DEFINITION
According to Koontz O'Donnel - "Planning is
an intellectual process, the conscious determination of courses of action, the
basing of decisions on purpose, acts and considered estimates".
NATURE AND PURPOSE OF PLANNING
Nature of Planning
1. Planning
is goal-oriented: Every plan
must contribute in some positive way towards the accomplishment of group objectives. Planning has no meaning
without being related to goals.
2. Primacy
of Planning: Planning
is the first of the managerial functions. It precedes all other management functions.
3. Pervasiveness
of Planning: Planning
is found at all levels of management. Top
management looks after strategic planning. Middle management is in charge
of administrative planning. Lower management has to concentrate on operational
planning.
4. Efficiency,
Economy and Accuracy: Efficiency
of plan is measured by its contribution to the objectives as economically as possible. Planning also focuses on
accurate forecasts.
5. Co-ordination:
Planning co-ordinates the what, who, how, where
and why of planning. Without co-ordination
of all activities, we cannot have united efforts.
6. Limiting
Factors: A planner must
recognize the limiting factors (money, manpower etc) and formulate plans in the light of these critical factors.
7. Flexibility:
The process of planning should be adaptable to
changing environmental conditions.
8. Planning
is an intellectual process: The quality of planning will vary according to the quality of the mind of the manager.
Purpose of Planning
1. To
manage by objectives: All
the activities of an organization are designed to achieve certain specified objectives. However, planning makes the
objectives more concrete by focusing attention on them.
2. To
offset uncertainty and change: Future is always full of uncertainties and changes. Planning foresees the future and makes the necessary provisions
for it.
3. To
secure economy in operation: Planning involves, the selection of most profitable course of action that would lead to the best
result at the minimum costs.
4. To
help in co-ordination: Co-ordination
is, indeed, the essence of management, the
planning is the base of it. Without planning it is not possible to
co-ordinate the different activities of an organization.
5. To
make control effective: The
controlling function of management relates to the comparison of the planned performance with the actual performance.
In the absence of plans, a management will have no standards for controlling
other's performance.
6. To
increase organizational effectiveness: Mere efficiency in the organization is not important; it should also lead to productivity and effectiveness.
Planning enables the manager to measure the organizational effectiveness in the
context of the stated objectives and take further actions in this direction.
Features of Planning
•
It is primary function of management.
•
It is an intellectual process
•
Focuses on determining the objectives
•
Involves choice and decision making
•
It is a continuous process
•
It is a pervasive function
Classification of Planning
On the basis of content
•
Strategic Planning
–
It is the process of deciding on Long-term
objectives of the organization.
–
It encompasses all the functional areas of
business
•
Tactical Planning
–
It is the blue print for current action and it
supports the strategic plans.
On the basis of time period
•
Long term planning
–
Time frame beyond five years.
–
It specifies what the organization wants to
become in long run.
–
It involves great deal of uncertainty.
•
Intermediate term planning
–
Time frame between two and five years.
–
It is designed to implement long term plans.
•
Short term planning
–
Time frame of one year or less.
–
It provide basis for day to day operations.
PLANNING PROCESS
The
various steps involved in planning are given below
Although preceding actual planning and therefore
not strictly a part of the planning process, awareness of an opportunity is the
real starting point for planning. It includes a preliminary look at possible
future opportunities and the ability to see them clearly and completely,
knowledge of where we stand in the light of our strengths and weaknesses, an
understanding of why we wish to solve uncertainties, and a vision of what we
expect to gain. Setting realistic objectives depends on this awareness.
Planning requires realistic diagnosis of the opportunity situation.
b) Establishing Objectives:
The first step in planning itself is to
establish objectives for the entire enterprise and then for each subordinate
unit. Objectives specifying the results expected indicate the end points of
what is to be done, where the primary emphasis is to be placed, and what is to
be accomplished by the network of strategies, policies, procedures, rules,
budgets and programs.
Enterprise objectives should give direction to
the nature of all major plans which, by reflecting these objectives, define the
objectives of major departments. Major department objectives, in turn, control
the objectives of subordinate departments, and so on down the line. The
objectives of lesser departments will be better framed, however, if subdivision
managers understand the overall enterprise objectives and the implied
derivative goals and if they are given an opportunity to contribute their ideas
to them and to the setting of their own goals.
c) Considering the Planning Premises:
Another logical step in planning is to
establish, obtain agreement to utilize and disseminate critical planning
premises. These are forecast data of a factual nature, applicable basic
policies, and existing company plans. Premises, then, are planning assumptions
– in other words, the expected environment of plans in operation. This step
leads to one of the major principles of planning.
The more individuals charged with planning
understand and agree to utilize consistent planning premises, the more
coordinated enterprise planning will be.
Planning premises include far more than the
usual basic forecasts of population, prices, costs, production, markets, and
similar matters.
Because the future environment of plans is so
complex, it would not be profitable or realistic to make assumptions about
every detail of the future environment of a plan.
