This model summarises the process and content of planning.Despite uncertainty, managers spend time planningMethods reflect beliefs about the process and context of managingKnowledge enables us to question:assumptions in a plan and the contextalternative methods and outcomeslimitations of a planning method
Why study planning? A planner is someone who contemplates future action.The activity of planning involves establishing goals (or objectives) for the management task, specifying how to achieve these goals, and then implementing the plan and evaluating the results. This planning will include the allocation of resources and what people are needed to achieve the plan.Planning:Helps us to clarify direction and allows individuals to contribute and ‘own’ the plan and its overall direction. This helps motivation and knowing the wider picture helps commitment to the achievement of the plan.Systematic planning helps us to use resources efficiently (resource productivity) and effectively (meeting customer needs) and helps to reduce overlap and allow us to co-ordinate the required tasksProgress can be monitored based on planned goals, targets and timescale. Remember goals require to be SMART if progress towards them is to be measured.Systematic planning also gives us the appearance of being rational and permits us to justify our future actions to others, including our superiors and our customers.
People starting a new business or expanding an existing one prepare a Business Plan. This sets out the markets that the business intends to serve, how it will do it and what finance is required. Business Planning and Financial Budgeting are closely interlinked and your study of this topic should integrate with your study of Finance and Accounting within your course. Within larger organisations plans can relate to the whole organisation corporate plans) or to department or business units.Strategic Plans set out the overall direction and cover major strategic decisions such as markets and revenues, together with plans for marketing, HR and production/operations. This plans set out a direction for several years, typically 5 years but as long as 15 years in long lead time industries such as energy production.Operational Plans detail how managers will achieve their strategic objectives. They are narrower in scope indicating what the business unit should do to support the overall strategy of the organisation and are shorter term. They are more specific than strategic plans.
This diagram shows an example of an hierarchy of plans at IKEA. This relates to IKEA’s plan to expand into Asia. This involved into a plan to start with Japan, and then a more specific plan for locations in both Tokyo and Kansai region. A more precise plan for the Tokyo location, led to detailed plans related to the store, it staff, customer research and assembly and delivery services to suit the Japanese market.
The role of finance is crucial in business planning. It is important that you link your learning in Finance and Accounting with this theme. Finance a major input to organisations: understanding basics is essential to management.External and internal reporting systems affect managers and their work (e.g. decision-making, motivation). Understanding the subjective assumptions beneath data and practice enables you to question them and to consider the effects of alternative methodsYour Business Plan will be supported by a number of basic financial reports:Cash Flow StatementProfit and Loss (P & L)Balance SheetYou must be able to interpret these financial reports to be able to plan and control your business.You must be aware of the difference between profit and cash. You should be able to plan for growth and profit, but realising that you must have enough working capital and cash in the bank particularly at a time of expansion. This will allow you to gain financail control of your business.A key part of the Business Plan is the budgeting process.
We require capital to plan a new business or expand an existing one. Public Limited Companies (Plcs) can raise capital by issuing shares. These shareholders will have right to share in future profits through dividends and their investment will grow in value if the share price increases (and vice versa of course). Shareholders include individuals, but the majority of shares are held by Pension funds,Life assurance companies andInvestment funds.Shareholders liability for the loses of the company are limited to the to their investment after the shares are fully paid up and they have the ability to appoint Directors to safeguard their interests. But they have no guarantee of any profit or capital repayment (ordinary shares are risk capital)Companies report to shareholders(and the market) in (1) Annual report and financial statements, (2) Periodic summary financial reports and (3) Websites and e-mails are now commonA Private Limited Company (Ltd), partnership or sole trader will require to use their own or borrowed funds to raise capital.
The Cash Flow Statement shows where cash has come from and where it has been spent. In a successful business the cash received will be greater than the cash spent. The surplus can then be spent for expansion or paid to shareholders. The big issue about Cash Flow is timing. In a new business or a business expansion upfront money will have to be spent and it may be some time before cash returns to the business when sales occur. Thus we need to have enough cash in the bank to cover these expanses. At all times we must check our cash position and bank balances. We can use overdraft and loan facilities to deal with short-term cash shortages, but this will have a cost in the interest charged.If the business fails to generate cash and have appropriate bank balances, it may find that banks will not permit further loans and suppliers may get nervous and require to be paid upfront (this was the issue recently with the collapse of electrical retailer Comet). Eventually if there is no cash, the business will cease or go into receivership. To survive the business must generate cash. It is the lack of cash that causes a business to fail.
In the P & L we subtract the cost of goods sold form revenue to find out our Gross Profit. This much be at a suitable level to cover the fixed costs of our business.Fixed costs are then deducted to arrive at Net Profit.Depreciation is one of the main differences between cash flow and P & L. When we purchase fixed assets that have a longer working life, we do not offset the whole amount in a single year. Instead we spread the cost over the years of the assets useful life.
Performance is a relative concept not an absolute one. There are two sources of comparison (1) competitors and (2) past performance.Profit has to be planned in the Budget:External pressure translated to operating planBegins with objective (e.g. profit, rate of return)Elements within organisation make inputs(e.g. sales, expenses, capital requirements)Process of negotiation to agree acceptable coordinated combination of resources and activitiesBudget becomes operating planFinancial control is based on comparison with the budget:Actual spend is compared with the budget to assess financial performancePerformance is questioned if targets are consistently not metEach management function can be allocated a budgetOr in project-based organisations each project will have a budget
Here is the example of the Mobile Phone decision. Some of the problems with this decision-making model is that it is iterative, not sequential. We may miss a step, or spend too much time on other steps. Recognising problem Subjective, spotting opportunities Setting and weighting criteria Subjective, and in itself a set of decisions(Figure 7.3) Developing alternatives Costly – how many to develop (Mintzberg, 1976)?
