Concept of Planning Planning is a rational action mixed with a little of forethought. It is seen everywhere. In a business, planning is the primary of all managerial functions as it involves deciding of future course of action. Thus, planning logically precedes the execution of all managerial functions. Planning is the process of deciding in advance what is to be done, where, how and by whom it is to be done. Thus, it is basically a process of „thinking before doing‟. All these elements speak about the futurity of an action. Koontz and O’Donnell have defined planning in terms of future course of action. They state “that Planning is the selection from among alternatives for future courses of action for the enterprise as a whole and each department within it.“Planning involves defining the organization‟s goals, establishing overall strategyfor achieving goals, and developing a comprehensive set of plans to integrate,coordinate organizational work.”
Planning The process of establishing goals and a suitable course of action for achieving those goals. It requires decision making The necessity of planning arises because of the fact that business organizations have to operate, survive and progress in a highly dynamic economy where change is the rule, changes gives rise to the problems and throw countless challenges
Difference between planning and decision-making Decision-making is the part of the planning process Decision-making involves choosing among the various alternatives. It is the process of identifying problems and opportunities and then resolving them.
FEATURES OF PLANNING Planning is goal-oriented Planning is primary function Planning is all-pervasive Planning is mental exercise Planning is continuous-process Planning involves decision making Planning is forward looking Planning is flexible Planning is an integrated process Planning includes efficiency and effectiveness dimension
Nature of Planning The nature of planning can be highlighted by studying its characteristics. They are as follows(a) Planning is a mental activity. Planning is not a simple process. It is an intellectual exercise and involves thinking and forethought on the part of the manager.(b)Planning is goal-oriented. Every plan specifies the goals to be attained in the future and the steps necessary to reach them. A manager cannot do any planning, unless the goals are known.(c) Planning is forward looking. Planning is in keeping with the adage, “look before you leap”. Thus planning means looking ahead. It is futuristic in nature since it is performed to accomplish some objectives in future.
d) Planning pervades all managerial activity. Planning is the basic function of managers at all levels, although the nature and scope of planning will vary at each level.
Planning is Pervasive•Corporation Level•Strategic Business Unit (SBU)Level•Functional or Department Level•Team or work group level•Individual level
(e) Planning is the primary function. Planning logically precedes the execution of all other managerial functions, since managerial activities in organizing; staffing, directing and controlling are designed to support the attainment of organizational goals. Thus, management is a circular process beginning with planning and returning to planning for revision and adjustment.
(f) Planning is based on facts. Planning is a conscious determination and projection of a course of action for the future. It is based on objectives, facts and considered forecasts. Thus planning is not a guess work. (g) Planning is flexible. Planning is a dynamic process capable of adjustments in accordance with the needs and requirements of the situations. Thus planning has to be flexible and cannot be rigid.(h) Planning is essentially decision making. Planning is a choice activity as the planning process involves finding the alternatives and the selection of the best. Thus decision making is the cardinal part of planning.
Importance of Planning According to G.R. Terry, “Planning is the foundation of most successful actions of all enterprises.” An enterprise can achieve its objectives only through systematic planning on account of the increasing complexities of modern business. The importance and usefulness of planning can be understood with reference to the following benefits.
(a) Minimizes uncertainty: The future is generally uncertain and things are likely to change with the passage of time. Planning helps in minimizing the uncertainties of the future as it anticipates future events. (b) Emphasis on objectives: The first step in planning is to fix the objectives. When the objectives are clearly fixed, the execution of plans will be facilitated towards these objectives. (c) Promotes coordination. Planning helps to promote the coordinated effort on account of pre- determined goals.
(d) Facilitates control. Planning and control are inseparable in the sense that unplanned actions cannot be controlled. Control is nothing but making sure that activities conform to the plans.(e) Improves competitive strength. Planning enables an enterprise to discover new opportunities, which give it a competitive edge.(f) Economical operation. Since planning involves a lot of mental exercise, it helps in proper utilization of resources and elimination of unnecessary activities.This, in turn, leads to economy in operation.
g) Encourages innovation. Planning is basically the deciding function of management. Many new ideas come to the mind of a manager when he is planning. This creates an innovative and foresighted attitude among the managers. (h) Tackling complexities of modern business. With modern business becoming more and more complex, planning helps in getting a clear idea about what is to be done, when it is to be done, where it is to be done and how it is tobe done.
FEATURES OF PLANNING Planning is goal-oriented Planning is primary function Planning is all-pervasive Planning is mental exercise Planning is continuous-process Planning involves decision making Planning is forward looking Planning is flexible Planning is an integrated process Planning includes efficiency and effectiveness dimension
Barriers to effective Planning (a) Influence of external factors: The effectiveness of planning is sometimes limited because of the external social, political, economical and technological factors which are beyond the control of the planners. (b) Non-availability of data: Planning needs reliable facts and figures. Planning loses its value unless reliable information is available. (c) People’s resistance: Resistance to change hinders planning. Planners often feel frustrated in instituting new plans, because of the inability of people to accept them. (d) Time and Cost: Collection of data and revision of plans involves considerable time, effort and money.