Since
agreement to utilize a given set of premises is important to coordinate
planning, it becomes a major responsibility of managers, starting with those at
the top, to make sure that subordinate managers understand the premises upon
which they are expected to plan. It is not unusual for chief executives in
well- managed companies to force top managers with differing views, through
group deliberation, to arrive at a set of major premises that all can accept.
d) Identification of alternatives:
Once the organizational objectives have been
clearly stated and the planning premises have been developed, the manager
should list as many available alternatives as possible for reaching those
objectives.
The focus of this step is to search for and
examine alternative courses of action, especially those not immediately
apparent. There is seldom a plan for which reasonable alternatives do not
exist, and quite often an alternative that is not obvious proves to be the
best.
The more common problem is not finding
alternatives, but reducing the number of alternatives so that the most
promising may be analyzed. Even with mathematical techniques and the computer,
there is a limit to the number of alternatives that may be examined. It is
therefore usually necessary for the planner to reduce by preliminary
examination the number of alternatives to those promising the most fruitful
possibilities or by mathematically eliminating, through the process of
approximation, the least promising ones.
e) Evaluation of alternatives
Having sought out alternative courses and
examined their strong and weak points, the following step is to evaluate them
by weighing the various factors in the light of premises and goals. One course
may appear to be the most profitable but require a large cash outlay and a slow
payback; another may be less profitable but involve less risk; still another
may better suit the company in long–range objectives.
If the only objective were to examine profits in
a certain business immediately, if the future were not uncertain, if cash
position and capital availability were not worrisome, and if most factors could
be reduced to definite data, this evaluation should be relatively easy. But
typical planning is replete with uncertainties, problems of capital shortages,
and intangible factors, and so evaluation is usually very difficult, even with
relatively simple problems. A company may wish to enter a new product line
primarily for purposes of prestige; the forecast of expected results may show a
clear financial loss, but the question is still open as to whether the loss is
worth the gain.
An evaluation of alternatives must include an
evaluation of the premises on which the alternatives are based. A manager
usually finds that some premises are unreasonable and can therefore be excluded
from further consideration. This elimination process helps the manager
determine which alternative would best accomplish organizational objectives.
g) Formulating of Supporting Plans
After decisions are made and plans are set, the
final step to give them meaning is to numberize them by converting them to
budgets. The overall budgets of an enterprise represent the sum total of income
and expenses with resultant profit or surplus and budgets of major balance–
sheet items such as cash and capital expenditures. Each department or program
of a business or other enterprise can have its own budgets, usually of expenses
and capital expenditures, which tie into the overall budget.
If this process is done well, budgets become a
means of adding together the various plans and also important standards against
which planning progress can be measured.
h) Establishing sequence of activities
Once plans that furnish the organization with
both long-range and short-range direction have been developed, they must be
implemented. Obviously, the organization can not directly benefit from planning
process until this step is performed.
TYPES OF PLANS / COMPONENTS OF PLANNING
In the process of planning, several plans are
prepared which are known as components of planning.
Plans can
be broadly classified as
a) Strategic plans
b) Tactical plans
c) Operational plans
Operational plans lead to the achievement of
tactical plans, which in turn lead to the attainment of strategic plans. In
addition to these three types of plans, managers should also develop a
contingency plan in case their original plans fail.
a) Strategic plans:
A strategic plan is an outline of steps designed
with the goals of the entire organization as a whole in mind, rather than with
the goals of specific divisions or departments. It is further classified as
i) Mission:
. The mission is a statement that reflects the
basic purpose and focus of the organization which normally remain unchanged.
The mission of the company is the answer of the question : why does the
organization exists?
Properly crafted mission statements serve as filters to separate what is important
from what is not, clearly state which markets will be served and how, and communicate a sense of intended direction to
the entire organization.
Mission of Ford: “we are a global, diverse
family with a proud inheritance, providing exceptional products and services”.
ii) Objectives or goals:
Both goal and objective can be defined as
statements that reflect the end towards which the organization is aiming to
achieve. However, there are significant differences between the two. A goal is
an abstract and general umbrella statement, under which specific objectives can
be clustered. Objectives are statements that describe—in precise, measurable,
and obtainable terms which reflect the desired organization’s outcomes.
iii) Strategies:
Strategy is the determination of the basic long
term objectives of an organization and the adoption of action and collection of
action and allocation of resources necessary to achieve these goals.
Strategic planning begins with an organization's
mission. Strategic plans look ahead over the next two, three, five, or even
more years to move the organization from where it currently is to where it
wants to be. Requiring multilevel involvement, these plans demand harmony among
all levels of management within the organization. Top-level management develops
the directional objectives for the entire organization, while lower levels of
management develop compatible objectives and plans to achieve them. Top
management's strategic plan for the entire organization becomes the framework
and sets dimensions for the lower level planning.
b) Tactical plans:
A tactical plan is concerned with what the lower
level units within each division must do, how they must do it, and who is in
charge at each level. Tactics are the means needed to activate a strategy and
make it work.
