UNIT II

PLANNING

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".

NATUREANDPURPOSEOFPLANNING
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
As a managerial function planning is important due to the following reasons:-
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
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 involves conversion of detailed and specific plans into detailed
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.
PLANNINGPROCESS
The various steps involved in planning are given below

a) Perception of Opportunities:
 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.
• 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.
• 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.

d)Choice of alternative plans

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.
e) 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.
f) 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.
TYPESOFPLANS/COMPONENTSOFPLANNING
In the process of planning, several plans are prepared which are known as
components of planning.

•
•

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.
a) 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.
b) 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.
Ø Programme: Programme consists of an ordered list of events to be
followed to execute a project.
Ø 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:
Ø 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.

Ø 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
the order in which they are to be done, procedures provide a
standardized way of responding to a repetitive problem.
Ø 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.
c) 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 implementedif 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.
Features of 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 vitallyaffects 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
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
areconsistent with their higher organizational objectives.
 4. MBO focuses attention on appropriate goals and plans.
MBO facilitates control through the periodic development and subsequent evaluation of
Indidual goals and plans

Steps in MBO:

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.
Characteristics of Strategy
• 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.

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.
2. 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.
3. 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.
4. 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.
5. Present and Future External Environment: The present and future
external environment must be assessed in terms of threats and
opportunities.
6. 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.
7. 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.
8. 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.
9. 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
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 marketshare. 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 verticalintegration 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.

Firms that succeed in cost leadership often have the

following internal strengths:
• Access to the capital required to make a significant investment in
productionassets; this investment represents a barrier to entry that
many firms may not overcome.
• Skill in designing products for efficient manufacturing, for
example, having asmall 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.
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.

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
GenericStrategies
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.
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
judgmental 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.

TYPESOFDECISIONS
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.
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
ii) 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
iii) Tactical Decisions: Routine decisions or tactical decisions are
decisions which
are routine and repetitive. They are derived out of strategic decisions.
DECISIONMAKINGPROCESS

Specific Objective: The need for decision making arises in order to achieve
certain specific objectives. The starting point in any analysis of decision
1. 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.
2. 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.
 3. 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.
4. 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.
5. 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.
Results: When the decision is put into action, it brings certain result
1. 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.
RATIONALDECISIONMAKINGMODEL
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

1)Defining the problem

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.
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.
4) 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.
5)Compute the optimal decision
Evaluating each alternative against the weighted criteria and selecting the
alternative with the highest total score.
DECISIONMAKINGUNDERVARIOUSCONDITIONS
The conditions for making decisions can be divided into three types.
Namely
a) Certainty,
b) Uncertainty and
c) Risk
a) 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 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 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.