(e) Inflexibility: Formal planning efforts can lock an organization into specific goals to be achieved within specific timetables. When these objectives were set, the assumption may have been made that the environment wouldn‟t change during the time period the objectives cover. If that assumption is faulty, managers who follow a plan may have trouble. Rather than remaining flexible and possibly scrapping the plan-managers who continue to do what is required to achieve the original objectives may not be able to cope with the changed environment. Forcing a course of action when the environment is fluid can be a recipe for disaster.
Requirements of a Good Plan An effective and sound plan should have the following features:(a) Clear objective: The purpose of plans and their components is to develop and facilitate the realization of organizational objectives. The statement on objectives should be clear, concise, definite and accurate. It should not be colored by bias resulting from emphasis on personal objectives.(b) Proper understanding: A good plan is one which is well understood by those who have to execute it. It must be based on sound assumptions and sound reasoning.(c) Flexible: The principle of flexibility states that management should be able to change an existing plan because of change in environment without undue extra cost or delay so that activities keep moving towards the established goals. Thus, a good plan should be flexible to accommodate future uncertainties.(d) Stable: The principle of stability states that the basic feature of the plan should not be discarded or modified because of changes in external factors such as population trends, technological developments, or unemployment.(e) Comprehensive: A plan is said to be comprehensive when it covers each and every aspect of business. It should integrate the various administrative plans so that the whole organization operates at peak efficiency.(f) Economical: A plan is said to be good, if it is as economical as possible,depending upon the resources available with the organization.
There are seven essential steps in operating planning process. Managers use this process in carrying out their jobs . Steps in operating planning process: 1- Setting Goals: Establish the targets for the short and long range future. For example: - 25 percent growth over last year sales in present financial year. - To increase market share by 5 percent in next five years. 2- Analyzing and evaluating the environment: Analyze the present position and resources available to achieve objectives. - Where are we now? - What are the limitations in the environment? - What resources do we have? - Are there any external factors that can influence the objectives and there accomplishment?
3- Determining Alternatives: Construct a list of possible courses of action that will lead you to your goal. 4- Evaluating the alternative: Listing and considering the various advantages and disadvantages of each of your possible course of action. 5- Selecting the Best solution: Selecting the course of action that has the most advantages and the fewest serious disadvantages. 6- Implementing the Plan: Determine, who will be involved, what resources will be assigned how the plan will be evaluated, and reporting procedures. 7- Controlling and evaluating the Results: Making certain that the plan is going according to expectations and making necessary adjustments.
TYPES OF PLANS Most organizations of any size offer more than one product or services, as a result they cannot develop a single plan to cover all organizations activities, they must develop plans for multiple levels. For this purpose, there are many types of plans and those different plans are carried out at different levels of an organization.
TYPES OF PLANS1) STRATEGIC PLANS2) TACTICAL PLANS3) OPERATIONAL PLANS4) LONG TERM AND SHORT TERM PLANS5) PROACTIVE PLANS AND REACTIVE PLANS6) FORMAL AND INFORMAL PLANS7) STANDING AND SINGLE-USE PLANS
STRATEGIC PLANS Strategic planning sets the long-term direction of the org in which it wants to proceed in future. It focus on the broad future of the org. Incorporating both external information gathered by analyzing the company‟s competitive environment and the firms internal resources, managers determine the scope of the business to achieve the org long-term objectives. Strategic planning involves the analysis of various environmental factors and the competition. Most strategic plans focus on how to achieve goals three to five years into the future.
CONTD….. It has the potential to impact dramatically, both positively and negatively, on the survival and success of the organization. Typically 3-5 years of horizon Top management is involved in framing the strategic plans.
TACTICAL PLANS Tactical plans translate the strategic plans into specific goals for specific parts of the organizations. They are for shorter time frame and usually focused for 1-2 years Instead of focusing on the entire corporation, tactical plans typically affect a single business within an organization. Although tactical plans should complement the organizations overall strategic plan, they are often somewhat independent of other tactical plans.
Contd…. Tactical plans are concerned with implementation of strategic plans by coordinating the work of different departments in the organization. They try to integrate various org units and ensure the commitment to strategic plans.
OPERATIONAL PLANS Operational plans translate the tactical plans into specific goals and actions for small units of the organization. They typically focus on the short term usually 12 months or less. These plans are least complex than strategic and tactical plans, and rarely have a direct effect on other plans outside of the department or unit for which the plan was developed.