Tactical plans are concerned with shorter time
frames and narrower scopes than are strategic plans. These plans usually span
one year or less because they are considered short-term goals. Long-term goals,
on the other hand, can take several years or more to accomplish. Normally, it
is the middle manager's responsibility to take
the broad strategic plan and identify specific tactical actions.
c) Operational plans
The specific results expected from departments,
work groups, and individuals are the operational goals. These goals are precise
and measurable. “Process 150 sales applications each week” or “Publish 20 books
this quarter” are examples of operational goals.
An operational plan is one that a manager uses
to accomplish his or her job responsibilities. Supervisors, team leaders, and
facilitators develop operational plans to support tactical plans (see the next
section). Operational plans can be a single-use plan or a standing plan.
i)
Single-use plans apply to
activities that do not recur or repeat. A one-time occurrence, such as a special sales program, is a single-use plan
because it deals with the who, what, where, how, and how much of an activity.
¬ Programme: Programme consists of an ordered list of
events to be followed to execute a
project.
¬
Budget: A budget predicts sources and amounts of
income and how much they are
used for a specific project.
ii)
Standing plans are
usually made once and retain their value over a period of years while undergoing periodic revisions
and updates. The following are examples of ongoing plans:
¬ Policy: A policy provides a broad guideline for
managers to follow when dealing with important
areas of decision making. Policies are general statements that explain how a
manager should attempt to handle routine management responsibilities. Typical
human resources policies, for example, address such matters as employee hiring,
terminations, performance appraisals, pay increases, and discipline.
¬ Procedure: A procedure is a set of step-by-step
directions that explains how activities
or tasks are to be carried out. Most organizations have procedures for
purchasing supplies and equipment, for example. This procedure usually begins
with a supervisor completing a purchasing requisition. The requisition is then
sent to the next level of management for approval. The approved requisition is
forwarded to the purchasing department. Depending on the amount of the request,
the purchasing department may place an order, or they may need to secure
quotations and/or bids for several vendors before placing the order. By
defining the steps to be taken and
responding to a repetitive problem.
¬ Rule: A rule is an explicit statement that tells an
employee what he or she can and cannot
do. Rules are “do” and “don't” statements put into place to promote the safety
of employees and the uniform treatment and behavior of employees. For example,
rules about tardiness and absenteeism permit supervisors to make discipline
decisions rapidly and with a high degree of fairness.
d) Contingency plans
Intelligent and successful management depends
upon a constant pursuit of adaptation, flexibility, and mastery of changing
conditions. Strong management requires a “keeping all options open” approach at
all times — that's where contingency planning comes in.
Contingency planning involves identifying
alternative courses of action that can be implemented if and when the original
plan proves inadequate because of changing circumstances.
Keep in mind that events beyond a manager's
control may cause even the most carefully prepared alternative future scenarios
to go awry. Unexpected problems and events frequently occur. When they do,
managers may need to change their plans. Anticipating change during the
planning process is best in case things don't go as expected. Management can
then develop alternatives to the existing plan and ready them for use when and
if circumstances make these alternatives appropriate.
OBJECTIVES
Objectives may be defined as the goals which an
organisation tries to achieve. Objectives are described as the end- points of
planning. According to Koontz and O'Donnell, "an objective is a term
commonly used to indicate the end point of a management programme." Objectives
constitute the purpose of the enterprise and without them no intelligent
planning can take place.
Objectives are, therefore, the ends towards
which the activities of the enterprise are aimed. They are present not only the
end-point of planning but also the end towards which organizing, directing and
controlling are aimed. Objectives provide direction to various activities. They
also serve as the benchmark of measuring the efficiency and effectiveness of
the enterprise. Objectives make every human activity purposeful. Planning has
no meaning if it is not related to certain objectives.
•
The objectives must be predetermined.
•
A clearly defined objective provides the clear
direction for managerial effort.
•
Objectives must be realistic.
•
Objectives must be measurable.
•
Objectives must have social sanction.
•
All objectives are interconnected and mutually
supportive.
•
Objectives may be short-range, medium-range and
long-range.
•
Objectives may be constructed into a hierarchy.
Advantages of Objectives
•
Clear definition of objectives encourages
unified planning.
•
Objectives provide motivation to people in the
organization.
•
When the work is goal-oriented, unproductive
tasks can be avoided.
•
Objectives
provide standards which aid in the control of human efforts in an organization.
•
Objectives
serve to identify the organization and to link it to the groups upon which its
existence depends.
•
Objectives act as a sound basis for developing
administrative controls.
•
Objectives
contribute to the management process: they influence the purpose of the
organization, policies, personnel, leadership as well as managerial control.
Process of Setting Objectives
Objectives are the keystone of management
planning. It is the most important task of management. Objectives are required
to be set in every area which directly and vitally effects the survival and
prosperity of the business. In the setting of objectives, the following points
should be borne in mind.
•
Objectives
are required to be set by management in every area which directly and vitally
affects the survival and prosperity of the business.