Another way to categorise decisions is in terms of their links to other decisions. Some decisions have few implications beyond their immediate area and thus are relatively independent. Other may have significant implications for other parts of the organisation.
As we have already identified, decisions lead to a commitment to action ( and the use of resources).At all levels – the focus here is organisational.Visible decisions embedded in a wider processof decision making: before and after Decisions can be strategic or operationalProgrammed Decisions deal with problems or opportunities that are familiar and where the information is easy to define and obtain. Decisions may be similar to those that have been made before and can be made by following an established procedure. There may be established rules and policies to guide the decision. Non-programmed Decisions deal with unusual and unfamiliar situations. Perhaps the issue has not arisen in quite that form before and the information required is unclear or open to several interpretations. This type of decision will not be solved by pre-existing rules and will require judgment, intuition
Prior hypothesis biasPeople who have strong beliefs about the situation of a decision (even when they receive evidence that the beliefs are wrong) fall victim to Prior Hypothesis Bias when they focus on information that is consistent with their beliefs and ignore anything that is inconsistent. Thus they select the information which supports previous beliefs.RepresentativenessThis is the tendency to generalise from a small sample and to ignore other information relevant to the decision (e.g. predicting that a new recording artist will be successful because a similar one succeeded in that genre).Optimism biasThe human tendency to judge future events in a more positive light than is warranted by actual experience.Illusion of controlThis is the human tendency to overestimate our ability to control activities and events. Many in senior positions with a record of success are prone to this bias and overestimate chances of favourable outcome.Escalating commitmentPeople are reluctant to admit mistakes and rather than search for a new solution may increase their commitment to the original decision and put in more resources despite evidence of failureEmotional attachmentPeople are frequently influenced by emotional attachment to people or things. This can bias decisions to make decisions that are not supported by the facts of the case.GroupthinkThis is a pattern of biased decision-making that occurs in groups. Group members strive for agreement and harmony in the group at the expense of accurately and dispassionately evaluating relevant and sometimes disturbing information.
Vroom and Yetton (1973) developed a contingency model of decision making – that is, the extent to which it is wise to involve subordinates in decision depends on the circumstancesSection 7.7 in the key text outlines the five decision styles,and eight situational factors – Figure 7. 8
101 lect6 planning
PGDBA 101Strategic Leadership and Management SkillsTOPIC 4: PLANNING AND DECISION-MAKINGDR DOUG NISBET
Learning Objectives• To understand the process of planning in organisations and to be able to construct a business plan to meet objectives• To be able to construct a budget and cash flow statement for a business plan and its implementation• To identify the main aspects of decision- making in organisations and to understand the alternative ways of making decisions.
Topic ThemesThere are 3 themes in this topic:1. Business Planning2. Supporting Financial Tools3. Decision-making
Theme 1: Business Planning• Purposes and contents of plans• Steps in making a plan• Information for planning• Setting objectives• Identifying steps to meet objectives• Implementing and monitoring
An overview of planningFigure 6.1 An overview of the chapter
Purposes of planningWhy Study Planning?• Clarify direction• Motivate• Use resources efficiently and effectively• To measure progress• Rationality and justification
The content of plansPlans can be• Focus - Corporate or business unit• Level - Strategic or operational (BP’s plan for survival)• Timescale- Long- or short-term• Nature - Specific or directional A universal activity, at all levels of formality
The process of planningFigure 6.3 Seven iterative tasks in making a plan
A hierarchical plan at IKEAFigure 6.4 Developing a plan for IKEA (Japan)
Monitoring progress to be able to adaptFigure 6.6 A programme overview chartSource: Boddy et al. (2009a)
Theme 2: Supporting Financial Tools• Role of finance in business planning and control• Interpreting basic financial reports• The difference between profit and cash• Evaluating performance• Gaining financial control of the business• Methods of budgeting
Raising capital• Ownership – shares (equity) – Prospectus (purpose of raising capital) – Right to share in profits – Limited liability – Appoint directors (responsibility to shareholders)• Debt – borrowed funds – Bank – Marketable debt
Cash flow statement• Sources from which cash has been received during a period (sales)• Uses to which cash put (purchases, administration, marketing)• Sources of capital raising to fill the gap or repayment of capital (financing flows)• To survive, business has to generate cash
Profit and Loss Statement (P & L)• Revenue (usually sales)• From which subtracted – Cost of goods sold or of service provided – Costs of administration and management – Cost of marketing and product/service delivery – Cost of financing the business (interest on debt) – Taxation
Measuring performance• Compare with competitors• Compare with previous periods• Budgeting• Control against the budget
Importance of Finance to the Business Plan• All businesses need finance to survive• Financial resources have to be carefully controlled, their use carefully planned• Unless a business generates profit, its life will be limited as it will not have the funds to secure new resources
Theme 3: Decision-makingWithin this theme we shall examine:• Tasks in making decisions• Programmed and non-programmed decisions• Decision making conditions• Four decision making models• Biases in making decisions• Decision styles
(Iterative) stages in making decisionsFigure 7.2 Stages in making decisions
Example: deciding on a new mobile phoneFigure 7.3 Illustrating the decision-making tasks – a new mobile phone
Dependent or independent?Figure 7.5 Possible relationships between decisionsSource: Cooke and Slack (1991), p.24
An overview of the themesFigure 7.1 Overview of decision making in organisations
Conclusion on Theme 3• Processes of making decisions affect the value that management adds to resources• Many methods – do those used best suit the context of the organisation?• What alternative assumptions and methods might suit the context better?• What are the limitations of methods used?