THE ORGANIZATIONAL LEVELS AT WHICH PLANS ARE DEVELOPED1) CORPORATE LEVEL Most corporation of even moderate size have acorporate headquarters. The heads of these groups aretypically part of the group of senior executives at thecorporate headquarters. Executives at the corporatelevel in large firms include both those in theheadquarters and those heading up the large corporategroups such as finance, human resources, marketingetc.
CONTD…. These corporate-level executives primarily focus on the questions such as What industries should we get into? What markets should the firm be in? In which business should the corporation invest money? What resources should be allocated to each business?
BUSINESS LEVELAt this level managers focus on determining how theyare going to compete effectively in market.At this level, managers attempt to address questionssuch as Who are our direct competitors? What are their strengths and weaknesses? What are our strengths and weaknesses? What advantages do we have over competitors?
FUCNTIONAL LEVELSAt this level managers focus on how they can facilitatethe achievement of the competitive plan of thebusiness. These managers are often the heads ofdepartments such as finance, marketing, humanresources or product development.Depending on the business structure this can includemanagers responsible for business within a specificgeographic region or managers responsible for specificretail stores.
Functional managers attempt to address questions such as: What activities does my unit need to perform well in order to meet customer expectations? What information about competitors does my unit need in order to help the business compete effectively?The main focus of functional managers planning activities ison how they can support the business and corporate plans.Functional level managers are responsible for recognizingand ensuring effective and efficient operations.
Interrelationship between plan types and levels Types of plans Organizational levels Strategic plans Corporate level Tactical plans Business level Operational plans Functional plans
PROACTIVE AND REACTIVE PLANS Classification of planning into proactive and reactive is based on the organizations response to environmental dynamics. Proactive planning involves designing suitable courses of action in anticipation of likely changes in the relevant environment. In this approach, org do not wait for the environment to change but take action in advance. In India companies like reliance, Hindustan unilever have adopted this approach for the faster growth.
Contd….. In reactive planning, organizations responses come after the environmental changes have taken place. In such situation the org lose opportunities to those org which adopt proactive approach.
FORMAL AND INFORMAL PLANNING Formal planning is in the form of well-structured process involving different steps. In large organizations they undertake planning in formal way in which they create corporate planning cell placed at sufficiently high level in the organizations. Informal planning is undertaken by the smaller organizations, the planning process is based on managers memory of events, intuitions and gut-feeling, rather than based on systematic evaluation of the environment.
SINGLE AND STANDING USE PLANS Standing plans are put to use again and again over a long period of time. Once established they continue to apply until they are modified or abandoned. Standing plan help managers in dealing with routine matters in a pre-determined and consistent manner. Examples of standing plans are: organizational mission and long term objectives, strategies, policies, procedures and rules.
SINGLE USE PLANS Single use plans are relevant for a specified time and after the lapse of that time, these plans are formulated again for the next period. Single use plans are non-recurring in nature and deal with problems that probably will not be repeated in the same form in future. Generally these plans are derived from the standing plans Examples: projects, budgets, targets. Org set their mission and objectives out of which the strategic actions are determined, in order to put these actions into operations, projects, budgets etc. are prepared for the specific time period.
LONG TERM AND SHORT TERM PLANS Long term planning is of strategic nature and involves long period say 3-5 yrs. The long term plans usually encompass all the functional areas of the business and are affected within the existing and long-term framework of economic, social and technological factors. Short term planning is usually a plan made for one year. These are aimed at sustaining organization in its production and distribution of current products or services to the existing markets. These plans directly affect functional groups( production, marketing, finance)
STRATEGY The term „strategy‟ has been derived from Greek word „strategos‟ which means general. The word strategy means the art of general When the term strategy is used in the military sense, it refers to action taken by opposite party. “ strategy is a course of action through which an organization tries to relate itself with its environment to develop certain advantages which help in achieving its objectives” Strategy relates the firm to its environment particularly the external environment.
VISION The philosophy and vision of an organization are derived from the philosophy and vision of key decision makers. Vision is the long-term goal where the organization wants to see itself. It is a widely descriptive image of what a company wants to be known for Vision represents the imagination of the future events and prepares the organization for the same. Vision of the company helps in defining the mission and the objectives, so it has to be set clearly and has to be focused
MISSION Mission is the organizations purpose or fundamental reason for existence. A mission statement helps the organization to link its activities to the needs of the society and legitimize its existence. Mission statements are customer-oriented ( society) & future-oriented. It depicts the organization‟s business character and does so in ways, that distinguish the organization from other organization.