•
The objectives to be set in various areas have
to be identified.
•
While
setting the objectives, the past performance must be reviewed, since past
performance indicates what the organization will be able to accomplish in
future.
•
The
objectives should be set in realistic terms i.e., the objectives to be set
should be reasonable and capable of attainment.
•
Objectives must be consistent with one and
other.
•
Objectives must be set in clear-cut terms.
•
For the
successful accomplishment of the objectives, there should be effective
communication.
MANAGEMENT BY OBJECTIVES (MBO)
MBO was first popularized by Peter Drucker in
1954 in his book 'The practice of Management’. It is a process of agreeing
within an organization so that management and employees buy into the objectives
and understand what they are. It has a precise and written description
objectives ahead, timelines for their motoring and achievement.
The employees and manager agree to what the
employee will attempt to achieve in a period ahead and the employee will accept
and buy into the objectives.
Definition
“MBO is a process whereby the superior and the
mangers of an organization jointly identify its common goals, define each
individual’s major area of responsibility in terms of results expected of him,
and use these measures as guides for operating the unit and assessing the
contribution of each of its members.”
Features of MBO
1.
MBO is concerned with goal setting and planning
for individual managers and their units.
2. The essence of MBO is a process of joint goal
setting between a supervisor and a subordinate.
3. Managers work with their subordinates to
establish the performance goals that are consistent with their higher
organizational objectives.
4.
MBO focuses attention on appropriate goals and
plans.
5. MBO facilitates control through the periodic
development and subsequent evaluation of individual goals and plans.
The
typical MBO process consists of:
1)
Establishing a clear and precisely defined
statement of objectives for the employee
2)
Developing an action plan indicating how these
objectives are to be achieved
3)
Reviewing the performance of the employees
4)
Appraising performance based on objective
achievement
1) Setting objectives:
For Management by Objectives (MBO) to be
effective, individual managers must understand the specific objectives of their
job and how those objectives fit in with the overall company objectives set by
the board of directors.
The managers of the various units or sub-units,
or sections of an organization should know not only the objectives of their
unit but should also actively participate in setting these objectives and make
responsibility for them.
Management by Objective (MBO) systems, objectives are written down for each level of the organization,
and individuals are given specific aims and targets.
Managers need to identify and set objectives both for themselves, their units, and their
organizations.
2) Developing action plans
Actions plans specify the actions needed to
address each of the top organizational issues and to reach each of the
associated goals, who will complete each action and according to what timeline.
An overall, top-level action plan that depicts how each strategic goal will be
reached is developed by the top level management. The format of the action plan
depends on the objective of the organization.
3) Reviewing Progress:
Performance is measured in terms of results. Job
performance is the net effect of an employee's effort as modified by abilities,
role perceptions and results produced. Effort refers to the amount of energy an
employee uses in performing a job. Abilities are personal characteristics used
in performing a job and usually do not fluctuate widely over short periods of
time. Role perception refers to the direction in which employees believe they
should channel their efforts on their jobs, and they are defined by the
activities and behaviors they believe are necessary.
4) Performance appraisal:
Performance appraisals communicate to employees
how they are performing their jobs, and they establish a plan for improvement.
Performance appraisals are extremely important to both employee and employer,
as they are often used to provide predictive information related to possible
promotion. Appraisals can also provide input for determining both individual
and organizational training and development needs. Performance appraisals
encourage performance improvement. Feedback on behavior, attitude, skill or
knowledge clarifies for employees the job expectations their managers hold for
them. In order to be effective, performance appraisals must be supported by
documentation and management commitment.
Advantages
•
Motivation
– Involving employees in the whole process of goal setting and increasing employee
empowerment. This increases employee job satisfaction and commitment.
•
Better
communication and Coordination – Frequent reviews and interactions between
superiors and subordinates helps to maintain harmonious relationships within
the organization and also to solve many problems.
•
Clarity of goals
•
Subordinates
have a higher commitment to objectives they set themselves than those imposed
on them by another person.
•
Managers
can ensure that objectives of the subordinates are linked to the organization's
objectives.
Limitations
There are
several limitations to the assumptive base underlying the impact of managing by
objectives,
including:
•
It over-emphasizes the setting of goals over the
working of a plan as a driver of outcomes.
•
It
underemphasizes the importance of the environment or context in which the goals
are set. That context includes everything from the availability and quality of
resources, to relative buy-in by leadership and stake-holders.
•
Companies evaluated their employees by comparing
them with the "ideal" employee. Trait
appraisal only looks at what employees should be, not at what they
should do.
When this approach is not properly set, agreed
and managed by organizations, self-centered employees might be prone to distort
results, falsely representing achievement of targets that were set in a
short-term, narrow fashion. In this case, managing by objectives would be
counterproductive.
STRATEGIES
The term 'Strategy' has been adapted from war
and is being increasingly used in business to reflect broad overall objectives
and policies of an enterprise. Literally speaking, the term 'Strategy' stands
for the war-art of the military general, compelling the enemy to fight as per
out chosen terms and conditions.
