February 28, 2024
Uncategorized

Planning

Planning

Planning is the process of thinking before doing. It involves determination of objectives and steps to be taken to achieve those objectives. It is a continuous intellectual process of anticipating the future and deciding the activities. It is the process of deciding what is to be done, how where, when, and by whom is it to be done.

Planning  is deciding  in  advance what  to  do,  how  to do  it, when  to do  it  and who  is  to  do  it.  Planning  bridges  the  gap  from  where  we  are  to  where we want  to  go.  It  is  one  of  the  basic managerial  functions.  Planning  involves setting objectives and developing appropriate courses of action to achieve these objectives.  Thus  it  in  closely  connected with  creativity  and  innovation.

PLANNING FROM TOP TO BOTTOM DIAGRAM

NATURE OF PLANNING

1. Intellectual Process

Planning is an intellectual process. A good plain is based upon collection, study and analysis of facts, evaluating the alternatives, combination of factors and deciding the most appropriate line of action. The efficiency of plans depends on the ability of the management.

2. Planning is goal oriented

Planning is made to achieve the desired objectives of the business. The objectives of the business should become the focus of management team. It should be guided towards the selected objective of the business.

3. Planning is the primary function

Planning is the first function of management. Every other managerial function is based on the plans. It is the framework on which the other management functions are built. All managerial functions are interrelated and equally important. However planning is the basic function.

4. Planning is Pervasive

Planning is required at all levels of management as well as in all departments of the organization. It is not an exclusive function of top management alone. It is not reserved to one department alone. However the scope of planning differs at different levels of management. It differs from department to department.

5. Planning is flexible and continuous

Plans are prepared for a specific period of time. It is not a permanent structure in the process of management. The plan has to be modified within the period for which it is made according to actual situations. At the end of the period there may be a drastic revision of plan. At every stage there is continuous monitoring, evaluation and modifications in plans.

6. Planning is forward looking

Planning essentially involves looking ahead. It is preparing for the future. The purpose of planning is to meet the future situations effectively. It requires the management to foresee the future events on the basis of past. It must consider all other factors having influence on business environment. Planning is the activity making use of favourable factors in future to achieve goals. It also involves finding solutions to possible negative factors such as increased competition, fall in demand shortage of materials etc.

7. Planning is selection of best alternative

Planning is the identification of alternatives and selection of the best. If there is only one objective and only one course of action, there is no scope of planning. The planning process evaluations all the options and the strengths and weakness on the basis of resource availability and decides what exactly the best course of action is. Thus the planning process is the selection of the right course of action from the wide range of options.

Importance of planning

Planning is the primary function in the process of management. Planning involves forecasting the future, imagining various scenarios, selecting the most likely scenario and then organizing resources to put the plan into action Planning is concerned with the future impact of today’s decisions. It is the process of thinking before doing. It is involves determination of goals and deciding the course of action. Planning is important due to the following benefits derived from planning:

1. Planning helps in achieving the objectives

The objectives of the business are the guide posts to decide the course of action. Management process involves continuously monitoring what the management is achieving on daily basis in the wider canvas of the objectives of the organization

 2. Reduces uncertainties

Many of the problems that can arise in future are beyond the control of management. It however can prepare the organization to face problems to reduce the impact. Planning anticipates advantages and disadvantages in future events and suggests suitable course of action. Strength, Weakness, Opportunities and Threats (SWOT) are to be analyzed to determine the most suitable course of action.

3. Enables the best possible use of resources

The resources of business are to be put to the best use to achieve maximum result. Underutilization of resources is a symptom and cause of inefficiency. Planning determines the nature and volume of each resource at various stages in future. Thus the management can make provision to put them to the best use. Management can regulate and organize the supply of various resources to ensure that there is no over supply or scarcity. It reduces misuse and wastage.

4. Effective coordination

To coordinate is to fine tune the activities in the scale and rhythm of objectives. Planning leads to regulation of all activities in the business. It ensures smoothness in the functioning of business. In the absence of proper planning, interrelated activities fail to meet each others’ requirement and lead to inefficiency. For example production department should be coordinated with sales plan to make sure that there is no over production or scarcity.

5. Planning facilitates decision-making

Planning estimates future situations. The management is more or less aware of the prospective opportunities. It also gets a realistic picture of the problems that can crop up in future. Plans are made on the basis this analysis. Decision making process becomes simple implementation of plans in action. It is relatively easier, because the available options are considered in advance at the planning stage.

6. Planning helps in expansion of business

No business can survive by being stagnant. Business world is always mobile. This mobility is either upward or downward. Thus progress is not just a question of well being; it is the fundamental question of survival. In a competitive environment, when the rivals make their strategies to expand their market share, a stagnant company is a losing company. It may not be losing the absolute numbers in sales figure. But will be evident when their market share over a period of time is compared. Lost opportunity is a permanent loss. Planning involves allocation of resources and implementation of programs for expansion of the business.

7. Effective control

Planning establishes rules of action. It establishes procedures. Management knows the situations that are likely to emerge. When there is a well thought out plan, it is easier to compare results. When problems are detected at implementation stage, it can be sorted out, before it leads to more problems and inefficiency and ultimately a crisis. Thus planning is an effective tool of control.

Limitations of planning

Planning suffers from internal and external limitations. Internal limitations are inherent limitations and to some extent the management can take precautions and reduce their effect. However external limitations are mostly beyond the control of management.

The following are the limitations of planning:

a. Internal Limitations

1. Rigidity

Plan is the rigid framework for future activities. Planning reduces operational freedom to management. Business environment keeps on changing. The planned activities sometimes do not fit in the renewed circumstances. Problems once anticipated may not become realities. At the same time new problems may emerge. The requirements of strict planning sometimes cause opportunities slip through while the management strictly follow the order of preset priorities.