PlanningTraditional Objective Setting
WHAT ARE OBJECTIVES Objectives are the important ends toward which organizational and individual activities are directed An objective is verifiable (provable) when at the end of the period one can determine whether or not the objective has been achieved Objectives are precise and used to specify the end results which and org wants to achieve. The results can be achieved at the varying time period So the objective can be long term objectives which can be supported by the short term objectives
Objectives form a hierarchyOrganizational Objectives Divisional Objectives Departmental Objectives Individual Objectives
ESTABLISHING OBJECTIVES TRADITIONAL VIEW: In the traditional approach for the objective or goal setting, it is set by the top management, and then the derivate objectives are formulated for the middle and lower levels. MODERN VIEW: Management by objectives
MBOPETER DRUCKER IN 1954, Peter Drucker had provided more sophisticated approach to goal setting in organizations known as “management by objectives”
Management by objectives (MBO) is a systematic and organized approach that allows management to focus on achievable goals and to attain the best possible results from available resources. It aims to increase organizational performance by aligning goals and subordinate objectives throughout the organization. Ideally, employees together with managers get strong input to identify their objectives, and time lines for completion, etc. MBO includes ongoing tracking and feedback in the process to reach objectives.
Core Concepts OF MBO According to Drucker, managers should "avoid the activity trap", getting so involved in their day to day activities that they forget their main purpose or objective. Instead of just a few top-managers, all managers should: participate in the strategic planning process, in order to improve the implementability of the plan, and Implement a range of performance systems, designed to help the organization stay on the right track.
Steps in MBO Program 1. The organization‟s overall goals and strategies are formulated my managers of all level. 2. Major goals are allotted among divisional & department units. 3. Specific objectives are collaboratively set by managers and employees. 4. The action plans, defining how objectives are to be achieved and specified and agreed upon by managers and employees. 5. Implementation. 6. Periodical review and feedbacks are provided. 7. Evaluation of performance. 8. Rewards and Recognition.
Managerial Focus • MBO managers should focus on results not on the activities. • They should delegate the task by “negotiating a contract of goals” with their subordinates without dictating a detail roadmap for implementation. • MBO is about setting objectives and then breaking down into more specific goals or key results. Main Principle • Everyone must have clear understanding of the aims or objectives. • Everyone should be clear about their own roles and responsibilities and achieving those aims. • Employees must be empowered to take actions in their own way.
Where to Use MBO The MBO style is appropriate for knowledge-based enterprises when your staff is competent. It is appropriate in situations where you wish to build employees„ management and self-leadership skills and tap their creativity, tacit knowledge and initiative. Management by Objectives (MBO) is also used by chief executives of multinational corporations (MNCs) for their country managers abroad.
BENEFITS OF MBO Clear goals Role clarity Periodic feedback of performance Participation Personnel satisfaction Better morale Result-oriented philosophy Basis for organizational change Feedback and appraisals
Limitations of MBO Initial time and cost Frustration Problems in quantifying the objectives and setting the objectives
STRATEGY The term „strategy‟ has been derived from Greek word „strategos‟ which means general. The word strategy means the art of general “ strategy is a course of action through which an organization tries to relate itself with its environment to develop certain advantages which help in achieving its objectives” Strategy relates the firm to its environment particularly the external environment.
strategy Strategy includes the internal factors as well as the external factors of the organization. The major difference between strategy and tactic is that strategy determines what major plans are to be undertaken and allocates resources to them, while tactics, in contrast, is means by which previously determined plans are executed.
STRATEGIC MANAGEMENT Looking at the importance of strategies in organizational effectiveness, a new branch of management known as strategic management has been developed. Strategic management deals with strategy formulation and implementation. It is the management process that involves an organizations engaging in strategic planning and then acting on those plans.
The systems approach of management suggests interaction of an org with its environment on continuous basis. This interaction can be better maintained through formulation of suitable strategies. Careful strategies plays significant role in the success of an organization. E.g. reliance, ITC Ltd, Hindustan Unilever, P&G are successful because they have maintained their suitable strategies.
Strategic management is what managers do to develop an organizations strategies. It involves all the basic management functions. strategies are the plans for how the org will do whatever its in business to do, how it will compete successfully and how it will attract and satisfy its customers in order to achieve its goals. Business model is a design how a company is going to make money. Business model focuses on 1) whether customers will value what the company is providing 2) whether the company can make any money doing that. E.g DELL
IMPORTANCE OF STRATGEIC MANAGEMENT In 2000 star plus aired saas bhi kabhi bahu thi that became one of the most popular shown in india. Large number of viewers tuned in every evening to watch the story unfold. Similarly ramayan, KBC, IPL etc shows became quickly popular, it was because they had designed the strategies aiming for success. Some businesses fail and some succeed even though they are subjected to the same environmental conditions. Its because org that use SM do have higher level of performance.
IMPORTANCE OF SM Another importance of the SM is that because of the fact that managers in org of all types and sizes face continually changing situations. They cope with this uncertainty by using the SM process to examine relevant factors and decide what actions to take. Finally SM is important because organizations are complex and diverse. E.g INDIAN POST.