According to Koontz and O' Donnell,
"Strategies must often denote a general programme of action and deployment
of emphasis and resources to attain comprehensive objectives". Strategies
are plans made in the light of the plans of the competitors because a modern
business institution operates in a competitive environment. They are a useful
framework for guiding enterprise thinking and action. A perfect strategy can be
built only on perfect knowledge of the plans of others in the industry. This
may be done by the management of a firm putting itself in the place of a rival
firm and trying to estimate their plans.
•
It is the right combination of different
factors.
•
It relates the business organization to the
environment.
•
It is an
action to meet a particular challenge, to solve particular problems or to
attain desired objectives.
•
Strategy is a means to an end and not an end in
itself.
•
It is formulated at the top management level.
•
It involves assumption of certain calculated
risks.
Strategic Planning Process / Strategic
Formulation Process
1. Input
to the Organization: Various
Inputs (People, Capital, Management and Technical skills, others) including goals input of claimants (Employees,
Consumers, Suppliers, Stockholders, Government, Community and others)need to be
elaborated.
2. Industry
Analysis: Formulation of
strategy requires the evaluation of the attractiveness of an industry by analyzing the external environment. The focus
should be on the kind of compaction within an industry, the possibility of new
firms entering the market, the availability of substitute products or services,
the bargaining positions of the suppliers, and buyers or customers.
3. Enterprise
Profile: Enterprise profile
is usually the starting point for determining where the company is and where it should go. Top managers determine the
basic purpose of the enterprise and clarify the firm’s geographic orientation.
4. Orientation,
Values, and Vision of Executives: The enterprise profile is shaped by people, especially executives, and their orientation and values
are important for formulation the strategy. They set the organizational
climate, and they determine the direction of the firm though their vision.
Consequently, their values, their preferences, and their attitudes toward risk
have to be carefully examined because they have an impact on the strategy.
5. Mission
(Purpose), Major Objectives, and Strategic Intent: Mission or Purpose is the answer to the question: What is our business? The major Objectives
are the end points towards which the activates of the enterprise are directed.
Strategic intent is the commitment (obsession) to win in the competitive
environment, not only at the top-level but also throughout the organization.
6. Present
and Future External Environment: The present and future external
environment must be assessed in terms of threats and opportunities.
7. Internal
Environment: Internal
Environment should be audited and evaluated with respect to its resources and its weaknesses, and strengths in
research and development, production, operation, procurement, marketing and
products and services. Other internal factors include, human resources and
financial resources as well as the company image, the organization structure
and climate, the planning and control system, and relations with customers.
8. Development
of Alternative Strategies:
Strategic alternatives are developed on the
basis of an analysis of the external and internal environment. Strategies
may be specialize or concentrate. Alternatively, a firm may diversify,
extending the operation into new and profitable markets. Other examples of
possible strategies are joint ventures, and strategic alliances which may be an
appropriate strategy for some firms.
9. Evaluation
and Choice of Strategies:
Strategic choices must be considered in the light of the risk involved in a particular decision. Some profitable
opportunities may not be pursued because a failure in a risky venture could
result in bankruptcy of the firm. Another critical element in choosing a
strategy is timing. Even the best product may fail if it is introduced to the
market at an inappropriate time.
10. Medium/Short
Range Planning, Implementation through Reengineering the Organization
Structure, Leadership and Control: Implementation of the Strategy often
requires reengineering the organization, staffing the organization structure
and providing leadership. Controls must also be installed monitoring
performance against plans.
11. Consistency
Testing and Contingency Planning: The last key aspect of the strategic planning process is the testing for consistency and preparing for
contingency plans.
TYPES OF STRATEGIES
According
to Michel Porter, the strategies can be classified into three types. They are
a)
Cost leadership strategy
b)
Differentiation strategy
c)
Focus strategy
The
following table illustrates Porter's generic strategies:
a) Cost Leadership Strategy
This generic strategy calls for being the low
cost producer in an industry for a given level of quality. The firm sells its
products either at average industry prices to earn a profit higher than that of
rivals, or below the average industry prices to gain market share. In the event of a price war, the firm can maintain some profitability while
the competition suffers losses. Even without a price war, as the industry
matures and prices decline, the firms that can produce more cheaply will remain
profitable for a longer period of time. The cost leadership strategy usually
targets a broad market.
Some of the ways that firms acquire cost
advantages are by improving process efficiencies, gaining unique access to a
large source of lower cost materials, making optimal outsourcing and vertical integration decisions, or avoiding some costs altogether. If competing firms are
unable to lower their costs by a similar amount, the firm may be able to
sustain a competitive advantage based on cost leadership.
•
Access to
the capital required to make a significant investment in production assets;
this investment represents a barrier to entry that many firms may not overcome.
•
Skill in
designing products for efficient manufacturing, for example, having a small
component count to shorten the assembly process.
•
High level of expertise in manufacturing process
engineering.
