Chapter 4: Managerial Planning and Decision Making

Basics of Planning

Planning is the process of determining where to go by doing what. Planning is intertwined with effectiveness, which is defined as the achievement of organizational goals. An important concept that planning serves is efficiency, being defined as how good the organization is in its use of resources.

If a business organization just aims to survive, then it should try to be as well prepared as possible for the future. In our times where business organizations try to survive in highly competitive markets, the typical thing that happens is the rival firms’ launching innovative products or services. If an organization has not planned for this, it is more likely to panic and lose its position in the market because it takes time to do the very same thing. However, if it planned for this, then probably it can react correctly in a quicker manner because there would be some new products or services being developed or ready in the pipeline.

Levels of Planning

Being the primary function of management, planning should be done by all managers. However, the nature of planning changes with the level of management. High- level managers deal with long-term planning, whereas low-level managers plan for the short term. However, this does not necessarily mean that middle-level managers do not deal with long- or short-term planning, or low-level managers do not deal with medium-term planning.

By looking at the present through the collection of hourly, daily, monthly data, short-term planning shapes the near future of the organization. This planning addresses short- term concerns like the condition of machinery and equipment used in production.

In order to be more effective and efficient in their operations, managers need to make sure that day-to-day problems do not recur or are solved in a much better way. Therefore, in the medium term, more permanent solutions to short-term problems are sought out.

The planning that high-level managers do is also called strategic planning, because strategies are developed to guide the organization in reaching its vision. By setting the long-term plans and directions for the entire organization, high-level management sets the context for lower levels of management to work on useful short-term and medium-term plans. Long-term planning is high-level managers’ responsibility whereas middle-level managers are mainly responsible for medium-term planning and lower level managers are mainly responsible for planning for the short term.

Managerial Planning Process

Managerial planning is the process whereby managers assess an organization’s goals and create a plan of action for meeting those goals. Goals are the desired outcomes or results that people intend to achieve. Managerial planning involves determining

1. organizational goals, and
2. the action plans to reach those goals.

Organizational goals should be measurable, results- oriented, realistic, challenging, and have a clear time frame. In setting the organizational goals one should follow the hierarchy of objectives. This means that one should start from the longer term goals and continue with shorter term objectives that would enhance the fulfillment of the long-term ones. In setting organizational goals, managers start from the long-term objectives, then these long-term objectives serve as guides for shorter term objectives.

Many organizations use management by objectives13 (MBO) instead of this traditional perspective. MBO is a process by which managers and employees at all levels set mutually agreedupon goals. Those participatively set goals are used for motivating employees14 as well as for evaluating performance.

Determining Action Plans

The third step in the managerial planning process is determining the action plans. At this stage, concrete and detailed plans, specifically, statements of action steps (put in a chronological order) should be developed. In other words, tasks associated with the accomplishment of each goal should be identified. The clashing of action plans can only be solved by getting priorities (organizational values) straight.

Implementing Plans and Identifying Adjustments

Plans alone do not bring results. In order to realize results, plans have to be implemented (fourth step of the planning process). For the implementation to become successful the active participation or cooperation of people is highly important. In order for this to happen, plans must be communicated and explained so that people can get a clear picture of what is to be done.

Planning is a cycle: plan – execute – review – replan – execute. The managerial planning process involves an assessment of the organization with its resources and environment, and encompasses the setting of objectives. planning should not be seen as something to be done by managers occasionally and at scheduled times. It is an ongoing process, done continuously through evaluation and revision of plans and objectives.

Types of Plans

The most often used classification of organizational plans is strategic, tactical and operational plans (Table 4.2). 15 Strategic plans focus on the broad future and identify the long-term direction the organization will take as a whole. These plans ideally set forth the goals and objectives needed to accomplish the organization’s vision. In focusing on the long-run, as pointed out earlier, organizations analyze their external (especially the competitive environment) and internal (organizational resources) environments to gather information and determine the scope of business. Strategic plans cover the major aspects of business such as products, services, technology, finance and human resources with a time horizon of three to five years.

Tactical plans translate strategic plans into specific goals for specific parts of the organization. They specify how the organization’s resources can be used to put strategies into action. Tactical plans in business often take the form of functional plans that indicate how different operations within the organization will contribute to the overall strategy.

Even though tactical plans should complement the overall strategic plan, they are often somewhat independent of other tactical plans.

Operational plans translate tactical plans into specific goals and actions for small units of the organization and focus on the near term (12 months or less).