2. Misdirected Planning

Planning is anticipating a certain set of future situations which create physical and economic and physical environment of the business. It is a powerful force when the situations are accurately assessed and planned. But many of the future situations can change drastically which will make the entire plan meaningless. If the priorities are wrong in light of the new situations and the administrative procedures prevent a quick patch up, the strength and energies of the organization will be directed to some targets that are less meaningful.

3. Time Consuming

Planning is an activity covering the entire range of functions in the business. Gathering information from a wide range or sources analyzing them to arrive at meaningful conclusion is a time consuming matter. Management often fail to gather information at the right time to make effective plans.  In many cases the situations change by the time management gather the required information, which compels them to do the work all over again.

4. False sense of security

Plans often give a false sense of security to the management. The activities are planned.  All the business decisions simple logical extension of the plans.  Management often fail to recognize the change in situations. They expect the natural progress of events according to plans. This false sense of security makes the management complacent which ultimately result in inefficiency.

5 Dependence on forecasting

Forecasting is the foundation of planning process. The future can be predicted only to a vey limited extent. Uncertainties can topple the best estimate of management. In fact most the variables that are taken into account while planning change continuously. Many things can go wrong within the planning period. Lack of monitoring will drain the prospects of business while the management sits back and relax to reap the profits as a reward for effective planning.

6. Expensive process

Planning process is an expensive affair. Big organizations have planning department staffed by professionals, supported by subordinate staff. The company has the bear the burden of salary and service requirements of this additional department.

7. Bias – promoting self interest

Planning sometimes reflect the personal interest of the planners, rather that the interest of the business. If the planners have vested interest they may influence the planning process and tilt the direction of the business to serve those interests. In addition to vested interest there are personal opinions which influence the plans. Plans can reflect individual tastes and preferences rather than the best interest of the business.

Purposes of Planning

Planning is important and serves many significant purposes.

1. Planning gives direction to the organization.

2. Planning reduces the impact of change.

3. Planning establishes a coordinated effort.

4. Planning reduces uncertainty.

5. Planning reduces overlapping and wasteful activities.

6. Planning establishes objectives or standards that are used in controlling.

THE PLANNING PROCESS

TERRY has defined “Planning is the selection and relating of facts and making and using of assumptions regarding future in the visualization and formulation of proposed activity believed necessary to achieve desired results.”

Planning is a process for accomplishing purposes. It is a blue print of business growth and a road map of development. It helps in deciding objectives both in quantitative and qualitative terms. It is setting of goals on the basis of objectives and keeping in the resources. A plan should be a realistic view of the expectations. Depending upon the activities, a plan can be long range, intermediate range or short range. It is the framework within which it must operate. For management seeking external support, the plan is the most important document and key to growth. Preparation of a comprehensive plan will not guarantee success, but lack of a sound plan will almost certainly ensure failure.

Process of Planning involves

1. Perception of opportunities

2. Establishing objectives

3. Planning premises

4. Identification of alternatives

5. Evaluation of alternatives

6. Choice of alternative plans

7. Formulation of supporting plans

8. Establishing sequence of activities

The explanation of the following points are as follow :

1. Perception of Opportunities :

It includes a preliminary look at possible opportunities and the ability to see them clearly and completely, a knowledge of where the organization stands in the light of its strengths and weaknesses, an understanding of why the organization wants to solve uncertainties, and a vision of what it expects to gain.

2. Establishing Objective:

The objective should be specified before starting the business, its should be a clear idea what’s we are going to achieve in a future.

3. Planning premises:

It mean a planning assumptions, the expected environment and internal conditions. Thus, planning premises are external and internal. In externalits include political, social, technological, competitors’ plans and actions, govt. policies etc. internal factors includes organization’s policies , resources of various types, etc

4. Identification of Alternatives:

There are various alternative you have to identify the alternative which meet the requirement of your objective.

5. Evaluation of Alternatives:

After the identification of the various alternative you have to evaluate how each alternative contributes to the organisational objectives in the light of its resources and constraints, because every alternative have certain positive and certain negative points.

6. Choice of Alternative:

After evaluation of various alternatives, which alternative most fit with the organisational objective. Some time evaluation shows more than one alternative is equally good. In that case they choose more than one alternative because future is uncertain, therefore planner is ready with the another alternative.

7. Formulation of Supporting Plans:

After formulating the basic plan, various plans are derived so as to support the main plan. In an organization there can be various derivative plans like planning for buying equipments, buying raw materials, recruiting and training personnel, developing new product, etc.

8. Establishing sequence of Activities:

After formulating basic and derivative plans, the sequence of activities is determined so that plans are put into action. Based on plans at various levels, it can be decided who will do what and at what time. Budgets for various periods can be prepared.

Types of Plan

Strategic Plans

Strategic plans define the framework of the organization’s vision and how the organization intends to make its vision a reality.

  • It is the determination of the long-term objectives of an enterprise, the action plan to be adopted and the resources to be mobilized to achieve these goals.
  • Since it is planning the direction of the company’s progress, it is done by the top management of an organization.
  • It essentially focuses on planning for the coming years to take the organization from where it stands today to where it intends to be.
  • The strategic plan must be forward looking, effective and flexible, with a focus on accommodating future growth.
  • These plans provide the framework and direction for lower level planning.

Tactical Plans

Tactical plans describe the tactics that the managers plan to adopt to achieve the objectives set in the strategic plan.

  • Tactical plans span a short time frame (usually less than 3 years) and are usually developed by middle level managers.
  • It details specific means or action plans to implement the strategic plan by units within each division.
  • Tactical plans entail detailing resource and work allocation among the subunits within each division.

Operational Plans

Operational plans are short-term (less than a year) plans developed to create specific action steps that support the strategic and tactical plans.