•
Efficient distribution channels.
Each generic strategy has its risks, including
the low-cost strategy. For example, other firms may be able to lower their
costs as well. As technology improves, the competition may be able to leapfrog
the production capabilities, thus eliminating the competitive advantage.
Additionally, several firms following a focus strategy and targeting various
narrow markets may be able to achieve an even lower cost within their segments
and as a group gain significant market share.
b) Differentiation Strategy
A differentiation strategy calls for the
development of a product or service that offers unique attributes that are
valued by customers and that customers perceive to be better than or different
from the products of the competition. The value added by the uniqueness of the
product may allow the firm to charge a premium price for it. The firm hopes
that the higher price will more than cover the extra costs incurred in offering
the unique product. Because of the product's unique attributes, if suppliers
increase their prices the firm may be able to pass along the costs to its
customers who cannot find substitute products easily.
Firms that
succeed in a differentiation strategy often have the following internal
strengths:
•
Access to leading scientific research.
•
Highly skilled and creative product development
team.
•
Strong
sales team with the ability to successfully communicate the perceived strengths
of the product.
•
Corporate reputation for quality and innovation.
The risks associated with a differentiation
strategy include imitation by competitors and changes in customer tastes.
Additionally, various firms pursuing focus strategies may be able to achieve
even greater differentiation in their market segments.
c) Focus Strategy
The focus strategy concentrates on a narrow
segment and within that segment attempts to achieve either a cost advantage or
differentiation. The premise is that the needs of the group can be better
serviced by focusing entirely on it. A firm using a focus strategy often enjoys
a high degree of customer loyalty, and this entrenched loyalty discourages
other firms from competing directly.
Because of their narrow market focus, firms
pursuing a focus strategy have lower volumes and therefore less bargaining
power with their suppliers. However, firms pursuing a differentiation-focused
strategy may be able to pass higher costs on to customers since close
substitute products do not exist.
Firms that succeed in a focus strategy are able
to tailor a broad range of product development strengths to a relatively narrow
market segment that they know very well.
Some risks of focus strategies include imitation
and changes in the target segments. Furthermore, it may be fairly easy for a
broad-market cost leader to adapt its product in order to compete directly.
Finally, other focusers may be able to carve out sub-segments that they can
serve even better.
A Combination of Generic Strategies
These generic strategies are not necessarily
compatible with one another. If a firm attempts to achieve an advantage on all
fronts, in this attempt it may achieve no advantage at all. For example, if a
firm differentiates itself by supplying very high quality products, it risks
undermining that quality if it seeks to become a cost leader. Even if the
quality did not suffer, the firm would risk projecting a confusing image. For
this reason, Michael Porter argued that to be successful over the long-term, a
firm must select only one of these three generic strategies. Otherwise, with
more than one single generic strategy the firm will be "stuck in the
middle" and will not achieve a competitive advantage.
Porter argued that firms that are able to
succeed at multiple strategies often do so by creating separate business units
for each strategy. By separating the strategies into different units having
different policies and even different cultures, a corporation is less likely to
become "stuck in the middle."
However, there exists a viewpoint that a single
generic strategy is not always best because within the same product customers
often seek multi-dimensional satisfactions such as a combination of quality,
style, convenience, and price. There have been cases in which high quality
producers faithfully followed a single strategy and then suffered greatly when
another
firm entered the market with a lower-quality
product that better met the overall needs of the customers.
POLICIES
Policies
are general statements or understandings that
guide managers’ thinking in decision
making. They usually do not require action but are intended to guide managers
in their commitment to the decision they ultimately make.
The first step in the process of policy
formulation, as shown in the diagram below, is to capture the values or
principles that will guide the rest of the process and form the basis on which
to produce a statement of issues. The statement of issues involves identifying
the opportunities and constraints affecting the local housing market, and is to
be produced by
thoroughly analyzing the housing market. The kit
provides the user with access to a housing data base to facilitate this
analysis.
The statement of issues will provide the basis
for the formulation of a set of housing goals and objectives, designed to
address the problems identified and to exploit the opportunities which present
themselves.
The next step is to identify and analyze the
various policy options which can be applied to achieve the set of goals and
objectives. The options available to each local government will depend on local
circumstances as much as the broader context and each local authority will have
to develop its own unique approach to addressing the housing needs of its
residents.
An implementation program for realizing the
policy recommendations must then be prepared, addressing budgetary and
programming requirements, and allocating roles and responsibilities. Finally,
the implementation of the housing strategy needs to be systematically monitored
and evaluated against the stated goals and objectives, and the various
components of the strategy modified or strengthened, as required.
At each step of the way, each component of the
strategy needs to be discussed and debated, and a public consultation process
engaged in. The extent of consultation and the participants involved will vary
with each step.
Essentials of Policy Formulation
The
essentials of policy formation may be listed as below:
•
A policy
should be definite, positive and clear. It should be understood by everyone in
the organization.
•
A policy should be translatable into the
practices.