Standing plans are ongoing plans that provide guidance for activities performed repeatedly, like policies and procedures. A policy is a standing plan that communicates broad guidelines for making decisions and taking action in specific circumstances.

Procedures describe specific rules for what actions are to be taken in various situations. They are stated in employee handbooks and often called SOPs—standard operating procedures. Whereas a policy sets a broad guideline, procedures define precise actions to be taken

As the other type of operational plans, a single-use plan is a one-time plan specifically designed to meet the needs of a unique situation, like an advertising campaign for a new product launch.

Budgets and Budgeting

A budget is a plan that commits resources to projects or activities for a specific time period. In some organizations managers may spend a fair amount of time bargaining with higher levels to get adequate budgets to support the needs of their work units or teams. Most organizations have a two-phase process in making budgets. In the first phase, managers form a proposed budget. This provides a plan of the amount of money needed and is submitted to a superior or budget review committee. Then, by the end of the second phase, the manager receives an approved budget. This budget shows the total amount of money the manager is authorized to spend together with how much on which budget item.

In zero-based budgeting the budget for any activity at the beginning of each period is set at zero and all proposals – old and new – must be justified on a cost/ benefit basis.

Activity-based budgeting emphasizes the expected cost of the planned activities that will be consumed for a process, service, product or department. In this budgeting, costs can be assigned to activity and product level (e.g. assembly-line setup, inspections), rather than being averaged out across a number of products or services.

Decision Making Process

Decision making is the process of finding or identifying problems/opportunities in order to resolve them. This involves making a choice from available options.

The decision-making process starts with identifying a problem or opportunity. In order to initiate the decision- making process, one should feel the need to decide. The need to decide can be external or internal.

Once a problem or opportunity is identified, the decision maker needs to determine the criteria for selecting among alternative solutions. One simple way of doing it is to perform a cost-benefit analysis. Cost-benefit analysis compares the expected cost of an alternative to its expected benefits. In other words, it is simply guessing the downside and upside of choosing an alternative and weighing one side against the other. If a more refined and detailed approach is needed, one can think of three more criteria: ethicality, acceptability and timeliness.

Upon determining and assigning weights to the criteria, the decision maker needs to develop alternative courses of action that have the potential to bring the desired results. In solving a particular problem or capturing an opportunity mostly the first thing that people resort to is considering an old solution if they find the problem or opportunity to be the same or similar.

In evaluating alternatives, the decision maker might do preliminary screening and eliminate some alternatives that do not seem to bring minimally acceptable results and/or to reduce the number of alternatives to a manageable amount. Then, the alternatives thought to be worth giving serious consideration have to be examined.

The alternative with the highest expected future value is chosen to be the decision. In our hiring example, when we calculate and compare the total scores, we can see that candidate B is better. Nevertheless, the chosen alternative can have a feasibility problem

Making a decision does not necessarily guarantee its implementation. The main reason for that is resistance. Resistance to implement a decision can stem from the fact that the implementer of the decision did not take or was not given any part in making the decision.

Therefore, in order to counteract such resistances before or after it surfaces, the managers should (a) show extra care in bringing the voice of the implementers into the decision-making process (more participative decision making) or (b) sell the decision to the potential implementers by pointing out the expected benefits to convince them about the merits of the decision or (c) look for individuals who seem more motivated and competent to carry out the decision.

The decision-making process does not necessarily end with putting the decision into effect. The decision maker has to follow it up in order to check whether it is producing the expected benefits and generating some unexpected costs. At this stage, the decision maker or the implementer needs to collect information in order to see whether things are going in the right direction. In determining whether things are on track, one needs to know that implementation does not usually bring immediate results. In that case, the person who is making the decision should have a good enough idea about how long to wait before starting to collect and analyze the results.

Decision Models

The decision-making process discussed above is also known as the rational model of decision making, but this classical model is not the only model put forward to explain managerial decision making. There is the bounded rationality model which challenges the rational model for not being realistic enough and a third model, namely, intuitive decision making.

The rational decision-making model is a step-by-step process for making logically sound decisions. This model assumes that the decision maker has full or perfect information.

Bounded rationality is the idea that in decision making, rationality is limited by (a) the information at hand, (b) the cognitive limitations of the human mind, and (c) the finite amount of time to make a decision.

When compared with the rational model, another realistic model or approach would be intuitive decision making. Intuition is knowing or understanding something instinctively or subconsciously without reasoning or proof. intuitive decision making does not necessarily mean that the quality or correctness of the decision will suffer. In fact, it has been argued that this approach can complement both rational and bounded rational models and should be included in management education.