THE STRATEGIC MANAGEMENT PROCESS1) Identifying the organizations current mission, goals and strategies.2) Doing an external analysis3) Doing an internal analysis4) Formulating strategies5) Implementing strategies6) Evaluating result
STEP 1: IDENTIFYING THE ORG CURRENT MISSION, GOALS AND STRATEGIES Every org needs a mission- a statement of its purpose E.g. mission of Infosys is “ to achieve our objectives in an environment of fairness, honesty and courtesy towards our client, employees, vendors and society at large”
STEP 2: DOING AN EXTERNAL ANALYSIS External analysis consists of analyzing opportunities and threats to the organization. It is related to the environment of the organization. One of the tools managers use to assess the business environment is forecast. Forecast can be made about all critical elements in the organization that are likely to affect the org or managers area of responsibility. Eg. In increase in the interest rates on home loans affect the sales of the houses.
Environmental uncertainty Forecasting environmental uncertainty accurately is difficult. For e.g in IT industries new technological developments are introduced regularly. Also large economic changes occur. A key issue for managers and their planning activities is that the greater the environmental uncertainty, the more flexible their plans need to be. Contingency plans that identify key factors that could affect the desired results and specify what actions will be taken if key result change.
Assessing external environment Another popular tool for assessing the environment is benchmarking. Benchmarking involves investigating the best practices used by competitors and non-competitors, managers compare their own practices to the best practices available. Once the environment is analyzed, managers need to identify opportunities that org can exploit and threats that it must counteract or buffer against. Opportunities are the positive trends in the external env and threats are the negative trends.
Step 3: DOING AN INTERNAL ANALYSIS It provides important information about an organizations specific resources and capabilities. An org resources are its asset-financial, physical, human and intangible. –that is used to develop, manufacture, and deliver the products to its customers. ( what the organization has) Organizations capabilities are its skills and abilities in doing work activities needed in the business.( how it does its work) The major value creating capabilities of the organization are known its core competencies.
Strength and weaknesses After completing the internal analysis, managers should be able to identify organizational strengths and weaknesses. Any activities the org does well or any unique resources it has, are called strengths. Weaknesses are the activities the org doesn‟t do well or resources it needs but it doesn‟t posses. The combined external and internal analyses are called the SWOT analysis.
STEP 4: FORMULATING STRTEGIES Managers should consider the realities of the external environment and their available resources and capabilities and design that will help the organization achieve its goals. There are three main types of strategies managers formulate: corporate, business and functional.
STEP 5: IMPLEMENTING STRATEGIES Once strategies are formulated they must be implemented.
STEP 6: EVALUATING RESULTS The final step in the strategic management process is evaluating results. How effective have the strategies been at helping the org reach its goal? What adjustments are necessary?
THE CORPORATE PORTFOLIO APPROACH In this approach top management evaluates each of the corporations various business units with respect to the market place. When all the business units have been evaluated, an appropriate strategic role is developed for each unit with the goal of improving the overall performance of the organization. The corporate portfolio approach is analytical and rational, and is guided by market opportunities and tends to be initiated and controlled by top management only.
Portfolio framework advocated by Boston Consulting Group, also known as BCG Matrix. The BCG approach to analyzing a corporate portfolio of business focuses on three aspects of each particular business unit 1) its sales 2) the growth of its market 3) whether it absorbs or produces cash in its operations Its goal is to develop a balance among business units that use up cash and that supply cash
STARS: ( high relative market share in a rapidlygrowing market) Use large amounts of cash & are leaders in the market so they should also generate large amounts of cash. The rapid growth of market requires large investments to maintain the market position.CASH COW : ( high relative market share in a slowlygrowing market)• it is profitable and source of excess cash. The slow growth of market does not require large investments to maintain the market position.
QUESTION MARK : ( high growth rate of market with lowmarket share) It is the business with a relatively small market share in a rapidly growing market. It can be uncertain and expensive venture The rapid growth of market may force it to invest heavily simply to maintain its low share, even though the low market share is yielding low or negative profits and cash flow consumptions. Increasing the question marks share of market relative to the market leader would require larger investments. Opportunity: rapid growth of the market segment offers opportunity if the proper business strategy formulated.
DOGS: ( low market share, low market growth) A business with low relative market share in a slowly growing or stagnant market. Moderate user or supplier of cash Liquidate (shut down) / divest ( separate )
A success sequence in the BCG matrix involves investing cash from cash cows and be more successful dogs in a selected question marks. These question marks then becomes the stars by increasing the relative market shares. Over the time when the rate of market growth slows, the stars will become cash cows, generating excess cash to invest in the next generation of promising question marks.