  • They are usually developed by the manager to fulfill his or her job responsibilities.
  • They are developed by supervisors, team leaders, and facilitators to support tactical plans.
  • They govern the day-to-day operations of an organization.
  • Operational plans can be −
    • Standing plans − Drawn to cover issues that managers face repeatedly, e.g. policies, procedures, rules.
    • Ongoing plans − Prepared for single or exceptional situations or problems and are normally discarded or replaced after one use, e.g. programs, projects, and budgets.

POLICY

A policy is a broad statement formulated to provide guidance in decision-making at lower levels of management. It defines the area or limits within which decisions can be made.

For example, a policy that “promotions will be based on merit only”  tells that while deciding promotions merit criteria is to be adopted. Thus, “policies are general statements of understandings, which guide or channel thinking the decision making of subordinates.

According to McFarland, ’Policies are planned expressions of the company’s official attitudes towards the range of behaviour within which it  will permit or desire Its employees to act.”

 A policy reflects the intention of top management. It is stated in broad terms and is long lasting.

Need and Importance of Policies

Clear-cut and sound policies serve the following functions:

1.  Operationalise Objectives. :  Objectives arc expressed in general terms having little significance for rank and file of employees. It is the policies which translate them into concrete terms.

 For example, employees may understand little from the objective “to achieve sales target of fifty million rupees”. The implication becomes clear when the policy is formulated ‘to open as many retail outlets as possible.’ Thus, policies give practical shape to objectives.

2.  Save Time and effort.  Policies provide guidelines to the lower-level managers for repetitive situations. They avoid the need for frequent reference to higher managers for advice. The expensive analysis need not be carried out again and again. Policies provide guide to thinking and decision-making. In this way, policies save valuable time and effort. They are standing answers to recurring problems.

They build confidence among employees to solve problems.

3. Facilitate Delegation of Authority:-  Policies help in making the actions of each manager more predictable to others. They ensure that decisions made by different managers will be consistent, fair and in keeping with the objectives and interests of the organisation as a whole. Unwarranted deviations from planned operations can be minimized and coordination becomes easier.

4.  Speed up Decision-making:-  Policies facilitate quick decisions, by providing a framework within which decisions can be made. They avoid the need for repeated analysis and tend to predecide problems. Pollclcs delimit the area within which a decision Is to be made and assure that the decision will be consistent with and contribute to objectives.

5. Administrative Control. Policies facilitate administrative control by providing

a rational basis for evaluating results.

Procedure

Definition: Procedure, refers to a comprehensive set of instructions that prescribes a certain way of performing a process, or part of a process, in relation to time. It states a chronological sequence for undertaking activities, so as to achieve the objectives.

The procedures are meant for insiders (members of the organization including employees, directors, managers and workers) to be pursued. They are also popularly known as the term Standard Operating Procedure (SOPs). It states exactly what course of action is to be followed by an employee in a specific circumstance.

Characteristics of Procedure

Procedures are operational guidelines, reflecting the way in which policies can be implemented. A company’s policies and procedures are interconnected to one another, which are to be undertaken within a general policy framework. The salient features of procedures are discussed as under:

  • Acts as a guide to action.
  • Defined keeping in view the company’s objectives, policies and resources.
  • Related to the time sequence for the work to be performed.
  • Meant for handling repetitive and regular events effectively.
  • Relevant for controlling and coordination of activities.

Procedure suggests particular beginning and endpoints which are required to be pursued in an exact manner to efficiently and satisfactorily carry out a task.

Importance of Procedure

Upcoming points will discuss the importance of procedures:

  • It defines the manner in which work is to be carried out and eliminate all the irrelevant or repetitive steps.
  • It ensures a high level of uniformity in tasks, and consistency in the decisions which helps in avoiding chaos.
  • To undertake any task in an effective manner, the procedure suggests the ideal ways and methods.
  • It facilitates in eliminating or reducing errors or accidents.
  • It assists in the successful completion of the work assigned in a timely manner.
  • Procedures specify the base for evaluating the performance of the workers or employees. In this way, it ensures executive control over the performance of employees.
  • It saves time, efforts and money because it states the standard ways for doing things.

The procedure is a component of planning which handles the “how” and “when” aspect, i.e. it specifies the way in which work is to be performed and the right time for performing it.

Limitations of Procedure

As every coin has two sides, the procedure also has some limitations. As a standard way is prescribed for performing the task, it constrains the scope for innovation or improvement in performing the work.

Example

A firm develops procedures for various activities like purchasing, issuing raw materials from stores, recruiting employees, conducting meetings, handling grievances, granting loans to employees resolving customers issues, dealing with clients, granting leaves to employees, etc.

Basically, there is a definite procedure for each repetitive activity in a business concern.Come let’s discuss some examples:

Procedure followed for purchasing raw materials:

  1. Request made by the storekeeper to the purchasing department
  2. Inviting tenders for purchase of materials
  3. Selecting the suppliers
  4. Placing the order with the selected suppliers
  5. Inspection of materials purchased
  6. Payment made by the accounts department

Procedure followed for recruiting employees:

  1. Inviting applications through advertisements on various platforms.
  2. Screeing of the employees, through the CV or resume, received for the post.
  3. Shortlisting the candidates and inviting them.
  4. Conducting a written test.
  5. Conducting an interview for the candidates who clear the written test.
  6. Medical test for those who are selected in the interview round.
  7. Candidates who pass the medical test successfully are sent joining letter.

Simply put, the procedure is a well-defined method of completing a task, which embraces a series of steps to be undertaken while performing a course of action to undertake a repetitive task in a uniform as well as consistent manner.

Procedures can be reviewed and revised on the basis of past incidents and behaviours.

