5 6 7 8 Area Payroll ($100,000,000)

Multiple Regression
Multiple regression analysis is a practical extension that allows us to build a model with several independent variables. For example, in the previous case if we want to include average interest rates in its models to forecast renovation sales, the proper equation would be:

Y = a + b1X1 + b2X2 For example the following regression equation has been used by an electrical utility for residential electrical load forecasting Dt = 1.136 + 0.872Dt-1 0.341P + 0.021W + 0.115I Where Dt is the demand in period t, P is the price of electricity, W is the temperature humidity index and I is the total per capita income

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The Planning Function

The Planning Process SWOT Forecast Budgets

Objectives

Actions

Resources

Implementation

Performance Outcomes

Important Considerations in Determining Objectives

There are four important considerations in determining both the organization and organizational units' objectives: -Setting priorities for the objectives -Determining the time frame of the objectives -Determining the conflicts among objectives -Determining a methodology to measure the objectives

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Setting Priorities
Priority implies that at a given time, accomplishing one objective is more important than accomplishing others. Priority helps managers in allocating resources. Priorities of objectives are dynamic and they may change according to the environmental constraints.

Time Frame of Objectives

Depending on the duration of the action being planned, objectives can be short-term, intermediate, or long-term

Time Period
Long-term Medium-term Short-term

Organization Level

More than 5 years Upper level (Strategic level) 1 to 5 y years Less than 1 year Middle level (Functional level) Lower level (Operational level)

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Conflicts among Objectives

- There are many interest groups who are p of the firm. concerned with the operations - The differences in the degrees of concern could create problems in determining objectives & priorities.
- short-term profit versus long-term growth - profit margin versus competitive position - low-risk environment versus high-risk environment

- Management must consider the expectations of the diverse groups (customers, suppliers, Govt. agencies) on whom the firm's ultimate success depends.

Measurement of Objectives
Objectives must be understandable and acceptable to those who will help p to achieve them. Objectives must be measurable. Objectives should be established in every area that contributes to overall organizational performance: - Profitability objectives (return on investment) - Marketing objectives (market share, sales volume) - Productivity objectives (ratio of output to input, value added) - Physical & financial objectives (ability to get resources) - Other objectives (not measurable, such as employee attitudes & social responsibility)

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Selected Measures of Objectives

Objectives Profitability Marketing Productivity Physical & Financial Possible Measures -Ratio of profit to sales -Ratio of profit to total assets -Market share -Sales volume -Ratio Ratio of output to labour costs -Ratio of value added to profit -Current ratio -Ratio of debt to equity

The Planning Function

The Planning Process SWOT Forecast Budgets

Objectives

Actions

Resources

Implementation

Performance Outcomes

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Courses of Action
Planned courses of action are called strategies & tactics. Actions are alternatives designed to achieve objectives. Increase productivity from 5 units/hour to 8 units/hour." T i Tactics: - Improve I technology; h l employee l training; i i management training; reward systems; improved working conditions Efficient alternatives should be employed first Courses of action that affects sales include price changes, marketing and sales activities, and new product development External factors also affect sales such as price of competing and substitute product, general economic conditions etc. Managers can test the effects of a course of action by forecasting.

The Planning Function

The Planning Process SWOT Forecast Budgets

Objectives

Actions

Resources

Implementation

Performance Outcomes

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Managing Resources
Resources are used to acquire or produce the products. Resources are available in scarce quantities. Hunches, , market surveys, y , time-series, , and econometric models can be used to forecast resources. Given an adequate supply of resources, the manager's next task is the allocation of these resources. Budgeting is the principal technique used for this purpose. Sales forecasting plays a key role in determining the sales l budget b d t and d th then th the whole h l process of fb budgeting d ti starts. The adequacy and usefulness of budgets depend on the assumptions made about the future.