MATRIX OF MARUTI SUZUKI STAR: The Company has long run opportunity for growth and profitability. They have high relative market share and high Growth rate. SWIFT, SWIFT DESIRE AND ZEN ESTILO is the fast growing and has potential to gain substantial profit in the market. QUESTION MARK: there are also called as wild cats that are new products with potential for success but there cash needs are high And cash generation is low. In auto industry of MARUTI SX4, GRAND VITARA, ASTAR there has been improve the organization reputation As they want successful not only in Indian market but as well as in global market.
CASH COW: It has high relative market share but compete in low growth rate as they generate cash in excess of their needs. MARUTI 800, ALTO AND WAGONR have fallen to ladder 3 & 4 due to introduction of ZEN ESTALIO and A STAR. DOG: The dogs have no market share and do not have potential to bring in much cash. BALENO, OMINI, VERSA There business have liquidated and trim down thus The strategies adopted are that are harvest, divest and drop.
Limitations of the BCG MatrixSome limitations of the Boston Consulting Group Matrix include: High market share is not the only success factor. Market growth is not the only indicator for attractiveness of a market. Sometimes Dogs can earn even more cash as Cash Cows. The problems of getting data on the market share and market growth. There is no clear definition of what constitutes a "market". A high market share does not necessarily lead to profitability all the time. A business with a low market share can be profitable too.
Five forces of Corporate Strategy This approach to corporate strategy is designed by Michel Porter known as Porter‟s „five forces‟ model. In porter‟s view, an organization‟s ability to compete in a given market is determined by the organization‟s technical and economic resources, as well as by five environmental forces, each of which threatens the organization‟s venture in to new market.
Threat of New Entrants New entrants to an industry can raise the level of competition. The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency, restaurants). Key barriers to entry include - Economies of scale ( mass production to reduce cost) - Capital / investment requirements - Customer switching costs - Access to industry distribution channels
Bargaining Power of Buyers Buyers are the people / organizations who create demand in an industry The bargaining power of buyers is greater when - There are few dominant buyers and many sellers in the industry - The industry is not a key supplying group for buyers
Threat of Substitutes The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on: - Buyers willingness to substitute - The relative price and performance of substitutes - The costs of switching to substitutes
Bargaining Power of Suppliers The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a companys profitability. The bargaining power of suppliers will be high when: - There are many buyers and few dominant suppliers - There are undifferentiated, highly valued products - Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets)
Intensity of Rivalry The structure of competition - for example, rivalry is more intense where there are many small or equally sized competitors; rivalry is less when an industry has a clear market leader Degree of differentiation - industries where products are commodities (e.g. steel, coal) have greater rivalry; industries where competitors can differentiate their products have less rivalry Switching costs - rivalry is reduced where buyers have high switching costs - i.e. there is a significant cost associated with the decision to buy a product from an alternative supplier Exit barriers - when barriers to leaving an industry are high (e.g. the cost of closing down factories) - then competitors tend to exhibit greater rivalry
PLANNING PREMISES Managers plan their future course of action taking into consideration the future events which are likely to happen within the org and its external environment. Since the future events are not known accurately at the time of planning, managers have to make certain assumptions , either based on their intuitions or analysis of the factors responsible for such events. Thus manager have to identify the factors which are relevant for planning which is called planning premise The methods through which through which the likely future behavior of these factors can be predicted is called forecasting
“Planning premises are the anticipated environment in which plans are expected to operate. They include assumptions or forecast of the future and known conditions that will affect the operation of plan” Types of planning premises1) External premises2) Internal premises3) Controllable and uncontrollable premises.4) Tangible and intangible premises
EXTERNAL PREMISES External premise create threat or opportunity to the organization. As the org is an open system it is affected by the external factors such as1) Economic factors ( fiscal policy, budget etc)2) Political-legal factors ( laws, political interference )3) Technological factors ( sources of tech, new tech)4) International factors ( subsidies, duties)5) Competitive factors (sw, price, positioning of comp)
INTERNAL PREMISES Internal premises create strength or weakness for org Various departments in the org like productions/operations, marketing, finance, human resources department if working effectively and efficiently in coordination creates strength for org and vice versa.
Tangible And Intangible Premises Tangible premises are quantifiable like labor hour, man hours, monetary units etc Intangible are qualitative in nature and cannot be translated into quantity. E.g. image of company
Controllable and uncontrollable premises Controllable premises are which can be controlled by the organization. They are internal to org. like structure, policies, procedures, strategies. Uncontrollable premises are which can be controlled by the organization. They are external to the org. like taxation policy, rate of economic growth, inflation rate Semi-controllable are which can be controlled to some extent but not wholly. like market share, labor turnover, product price, labor efficiency.