Strategy

In ancient Greece, the term Strategos was used in military science and implied the plan to win a battle. However, in business, strategies are more about understanding the competition and preparing a plan to match/surpass the potential of the rivals. It is defined as:

“Strategy is the direction and scope of an organization over the long-term. It helps achieve an advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and fulfill stakeholder expectations.

Features of Strategy

  • Specialized plan to outperform the competitors.
  • Details about how managers must respond to any change in the business environment.
  • Redefines direction towards common goals.
  • Reflects the concern to effectively mobilize resources.
  • Maximizes the organization’s chances to achieve the set objectives.

Further, the top management formulates strategies.

Strategies at Different Levels of Business

In an organization, strategies can exist at all levels – right from the overall business to the individuals working in it. Here are some common types of strategies:

  • Corporate Strategies – These are also explicitly mentioned in the organization’s Mission Statement. They involve the overall purpose and scope of the business to help it meet the expectations of stakeholders. These are important strategies due to the heavy influence of investors. Further, corporate strategies act as a guide for strategic decision-making throughout the business.
  • Business Unit Strategies – These are more about how a business competes successfully in a particular market. They involve strategic decisions about:
    • Choosing products
    • Meeting the needs of the consumers
    • Gaining an advantage over the competitors
    • Creating new opportunities, etc.
  • Operational Strategies – These are about how each part of the business is organized to deliver the corporate and business unit level strategic direction. Therefore, these strategies focus on the issues of resources, people, processes, etc.

Policy vs Procedure – Differences

Differences between Policies and Procedures are presented in the following table.

PoliciesProcedures
1. Policy is a guide for thinking and action.Procedures are guide for action. They show the method of doing a task.
2. Policies are basis for procedures.Procedures follow the policies.
3. Policies are responsibilities of top management.Procedures are responsibilities of middle level and lower level managers.
4. Policies are stable.Procedures can be changes in the short-run.
5. Policies give emphasis on general approach.Procedures give emphasis on stage-by-stage details.
6. Policies are broad and comprehensive.Procedures are more rigid and allow no freedom.
7. Policies are applied in long-range planning.Procedures are applied in short range planning.
8. Policies are directly related to goals.Procedures are indirectly related to goals.
9. Policy does not provide any method of doing a work.Procedure is a standard method of doing a work.

Difference between Policy and Strategy

A policy is a guide to thinking and action for those responsible for making decisions. On the other hand, a strategy deals with the allocation and deployment of physical and human resources so as to achieve the desired goals in the face of environmental pressures.

A strategy may exist without a policy. Strategy and policy may in some cases be coextensive. A strategy deals primarily with environmental constraints and oppor­tunities whereas a policy is concerned mainly with internal management.

A policy is a contingent decision and it lays down the response to be made whenever the specified contingency arises. But a strategy is designed to deal with situations about which all facts are not known and, therefore, alternatives can not be evaluated in advance.

Decision Making

“A Decision is the act of choice wherein an executive forms a conclusion about what must be done in a given situation. A decision represents behaviour chosen from a number of possible alternatives.” —D.E. Mc Farland

Decision making is a process of selecting the best among the different alternatives.

“Decision making can be defined as the selection based on some criteria of one behaviour alternative from two or more possible alternatives. To decide means “to cut off” or in practical, content, “come to conclusion.” —R.S. Davar

Characteristics of Decision Making:

Followings are the characteristics of decision making.

1. Decision making is based on rational thinking. The manager tries to force various possible effects of a decision on before deciding a particular one.

2. It involves the evaluation of various alternatives available. The selection of best alternative will be made only when pros and cons of all of them are discussed and evaluated.

3. It is a process of selecting the best from among alternatives available.

4. It involves certain commitment. Management is committed to every decision it takes.

5. Decision making is the end product because it is preceded by discussions and deliberations.

6. Decision making is aimed to achieve organisational goals.

Importance of Decision Making in Management

1. Better Utilisation of Resources

Decision making helps to utilise the available resources for achieving the objectives of the organisation. The available resources are the 6 Ms, i.e. Men, Money, Materials, Machines, Methods and Markets. The manager has to make correct decisions for all the 6 Ms. This will result in better utilisation of these resources.

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2. Facing Problems and Challanges

Decision making helps the organisation to face and tackle new problems and challenges. Quick and correct decisions help to solve problems and to accept new challenges.

3. Business Growth

Quick and correct decision making results in better utilisation of the resources. It helps the organisation to face new problems and challenges. It also helps to achieve its objectives. All this results in quick business growth. However, wrong, slow or no decisions can result in losses and industrial sickness.

4. Achieving Objectives

Rational decisions help the organisation to achieve all its objectives quickly. This is because rational decisions are made after analysing and evaluating all the alternatives.

5. Increases Efficiency

Rational decisions help to increase efficiency. Efficiency is the relation between returns and cost. If the returns are high and the cost is low, then there is efficiency and vice versa. Rational decisions result in higher returns at low cost.

6. Facilitate Innovation

Rational decisions facilitate innovation. This is because it helps to develop new ideas, new products, new process, etc. This results in innovation. Innovation gives a competitive advantage to the organisation.

7. Motivates Employees

Rational decision results in motivation for the employees. This is because the employees are motivated to implement rational decisions. When the rational decisions are implemented the organisation makes high profits. Therefore, it can give financial and non-financial benefits to the employees

Techniques /Methods of Decision making

Decision-Making: Technique # 1. Marginal Analysis:

This technique is used in decision-making to figure out how much extra output will result if one more variable (e.g. raw material, machine, and worker) is added. In his book, ‘Economics’, Paul Samuelson defines marginal analysis as the extra output that will result by adding one extra unit of any input variable, other factors being held constant.

Marginal analysis is particularly useful for evaluating alternatives in the decision-making process.