The Budgeting Process

Managements Objectives Sales budget forecast of quantities sold forecast of dollar income forecast of other income Less Production budget Marketing budget Other budget units to be produced promotional costs administrative cost of materials expense budget selling expenses direct labour costs Miscellaneous by territories factory overhead expense budget Results in financial budget budgeted balance sheet

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A Hypothetical Variable Budget

Output (units) Sales (at RO 5 per unit) Variable cost (at RO 3 per unit Fi d costs Fixed t Total costs Planned profit 1000 5000 3000 1000 4000 1000 1200 6000 3600 1000 4600 1400 1400 7000 4200 1000 5200 1800 1600 8000 4800 1000 5800 2200

Variable budgeting: Takes into consideration that the actual output can deviate from planned output. All supporting budgets should also vary based on the output. Moving budgeting: Is the preparation of a budget for a fixed period (1 year), with periodic updating for fixed intervals (1 month).

The Planning Function

The Planning Process SWOT Forecast Budgets

Objectives

Actions

Resources

Implementation

Performance Outcomes

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Implementing Plans
Plan implementations are generally accomplished through other people in the organization. Authority, persuasion, and policy are the manager's means of implementing plans plans. Authority: is a power that is derived from a position. It is the right to make decisions and to expect compliance with these decisions. Persuasion: is a process of selling a plan to those who must implement this plan. Policy: y is a written statement that outlines the objectives j of the plan and provides guidelines for selecting actions to achieve those objectives. Procedures: is written step-by-step actions to perform a specific tasks or objectives.

Strategic Planning

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What is Strategic Planning?

Strategic planning asks the questions. Where are we now? Where do we want to be? How do we get there? How do we track our progress? How do we measure our success?

What is Strategic Planning?

Strategic Planning is A systematic action-oriented process Based on scanning the internal and external environment A process that provides input to make critical decisions wisely Future-oriented A long-term investment, not a quick fix

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What is Strategic Planning?

In practice, the development of strategic plans involves taking information from the environment and deciding on an organizational vision, mission and on objectives, strategies, and a portfolio plan.

The Strategic Planning Process

Strategic Planning: Involves taking information from the Environment and deciding on an organizational vision, mission, objectives, strategies and Portfolio plan
Environment
Economy Technology Society Politics & Law Resources Customers

The Organizations Strategic Plan

Info

Vision/ Mission

Objectives Strategies

Portfolio Plans

Implementation

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Strategic Planning:
Vision Statement
The vision statement is your articulation of your dream of where you want your business to go in the future. Stated vision provides inspiration to employees and prospective employees. When writing a corporate vision statement, think in terms of writing just one very descriptive and passionate sentence about your company.

Strategic Planning:
Vision Statement Examples
In the 1950's, Boeing had the following vision statement, "Become Become the dominant player in commercial aircraft and bring the world into the jet age." In the 1980s, Microsoft had as their vision, "A personal computer in every home running Microsoft software." Ford: To become the world's leading Consumer Company for automotive products and services. IKEA: The IKEA vision is to create a better everyday life for the many people. We make this possible by offering a wide range of well-designed, functional home furnishing products at process so low that as many people as possible will be able to afford them.

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Strategic Planning:
Mission Statement
A mission statement is a brief description of a company's company s fundamental purpose. purpose It answers the question, What we do and why we do? Mission statements broadly describe an organization's present capabilities, customer focus, and business activities. The difference between a mission statement and a vision statement is that a mission statement focuses on a companys present state while a vision statement focuses on a companys future.

Strategic Planning:
Mission Statement (Examples)
Apple is committed to bringing the best personal computing experience to students, educators, creative professionals and consumers around the world through its innovative hardware, software and Internet offerings. Facebooks mission is to give people the power to share and make the world more open and connected. Googles mission is to organize the worlds information and make it universally accessible and useful useful. Dunkin Donuts Make and serve the freshest, most delicious coffee and donuts quickly and courteously in modern, well-merchandised stores.