FORECASTING Forecasting is the process of estimating the events about future, based on the analysis of their past and present behavior. It refers to the statistical analysis, and gives clues about the future pattern It involves the estimation of the future events and facilitates planning process. It takes place at the middle or the lower level of mgmt. Planning involves decision making but forecasting helps in decision making It is key to planning
Following are the characteristics of forecasting: It is concerned with future events. It is made on the basis of data collected from within and outside the organization. • The quality of forecasts depends on the reliability of information. • It can be done by analyzing the past and present events related to particular function of the organization. • It may be long-term or short-term. • Forecasts can be of several types: Economic forecasts, sales forecasts, and Technological forecasts etc.
Importance of Forecasting 1- Key to Planning: It provides vital facts and pertinent information for effective planning. 2- Means of Coordination: People at different levels participate in the process of forecasting. 3- Basis for Control: It provides relevant information for exercising control. 4- Executive Development: Forecasting requires executives to look ahead, think through the future and improve their mental faculties. 5- Facing Environmental Challenges: By predicting future environmental situation based on the analysis of past and present facts one can face the environmental challenges in a better manner.
Steps in Process of Forecasting 1- Developing the Ground Work: Defined the purpose of forecasting. Past performance and events must be analyzed and compared with present events. A thorough investigation and analysis of various factors that can affect the organization‟s performance should be done. Base must be prepared on which the forecasting will be done. 2- Estimating Future Trends: Based on intelligent guess the probable future trends are estimated. 3- Comparing Actual with Estimated: The actual results are periodically compared with estimates to reveal any deviation. 4- Refining the forecast: Since forecasting is an on going process and with experience the refinement in the process is made.
DECISION MAKING “ The process of identifying and selecting a course of action to solve a specific problem” It connects to the organizations present circumstances to actions that will take the organization into future. It plays important role in selecting among the choices available to the manager. Decision making deals with problems and opportunities. A problem may be an opportunity in disguise. Problem is the situation that occurs when an actual state differs from the desired state.
Problem Finding Process1 • A deviation from past experience2 • A deviation from a set plan3 • Other people4 • The performance of competitors
What is Intuition?
The Decision making Process: 1. Define the Problem: Defining the problem is the critical step. If the problem is inaccurately defined, every other step in the decision- making process will be based on that incorrect point. A manager needs to focus on the problem, not the symptoms. This is accomplished by asking the right questions and developing a sound questioning process. In the process of asking questions the manager should gather relevant and timely information. Information gathered from people in the work environment is the most relevant and accurate in nature.
2. Identify the Limiting or Critical Factors: Limiting factor are those constraints that rule out certain alternative solutions. Resources – Personnel, money, facilities, and equipment – are the most common limiting or critical factors that narrow down the range of possible alternatives. 3. Develop Potential Alternatives: At this point it is necessary to look for, develop, and list as many possible alternatives – potential solutions to the problem – as you can.
While building this list of alternatives, it is wise to avoid being critical or judgmental about any alternative. Sources of alternatives include: experience, the practice of successful managers, group opinions through use task forces and committees, and the use of out side consultancy services. 4. Analyze the Alternatives: The purpose of this step is to decide the relative merits of each of the alternatives. What are the positives and negatives (the advantages and disadvantages) of each alternative?
5. Select the Best Alternative: In trying to select an alternative or combination of alternatives, you must, reasonably enough, find a solution that appears to offer the fewest serious disadvantages and the most advantages. 6. Implement the Solution: The selected alternative needs effective implementation to yield the desired results. People involved, must be convinced about the importance of their roles and must know exactly what they must do and why. 7. Establish Control and Evaluation System: Ongoing actions need to be monitored. This system should provide feedback on how well the decisions are implemented, what the results are – positive or negative – and what adjustments are necessary to get the results that were wanted when the solution was chosen.
Decisions in the Management Functions
TYPES OF DECISIONS STRUCTURED PROBLEMS & PROGRAMMED DECISIONS Some problems are straight forward, the problem is familiar and information about the problem is easily defined and complete The decision which manager takes for the structured problem is called the programmed decision. Programmed decision is repetitive and routine and are undertaken within a framework of organizational policies and rules, the time frame is short. Information is readily available.
UNSTRUCTURED PROBLEMS & NONPROGRAMMED DECISIONS Many organizational situation involve unstructured problems that are new or unusual and for which information is incomplete. When problems are unstructured managers can rely on the non programmed decisions. They are unique and nonrecurring and involve custom-made solutions. Time frame is long and it is gen. taken by top management Solution relies on judgement and creativity.
STRATEGIC AND TACTICAL DECISIONS Strategic choice is the major choice of actions concerning allocation of resources and contribution to the achievement of the organizational objective It affects the whole or major part of the organization. It is normally non-programmed decision Tactical or the operational decisions is derived out of strategic decisions. It related to day-to-day working of org and is made in the context of the policies and procedures. E.g purchase of the raw material It is the programmed decisions. It affects the narrow part if the org. The authority to take tactical decisions can be delegated to the lower-level managers.