Decision-Making: Technique # 2. Financial Analysis:

This decision-making tool is used to estimate the profitability of an investment, to calculate the payback period (the period taken for the cash benefits to account for the original cost of an investment), and to analyze cash inflows and cash outflows.

Investment alternatives can be evaluated by discounting the cash inflows and cash outflows (discounting is the process of determining the present value of a future amount, assuming that the decision-maker has an opportunity to earn a certain return on his money).

Decision-Making: Technique # 3. Break-Even Analysis:

This tool enables a decision-maker to evaluate the available alternatives based on price, fixed cost and variable cost per unit. Break-even analysis is a measure by which the level of sales necessary to cover all fixed costs can be determined.

Using this technique, the decision-maker can determine the break-even point for the company as a whole, or for any of its products. At the break-even point, total revenue equals total cost and the profit is nil.

Decision-Making: Technique # 4. Ratio Analysis:

It is an accounting tool for interpreting accounting information. Ratios define the relationship between two variables. The basic financial ratios compare costs and revenue for a particular period. The purpose of conducting a ratio analysis is to interpret financial statements to determine the strengths and weaknesses of a firm, as well as its historical performance and current financial condition.

Decision-Making: Technique # 5. Operations Research Techniques:

One of the most significant sets of tools available for decision-makers is operations research. An operation research (OR) involves the practical application of quantitative methods in the process of decision-making. When using these techniques, the decision-maker makes use of scientific, logical or mathematical means to achieve realistic solutions to problems. Several OR techniques have been developed over the years.

Decision-Making: Technique # 6. Linear Programming:

Linear programming is a quantitative technique used in decision-making. It involves making an optimum allocation of scarce or limited resources of an organization to achieve a particular objective. The word ‘linear’ implies that the relationship among different variables is proportionate.

The term ‘programming’ implies developing a specific mathematical model to optimize outputs when the resources are scarce. In order to apply this technique, the situation must involve two or more activities competing for limited resources and all relationships in the situation must be linear.

Some of the areas of managerial decision-making where linear programming technique can be applied are:

i. Product mix decisions

ii. Determining the optimal scale of operations

iii. Inventory management problems

iv. Allocation of scarce resources under conditions of uncertain demand

v. Scheduling production facilities and maintenance.

Decision-Making: Technique # 7. Game Theory:

This is a systematic and sophisticated technique that enables competitors to select rational strategies for attainment of goals. Game theory provides many useful insights into situations involving competition. This decision-making technique involves selecting the best strategy, taking into consideration one’s own actions and those of one’s competitors.

The primary aim of game theory is to develop rational criteria for selecting a strategy. It is based on the assumption that every player (a competitor) in the game (decision situation) is perfectly rational and seeks to win the game.

In other words, the theory assumes that the opponent will carefully consider what the decision­-maker may do before he selects his own strategy. Minimizing the maximum loss (minimax) and maximizing the minimum gain (maximin) are the two concepts used in game theory.

Decision-Making: Technique # 8. Simulation:

This technique involves building a model that represents a real or an existing system. Simulation is useful for solving complex problems that cannot be readily solved by other techniques. In recent years, computers have been used extensively for simulation. The different variables and their inter­relationships are put into the model.

When the model is programmed through the computer, a set of outputs is obtained. Simulation techniques are useful in evaluating various alternatives and selecting the best one. Simulation can be used to develop price strategies, distribution strategies, determining resource allocation, logistics, etc.

Decision-Making: Technique # 9. Decision Tree:

This is an interesting technique used for analysis of a decision. A decision tree is a sophisticated mathematical tool that enables a decision-maker to consider various alternative courses of action and select the best alternative. A decision tree is a graphical representation of alternative courses of action and the possible outcomes and risks associated with each action.

In this technique, the decision-­maker traces the optimum path through the tree diagram. In the tree diagram the base, known as the ‘decision point,’ is represented by a square. Two or more chance events follow from the decision point. A chance event is represented by a circle and constitutes a branch of the decision tree. Every chance event produces two or more possible outcomes leading to subsequent decision points.

The decision tree can be illustrated with an example. If a firm expects an increase in the demand for its products, it can consider two alternative courses of action to meet the increased demand:

(a) Installing new machines,

(b) Introducing a double shift.

There are two possibilities for each alternative, i.e. output may increase (positive state) or fall (negative state). The probabilities associated with each state are taken as 0.6 and 0.4 respectively. This information can be presented in a tabular form, known as a pay-off matrix (see Table 13.2).

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Additional machines

= (Rs. 3,00,000 × 0.6) + (Rs. 2,00,000 × 0.4)

= Rs. 2,60,000

Double shift

= (Rs. 2,80,000 × 0.6) + (Rs. 2,40,000 × 0.4)

= Rs. 2,64,000

Since the pay-off from introducing a double shift is higher, it may be selected. Though, the decision tree does not provide a solution to the decision-maker, it helps in decision-making by showing the alternatives available and their probabilities.

The decision tree allows the decision-maker to see the application of most of the steps in the decision-making process in one single diagram. The effectiveness of this decision-making technique depends on the assumptions and the probability estimates made by the decision-maker.

Planning

Planning is the process of thinking before doing. It involves determination of objectives and steps to be taken to achieve those objectives. It is a continuous intellectual process of anticipating the future and deciding the activities. It is the process of deciding what is to be done, how where, when, and by whom is it to be done.

Planning  is deciding  in  advance what  to  do,  how  to do  it, when  to do  it  and who  is  to  do  it.  Planning  bridges  the  gap  from  where  we  are  to  where we want  to  go.  It  is  one  of  the  basic managerial  functions.  Planning  involves setting objectives and developing appropriate courses of action to achieve these objectives.  Thus  it  in  closely  connected with  creativity  and  innovation.