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The Strategic Planning Process

Strategic Planning: Involves taking information from the Environment and deciding on an organizational vision, mission, objectives, strategies and Portfolio plan
Environment
Economy Technology Society Politics & Law Resources Customers

The Organizations Strategic Plan

Info

Vision/ Mission

Objectives Strategies

Portfolio Plans

Implementation

Strategic Planning:
Setting up Organizational Objectives
Once a mission is set, This mission should then be defined into a finer set of specific and achievable organizational objectives. objectives The objectives should provide long range specific actions and directions, and they should establish priorities and facilitate management control. Objectives should be set in performance areas such as market, productivity, resources, profitability, management performance, workers performance, social responsibilities, ibili i technology h l and dI Innovations. i .etc. Objective Example: Profitability- To achieve an annual rate of return on investment of at least 15 percent.

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The Strategic Planning Process

Strategic Planning: Involves taking information from the Environment and deciding on an organizational vision, mission, objectives, strategies and Portfolio plan
Environment
Economy Technology Society Politics & Law Resources Customers

The Organizations Strategic Plan

Info

Vision/ Mission

Objectives Strategies

Portfolio Plans

Implementation

Strategic Planning:
Setting up Organizational Strategies
Strategy involves the choice of major directions the organization takes in pursuing its objectives. Corporate (grand) strategies addresses which businesses the organization will be in and how resources will be allocated among businesses. Corporate strategies are specifically tied to mission statements and are recognized in four basic types: growth, stability, defensive, and combination. The product-market matrix tool presents the available strategic choices.

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Strategic Planning:
Corporate Strategies
Growth Strategy: Direct expansion, merger or diversification Stability Strategy: Continue with same pace maintaining market share and return on investment (status quo) Retrenchment (Defensive) Strategy: Reduce its operation. Often used to reverse the negative trend or to overcome crisis or problem Combination Strategy: Used when an organization simultaneously pursue different strategies for different part of the company

Strategic Planning:
Product-Market Matrix
Organization must decide on it's growth direction Product Markets Present Customers Present Products Market Penetration New Products

Product Development Diversification

New Customers Market Development

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The Strategic Planning Process

Strategic Planning: Involves taking information from the Environment and deciding on an organizational vision, mission, objectives, strategies and Portfolio plan
Environment
Economy Technology Society Politics & Law Resources Customers

The Organizations Strategic Plan

Info

Vision/ Mission

Objectives Strategies

Portfolio Plans

Implementation

Strategic Planning:
Setting up Organizational Portfolio Plans
Most organizations at a particular time are a portfolio of businesses , e.g., Appliance
Manufacturer.

In the face of limited resource management must decide which business to build, maintain, or eliminate or which one to add. A good method to do this is by using the business portfolio matrix.

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Strategic Planning: Business Portfolio

Matrix Resource allocation
Identify products, divisions, companies into Strategic Business Units Classify all SBUs in the business portfolio matrix according to market Based on the position allocate resources

Relative Market share Market Growth Rate High Low

High

Low

Star Cash cows

Question Q ti marks Dogs

Strategic Planning: Business Portfolio

Matrix Strategic Choices
Build: For SBU that believes has the potential to be a star. Organization needs to provide adequate financial resources for growth of this SBU. Hold: If an SBU is a very successful cash cow, then the organization should hold the market share to take advantage of the positive cash flow. Harvest: Appropriate for all SBU's except stars. I focus It f on increasing i i short h term cash h return without too much concern for long-term impact. Divest: Getting rid of SBU's with low shares of low- growth markets such as question marks & cash traps/dogs.

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Strategic Planning: Using the Process

Strategic planning provides direction for an organizations mission, objective and strategies, t t i facilitating f ilit ti the th development d l t of f plans for each of the organizations functional area A completed strategic plan guides each area in the direction the organization wishes to go and allow each area to develop objectives, strategies, and programs consistent with those goals

Relationship between Strategic plan and Operational plans

The Strategic plan Vision/Mission Objectives Strategies Portfolio plan Operational Plans Production plan Objectives Forecast Budgets Strategies and programs Marketing Plan Objectives Forecast Budgets Strategies and programs Financial Plan Objectives Forecast Budgets Strategies and programs

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