INDIVIDUAL AND GROUP DECISIONS Individual decisions are taken where the problem is of routine nature. Important and strategic decisions are taken by group. There are two methods involved in group decision making Dialectical inquiry method. In this method the group determines all the assumptions and solution, then considers the opposite of all the assumptions, then they develop the counter solution based on all the negative solutions. Devils advocacy involves assigning someone the role of critic.
Nominal group tech and Delphi tech In nominal group tech the member silently writes down the ideas on problem, then present their ideas, on black board without discussion, then all the recorded ideas are discussed, and finally each member silently gives rating about the various ideas In delphi tech a questionnaire is sent to the members of groups who are physically dispersed and they give their feedback, again the second questionnaire is sent probing more deeply into the ideas to the first ques.‟ then finally the summary of both the first and second quess is developed.
DECISION MAKING PROCESSSTEP 1: RECOGNISING THE PROBLEMSTEP 2: DECIDING PRIORITIES AMONG PROBLEMSTEP 3: DIAGNOSING & STATING THE PROBLEMSTEP 4: DEVELOP THE ALTERNATIVESSTEP 5: EVALUATE THE ALTERNATIVESSTEP 6: SELECT THE BEST ALTERNATIVESTEP 7: IMPLEMENT THE ALTERNATIVESTEP 8: EVALUATING THE DECISION EFFECTIVENESS
RATIONAL DECISION MAKING A type of decision making in which choices are logical and consistent and maximize value. Assumptions of rationality: a rational decision maker would be fully objective and logical. He will have a clear and specific goal and know all the possible alternatives and consequences. Making decisions rationally would consistently lead to selecting the alternative that maximizes the likelihood of achieving that goal. Decisions are made in the best interest of the organization.
BOUNDED RATIONILITY It is more realistic approach Managers make decisions rationally but are bounded by their ability to process information. Because they cant possibly analyse all information on all alternatives, manager satisfice rather than maximize. i.e. they accept the solutions that are good enough. They are being rational within the limits of their ability to process information.
INTUTION BASED DECISION MAKING Making decisions on the basis of experience, feelings and judgment. It can be cognitive-based , experience-based, value or ethics based, or subconscious mental processing
DECISION-MAKING CONDITIONS1) CERTAINTY: it is the ideal situation to make decision. The outcome of every alternative is known.2) RISK: a situation in which the decision maker is able to estimate the likelihood of certain outcomes.3) UNCERTAINTY: A situation in which a decision maker has neither certainty nor reasonable probability estimates available.
DECISION MAKING STYLES LINEAR & NON-LINEAR THINKING STYLES Linear thinking style is characterized by a person‟s preference for using external data and facts and processing this information through rational, logical thinking to guide decisions and actions Non-linear thinking style is characterized by a person‟s preference for using the internal sources of information ( feeling and intutions) and processing this information with the internal insights, feelings and hunches to guide decisions and actions.
DECISION MAKING ERRORS AND BIASES1) Immediate gratification: it describes the decision makers who tend to want immediate rewards and to avoid immediate costs. For this individuals, decision choices that provides quick payoffs are more appealing than those that may provide payoffs in the future.2) Anchoring effect: it describes the situation when decision makers fixate on initial information as a starting point and once then set, fail to adequately adjust for subsequent information. First impressions, ideas, prices and estimates carry unwanted weight relative to the information received later.
3. Selective perception bias: when decision makers selectively organize and interpret events based on their biased perception, they are using selective perception bias. This influences the information they pay attention to , they problems they identify and the alternatives they develop.4. Confirmation bias: decision makers that seek out the information that reaffirms their past choices and discount information that contradict the past judgments is the confirmation bias. This people ignore the critical information that challenges their preconceived ideas.
5. Framing bias: decision makers select and highlights certain aspects of a situation while excluding others. By drawing attention to specific aspects of a situation and highlighting them, while at the same time omitting other aspects, they distort what they see and create incorrect reference points.6. Availability bias: it causes decision makers to tend to remember events that are the most recent and vivid in their memory. The bias distorts their ability to recall events in an objective manner and results in distorted judgments and probability estimates.
7) Representation bias: when decision maker assess the likelihood of an event based on how closely it resembles other events. Managers see identical situation where they don‟t exist.8) Randomness: it occurs when decision makers try to create meaning out of random events.9) Sunk cost errors: decision makers forget that current choices cant correct the past. They incorrectly fixate on past expenditures of time, money or effort in assessing their chocie.
10. self-serving bias: decision makers who are quick to take credit for their success and to blame failure on outside factors exhibit this bias.11. Hindsight bias: it is the tendency for decision makers to falsely believe, after that outcome is actually know, that they could have accurately predicted the outcome of the event.