PLANNING FROM TOP TO BOTTOM DIAGRAM

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NATURE OF PLANNING

1. Intellectual Process

Planning is an intellectual process. A good plain is based upon collection, study and analysis of facts, evaluating the alternatives, combination of factors and deciding the most appropriate line of action. The efficiency of plans depends on the ability of the management.

2. Planning is goal oriented

Planning is made to achieve the desired objectives of the business. The objectives of the business should become the focus of management team. It should be guided towards the selected objective of the business.

3. Planning is the primary function

Planning is the first function of management. Every other managerial function is based on the plans. It is the framework on which the other management functions are built. All managerial functions are interrelated and equally important. However planning is the basic function.

4. Planning is Pervasive

Planning is required at all levels of management as well as in all departments of the organization. It is not an exclusive function of top management alone. It is not reserved to one department alone. However the scope of planning differs at different levels of management. It differs from department to department.

5. Planning is flexible and continuous

Plans are prepared for a specific period of time. It is not a permanent structure in the process of management. The plan has to be modified within the period for which it is made according to actual situations. At the end of the period there may be a drastic revision of plan. At every stage there is continuous monitoring, evaluation and modifications in plans.

6. Planning is forward looking

Planning essentially involves looking ahead. It is preparing for the future. The purpose of planning is to meet the future situations effectively. It requires the management to foresee the future events on the basis of past. It must consider all other factors having influence on business environment. Planning is the activity making use of favourable factors in future to achieve goals. It also involves finding solutions to possible negative factors such as increased competition, fall in demand shortage of materials etc.

7. Planning is selection of best alternative

Planning is the identification of alternatives and selection of the best. If there is only one objective and only one course of action, there is no scope of planning. The planning process evaluations all the options and the strengths and weakness on the basis of resource availability and decides what exactly the best course of action is. Thus the planning process is the selection of the right course of action from the wide range of options.

Importance of planning

Planning is the primary function in the process of management. Planning involves forecasting the future, imagining various scenarios, selecting the most likely scenario and then organizing resources to put the plan into action Planning is concerned with the future impact of today’s decisions. It is the process of thinking before doing. It is involves determination of goals and deciding the course of action. Planning is important due to the following benefits derived from planning:

1. Planning helps in achieving the objectives

The objectives of the business are the guide posts to decide the course of action. Management process involves continuously monitoring what the management is achieving on daily basis in the wider canvas of the objectives of the organization

 2. Reduces uncertainties

Many of the problems that can arise in future are beyond the control of management. It however can prepare the organization to face problems to reduce the impact. Planning anticipates advantages and disadvantages in future events and suggests suitable course of action. Strength, Weakness, Opportunities and Threats (SWOT) are to be analyzed to determine the most suitable course of action.

3. Enables the best possible use of resources

The resources of business are to be put to the best use to achieve maximum result. Underutilization of resources is a symptom and cause of inefficiency. Planning determines the nature and volume of each resource at various stages in future. Thus the management can make provision to put them to the best use. Management can regulate and organize the supply of various resources to ensure that there is no over supply or scarcity. It reduces misuse and wastage.

4. Effective coordination

To coordinate is to fine tune the activities in the scale and rhythm of objectives. Planning leads to regulation of all activities in the business. It ensures smoothness in the functioning of business. In the absence of proper planning, interrelated activities fail to meet each others’ requirement and lead to inefficiency. For example production department should be coordinated with sales plan to make sure that there is no over production or scarcity.

5. Planning facilitates decision-making

Planning estimates future situations. The management is more or less aware of the prospective opportunities. It also gets a realistic picture of the problems that can crop up in future. Plans are made on the basis this analysis. Decision making process becomes simple implementation of plans in action. It is relatively easier, because the available options are considered in advance at the planning stage.

6. Planning helps in expansion of business

No business can survive by being stagnant. Business world is always mobile. This mobility is either upward or downward. Thus progress is not just a question of well being; it is the fundamental question of survival. In a competitive environment, when the rivals make their strategies to expand their market share, a stagnant company is a losing company. It may not be losing the absolute numbers in sales figure. But will be evident when their market share over a period of time is compared. Lost opportunity is a permanent loss. Planning involves allocation of resources and implementation of programs for expansion of the business.

7. Effective control

Planning establishes rules of action. It establishes procedures. Management knows the situations that are likely to emerge. When there is a well thought out plan, it is easier to compare results. When problems are detected at implementation stage, it can be sorted out, before it leads to more problems and inefficiency and ultimately a crisis. Thus planning is an effective tool of control.

Limitations of planning

Planning suffers from internal and external limitations. Internal limitations are inherent limitations and to some extent the management can take precautions and reduce their effect. However external limitations are mostly beyond the control of management.

The following are the limitations of planning:

a. Internal Limitations

1. Rigidity

Plan is the rigid framework for future activities. Planning reduces operational freedom to management. Business environment keeps on changing. The planned activities sometimes do not fit in the renewed circumstances. Problems once anticipated may not become realities. At the same time new problems may emerge. The requirements of strict planning sometimes cause opportunities slip through while the management strictly follow the order of preset priorities.

2. Misdirected Planning

Planning is anticipating a certain set of future situations which create physical and economic and physical environment of the business. It is a powerful force when the situations are accurately assessed and planned. But many of the future situations can change drastically which will make the entire plan meaningless. If the priorities are wrong in light of the new situations and the administrative procedures prevent a quick patch up, the strength and energies of the organization will be directed to some targets that are less meaningful.

3. Time Consuming

Planning is an activity covering the entire range of functions in the business. Gathering information from a wide range or sources analyzing them to arrive at meaningful conclusion is a time consuming matter. Management often fail to gather information at the right time to make effective plans.  In many cases the situations change by the time management gather the required information, which compels them to do the work all over again.