•
A policy should be flexible and at the same time
have a high degree of permanency.
•
A policy should be formulated to cover all
reasonable anticipatable conditions.
•
A policy should be founded upon facts and sound
judgment.
•
A policy should conform to economic principles,
statutes and regulations.
•
A policy should be a general statement of the
established rule.
Importance of Policies
Policies
are useful for the following reasons:
•
They provide guides to thinking and action and
provide support to the subordinates.
•
They delimit the area within which a decision is
to be made.
•
They save time and effort by pre-deciding
problems and
•
They permit delegation of authority to mangers
at the lower levels.
DECISION MAKING
The word decision has been derived from the
Latin word "decidere" which means "cutting off". Thus,
decision involves cutting off of alternatives between those that are desirable
and those that are not desirable.
In the words of George R. Terry,
"Decision-making is the selection based on some criteria from two or more
possible alternatives".
Characteristics of Decision Making
•
Decision
making implies that there are various alternatives and the most desirable
alternative is chosen to solve the problem or to arrive at expected results.
•
The decision-maker has freedom to choose an
alternative.
•
Decision-making may not be completely rational
but may be judgemental and emotional.
•
Decision-making is goal-oriented.
•
Decision-making
is a mental or intellectual process because the final decision is made by the
decision-maker.
•
A decision may be expressed in words or may be
implied from behaviour.
•
Choosing
from among the alternative courses of operation implies uncertainty about the
final result of each possible course of operation.
•
Decision
making is rational. It is taken only after a thorough analysis and reasoning
and weighing the consequences of the various alternatives.
TYPES OF DECISIONS
a) Programmed and Non-Programmed Decisions: Herbert Simon has grouped organizational decisions into two categories based on
the procedure followed. They are:
i)
Programmed decisions: Programmed
decisions are routine and repetitive and are made within the framework of organizational policies and rules.
These policies and rules are established well in advance to solve recurring
problems in the organization. Programmed decisions have short-run impact. They
are, generally, taken at the lower level of management.
ii) Non-Programmed
Decisions: Non-programmed
decisions are decisions taken to meet
non-repetitive problems. Non-programmed decisions are relevant for solving
unique/ unusual problems in which various alternatives cannot be decided in
advance. A common feature of non-programmed decisions is that they are novel
and non-recurring and therefore, readymade solutions are not available. Since
these decisions are of high importance and have long-term consequences, they
are made by top level management.
b)
Strategic and Tactical Decisions: Organizational decisions may also be classified
as strategic or tactical.
i) Strategic
Decisions: Basic
decisions or strategic decisions are decisions which are of crucial importance. Strategic decisions a major choice of actions
concerning allocation of resources and contribution to the achievement of
organizational objectives. Decisions like plant location, product
diversification, entering into new markets, selection of channels of
distribution, capital expenditure etc are examples of basic or strategic
decisions.
ii) Tactical Decisions: Routine decisions or tactical decisions are decisions which are routine and repetitive. They are
derived out of strategic decisions. The various features of a tactical decision
are as follows:
•
Tactical
decision relates to day-to-day operation of the organization and has to be
taken very frequently.
•
Tactical
decision is mostly a programmed one. Therefore, the decision can be made within
the context of these variables.
•
The
outcome of tactical decision is of short-term nature and affects a narrow part
of the organization.
•
The
authority for making tactical decisions can be delegated to lower level
managers because: first, the impact of tactical decision is narrow and of
short-term nature and Second, by delegating authority for such decisions to
lower-level managers, higher level managers are free to devote more time on
strategic decisions.
DECISION MAKING PROCESS
The
decision making process is presented in the figure below:
1. Specific
Objective: The need
for decision making arises in order to achieve certain specific objectives. The starting point in any
analysis of decision making involves the determination of whether a decision
needs to be made.
2.
Problem Identification: A problem is a felt need, a question which needs
a solution. In the words of Joseph L
Massie "A good decision is dependent upon the recognition of the right
problem". The objective of problem identification is that if the problem
is precisely and specifically identifies, it will provide a clue in finding a
possible solution. A problem can be identified clearly, if managers go through
diagnosis and analysis of the problem.
Diagnosis:
Diagnosis is the process of identifying a
problem from its signs and symptoms.
A symptom is a condition or set of conditions that indicates the existence of a
problem. Diagnosing the real problem implies knowing the gap between what is
and what ought to be, identifying the reasons for the gap and understanding the
problem in relation to higher objectives of the organization.
Analysis: Diagnosis gives rise to analysis. Analysis of a problem requires:
•
Who would make decision?
•
What information would be needed?
•
From where the information is available?
Analysis helps managers to gain an insight into the problem.
3. Search
for Alternatives: A problem can be solved in several ways; however, all the
ways cannot be equally satisfying. Therefore, the decision maker must try to
find out the various alternatives available in order to get the most
satisfactory result of a decision. A decision maker can use several sources for
identifying alternatives:
•
His own past experiences
•
Practices followed by others and
•
Using creative techniques.
4. Evaluation
of Alternatives: After the
various alternatives are identified, the next step is to evaluate them and select the one that will meet the choice
criteria. /the decision maker must check proposed alternatives against limits,
and if an alternative does not meet them, he can discard it. Having narrowed
down the alternatives which require serious consideration, the decision maker
will go for evaluating how each alternative may contribute towards the
objective supposed to be achieved by implementing the decision.
5. Choice
of Alternative: The
evaluation of various alternatives presents a clear picture as to how each one of them contribute to the
objectives under question. A comparison is made among the likely outcomes of
various alternatives and the best one is chosen.
6. Action:
Once the alternative is selected, it is put into
action. The actual process of decision making
ends with the choice of an alternative through which the objectives can be achieved.
7. Results:
When the decision is put into action, it brings
certain results. These results must correspond
with objectives, the starting point of decision process, if good decision has
been made and implemented properly. Thus, results provide indication whether
decision making and its implementation is proper.
Characteristics of Effective Decisions
An
effective decision is one which should contain three aspects. These aspects are
given
below:
•
Action Orientation: Decisions are action-oriented and are directed
towards relevant and controllable
aspects of the environment. Decisions should ultimately find their utility in
implementation.
•
Goal Direction: Decision making should be goal-directed to
enable the organization to meet its
objectives.
•
Effective in Implementation: Decision making should take into account all the
possible factors not only in terms
of external context but also in internal context so that a decision can be
implemented properly.
RATIONAL DECISION MAKING MODEL
The Rational Decision Making Model is a model
which emerges from Organizational Behavior. The process is one that is logical
and follows the orderly path from problem identification through solution. It
provides a structured and sequenced approach to decision making. Using such an
approach can help to ensure discipline and consistency is built into your
decision making process.
The Six-Step Rational Decision-Making Model
1.
Define the problem.
2.
Identify decision criteria
3.
Weight the criteria
4.
Generate alternatives
5.
Rate each alternative on each criterion
6.
Compute the optimal decision
This is the initial step of the rational
decision making process. First the problem is identied and then defined to get
a clear view of the situation.
2) Identify decision criteria
Once a decision maker has defined the problem,
he or she needs to identify the decision criteria that will be important in
solving the problem. In this step, the decision maker is determining what’s
relevant in making the decision.
This step brings the decision maker’s interests,
values, and personal preferences into the process.
Identifying criteria is important because what one person thinks is
relevant, another may not. Also keep in mind that any factors not identified in
this step are considered as irrelevant to the decision maker.
3) Weight the criteria
The
decision-maker weights the previously identified criteria in order to give them
correct priority
in the
decision.
4) Generate alternatives
The decision maker generates possible
alternatives that could succeed in resolving the problem. No attempt is made in
this step to appraise these alternatives, only to list them.
5) Rate each alternative on each criterion
The decision maker must critically analyze and
evaluate each one. The strengths and weakness of each alternative become
evident as they compared with the criteria and weights established in second
and third steps.
6) Compute the optimal decision
Evaluating each alternative against the weighted
criteria and selecting the alternative with the highest total score.
DECISION MAKING UNDER VARIOUS CONDITIONS
The conditions for making decisions can be
divided into three types. Namely a) Certainty, b) Uncertainty and c) Risk
Virtually all decisions are made in an
environment to at least some uncertainty However; the degree will vary from
relative certainty to great uncertainty. There are certain risks involved in
making decisions.
a) Certainty:
In a situation involving certainty, people are
reasonably sure about what will happen when they make a decision. The
information is available and is considered to be reliable, and the cause and
effect relationships are known.
b) Uncertainty
In a situation of uncertainty, on the other
hand, people have only a meager database, they do not know whether or not the
data are reliable, and they are very unsure about whether or not the situation
may change.
Moreover, they cannot evaluate the interactions
of the different variables. For example, a corporation that decides to expand
its Operation to an unfamiliar country may know little about the country,
culture, laws, economic environment, and politics. The political situation may
be volatile that even experts cannot predict a possible change in government.
c) Risk
In a situation with risks, factual information
may exist, but it may be incomplete. 1o improve decision making One may
estimate the objective probability of an outcome by using, for example,
mathematical models On the other hand, subjective probability, based on
judgment and experience may be used
All intelligent decision makers dealing with
uncertainty like to know the degree and nature of the risk they are taking in
choosing a course of action. One of the deficiencies in using the traditional
approaches of operations research for problem solving is that many of the data
used in model are merely estimates and others are based on probabilities. The
ordinary practice is to have staff specialists conic up with best estimates.
Virtually every decision is based on the
interaction of a number of important variables, many of which has e an element
of uncertainty but, perhaps, a fairly high degree of probability. Thus, the
wisdom of launching a new product might depend on a number of critical
variables: the cost of introducing the product, the cost of producing it, the
capital investment that will he required, the price that can be set for the
product, the size of the potential market, and the share of the total market
that it will represent.