4. False sense of security

Plans often give a false sense of security to the management. The activities are planned.  All the business decisions simple logical extension of the plans.  Management often fail to recognize the change in situations. They expect the natural progress of events according to plans. This false sense of security makes the management complacent which ultimately result in inefficiency.

5 Dependence on forecasting

Forecasting is the foundation of planning process. The future can be predicted only to a vey limited extent. Uncertainties can topple the best estimate of management. In fact most the variables that are taken into account while planning change continuously. Many things can go wrong within the planning period. Lack of monitoring will drain the prospects of business while the management sits back and relax to reap the profits as a reward for effective planning.

6. Expensive process

Planning process is an expensive affair. Big organizations have planning department staffed by professionals, supported by subordinate staff. The company has the bear the burden of salary and service requirements of this additional department.

7. Bias – promoting self interest

Planning sometimes reflect the personal interest of the planners, rather that the interest of the business. If the planners have vested interest they may influence the planning process and tilt the direction of the business to serve those interests. In addition to vested interest there are personal opinions which influence the plans. Plans can reflect individual tastes and preferences rather than the best interest of the business.

Purposes of Planning

Planning is important and serves many significant purposes.

1. Planning gives direction to the organization.

2. Planning reduces the impact of change.

3. Planning establishes a coordinated effort.

4. Planning reduces uncertainty.

5. Planning reduces overlapping and wasteful activities.

6. Planning establishes objectives or standards that are used in controlling.

THE PLANNING PROCESS

TERRY has defined “Planning is the selection and relating of facts and making and using of assumptions regarding future in the visualization and formulation of proposed activity believed necessary to achieve desired results.”

Planning is a process for accomplishing purposes. It is a blue print of business growth and a road map of development. It helps in deciding objectives both in quantitative and qualitative terms. It is setting of goals on the basis of objectives and keeping in the resources. A plan should be a realistic view of the expectations. Depending upon the activities, a plan can be long range, intermediate range or short range. It is the framework within which it must operate. For management seeking external support, the plan is the most important document and key to growth. Preparation of a comprehensive plan will not guarantee success, but lack of a sound plan will almost certainly ensure failure.

Process of Planning involves

1. Perception of opportunities

2. Establishing objectives

3. Planning premises

4. Identification of alternatives

5. Evaluation of alternatives

6. Choice of alternative plans

7. Formulation of supporting plans

8. Establishing sequence of activities

The explanation of the following points are as follow :

1. Perception of Opportunities :

It includes a preliminary look at possible opportunities and the ability to see them clearly and completely, a knowledge of where the organization stands in the light of its strengths and weaknesses, an understanding of why the organization wants to solve uncertainties, and a vision of what it expects to gain.

2. Establishing Objective:

The objective should be specified before starting the business, its should be a clear idea what’s we are going to achieve in a future.

3. Planning premises:

It mean a planning assumptions, the expected environment and internal conditions. Thus, planning premises are external and internal. In externalits include political, social, technological, competitors’ plans and actions, govt. policies etc. internal factors includes organization’s policies , resources of various types, etc

4. Identification of Alternatives:

There are various alternative you have to identify the alternative which meet the requirement of your objective.

5. Evaluation of Alternatives:

After the identification of the various alternative you have to evaluate how each alternative contributes to the organisational objectives in the light of its resources and constraints, because every alternative have certain positive and certain negative points.

6. Choice of Alternative:

After evaluation of various alternatives, which alternative most fit with the organisational objective. Some time evaluation shows more than one alternative is equally good. In that case they choose more than one alternative because future is uncertain, therefore planner is ready with the another alternative.

7. Formulation of Supporting Plans:

After formulating the basic plan, various plans are derived so as to support the main plan. In an organization there can be various derivative plans like planning for buying equipments, buying raw materials, recruiting and training personnel, developing new product, etc.

8. Establishing sequence of Activities:

After formulating basic and derivative plans, the sequence of activities is determined so that plans are put into action. Based on plans at various levels, it can be decided who will do what and at what time. Budgets for various periods can be prepared.

Types of Plan

Description: Types of Plans

Strategic Plans

Strategic plans define the framework of the organization’s vision and how the organization intends to make its vision a reality.

  • It is the determination of the long-term objectives of an enterprise, the action plan to be adopted and the resources to be mobilized to achieve these goals.
  • Since it is planning the direction of the company’s progress, it is done by the top management of an organization.
  • It essentially focuses on planning for the coming years to take the organization from where it stands today to where it intends to be.
  • The strategic plan must be forward looking, effective and flexible, with a focus on accommodating future growth.
  • These plans provide the framework and direction for lower level planning.

Tactical Plans

Tactical plans describe the tactics that the managers plan to adopt to achieve the objectives set in the strategic plan.

  • Tactical plans span a short time frame (usually less than 3 years) and are usually developed by middle level managers.
  • It details specific means or action plans to implement the strategic plan by units within each division.
  • Tactical plans entail detailing resource and work allocation among the subunits within each division.

Operational Plans

Operational plans are short-term (less than a year) plans developed to create specific action steps that support the strategic and tactical plans.

  • They are usually developed by the manager to fulfill his or her job responsibilities.
  • They are developed by supervisors, team leaders, and facilitators to support tactical plans.
  • They govern the day-to-day operations of an organization.
  • Operational plans can be −
    • Standing plans − Drawn to cover issues that managers face repeatedly, e.g. policies, procedures, rules.
    • Ongoing plans − Prepared for single or exceptional situations or problems and are normally discarded or replaced after one use, e.g. programs, projects, and budgets.

POLICY

A policy is a broad statement formulated to provide guidance in decision-making at lower levels of management. It defines the area or limits within which decisions can be made.

For example, a policy that “promotions will be based on merit only”  tells that while deciding promotions merit criteria is to be adopted. Thus, “policies are general statements of understandings, which guide or channel thinking the decision making of subordinates.

According to McFarland, ’Policies are planned expressions of the company’s official attitudes towards the range of behaviour within which it  will permit or desire Its employees to act.”

 A policy reflects the intention of top management. It is stated in broad terms and is long lasting.

Need and Importance of Policies

Clear-cut and sound policies serve the following functions:

1.  Operationalise Objectives. :  Objectives arc expressed in general terms having little significance for rank and file of employees. It is the policies which translate them into concrete terms.

 For example, employees may understand little from the objective “to achieve sales target of fifty million rupees”. The implication becomes clear when the policy is formulated ‘to open as many retail outlets as possible.’ Thus, policies give practical shape to objectives.

2.  Save Time and effort.  Policies provide guidelines to the lower-level managers for repetitive situations. They avoid the need for frequent reference to higher managers for advice. The expensive analysis need not be carried out again and again. Policies provide guide to thinking and decision-making. In this way, policies save valuable time and effort. They are standing answers to recurring problems.

They build confidence among employees to solve problems.

3. Facilitate Delegation of Authority:-  Policies help in making the actions of each manager more predictable to others. They ensure that decisions made by different managers will be consistent, fair and in keeping with the objectives and interests of the organisation as a whole. Unwarranted deviations from planned operations can be minimized and coordination becomes easier.

4.  Speed up Decision-making:-  Policies facilitate quick decisions, by providing a framework within which decisions can be made. They avoid the need for repeated analysis and tend to predecide problems. Pollclcs delimit the area within which a decision Is to be made and assure that the decision will be consistent with and contribute to objectives.

5. Administrative Control. Policies facilitate administrative control by providing

a rational basis for evaluating results.

Procedure

Definition: Procedure, refers to a comprehensive set of instructions that prescribes a certain way of performing a process, or part of a process, in relation to time. It states a chronological sequence for undertaking activities, so as to achieve the objectives.

The procedures are meant for insiders (members of the organization including employees, directors, managers and workers) to be pursued. They are also popularly known as the term Standard Operating Procedure (SOPs). It states exactly what course of action is to be followed by an employee in a specific circumstance.

Characteristics of Procedure

Procedures are operational guidelines, reflecting the way in which policies can be implemented. A company’s policies and procedures are interconnected to one another, which are to be undertaken within a general policy framework. The salient features of procedures are discussed as under:

Description: characteristics-of-procedures
  • Acts as a guide to action.
  • Defined keeping in view the company’s objectives, policies and resources.
  • Related to the time sequence for the work to be performed.
  • Meant for handling repetitive and regular events effectively.
  • Relevant for controlling and coordination of activities.

Procedure suggests particular beginning and endpoints which are required to be pursued in an exact manner to efficiently and satisfactorily carry out a task.

Importance of Procedure

Upcoming points will discuss the importance of procedures:

  • It defines the manner in which work is to be carried out and eliminate all the irrelevant or repetitive steps.
  • It ensures a high level of uniformity in tasks, and consistency in the decisions which helps in avoiding chaos.
  • To undertake any task in an effective manner, the procedure suggests the ideal ways and methods.
  • It facilitates in eliminating or reducing errors or accidents.
  • It assists in the successful completion of the work assigned in a timely manner.
  • Procedures specify the base for evaluating the performance of the workers or employees. In this way, it ensures executive control over the performance of employees.
  • It saves time, efforts and money because it states the standard ways for doing things.

The procedure is a component of planning which handles the “how” and “when” aspect, i.e. it specifies the way in which work is to be performed and the right time for performing it.

Limitations of Procedure

As every coin has two sides, the procedure also has some limitations. As a standard way is prescribed for performing the task, it constrains the scope for innovation or improvement in performing the work.

Example

A firm develops procedures for various activities like purchasing, issuing raw materials from stores, recruiting employees, conducting meetings, handling grievances, granting loans to employees resolving customers issues, dealing with clients, granting leaves to employees, etc.

Basically, there is a definite procedure for each repetitive activity in a business concern.Come let’s discuss some examples:

Procedure followed for purchasing raw materials:

  1. Request made by the storekeeper to the purchasing department
  2. Inviting tenders for purchase of materials
  3. Selecting the suppliers
  4. Placing the order with the selected suppliers
  5. Inspection of materials purchased
  6. Payment made by the accounts department

Procedure followed for recruiting employees:

  1. Inviting applications through advertisements on various platforms.
  2. Screeing of the employees, through the CV or resume, received for the post.
  3. Shortlisting the candidates and inviting them.
  4. Conducting a written test.
  5. Conducting an interview for the candidates who clear the written test.
  6. Medical test for those who are selected in the interview round.
  7. Candidates who pass the medical test successfully are sent joining letter.

Simply put, the procedure is a well-defined method of completing a task, which embraces a series of steps to be undertaken while performing a course of action to undertake a repetitive task in a uniform as well as consistent manner.

Procedures can be reviewed and revised on the basis of past incidents and behaviours.

Strategy

In ancient Greece, the term Strategos was used in military science and implied the plan to win a battle. However, in business, strategies are more about understanding the competition and preparing a plan to match/surpass the potential of the rivals. It is defined as:

“Strategy is the direction and scope of an organization over the long-term. It helps achieve an advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and fulfill stakeholder expectations.

Features of Strategy

  • Specialized plan to outperform the competitors.
  • Details about how managers must respond to any change in the business environment.
  • Redefines direction towards common goals.
  • Reflects the concern to effectively mobilize resources.
  • Maximizes the organization’s chances to achieve the set objectives.

Further, the top management formulates strategies.

Strategies at Different Levels of Business

In an organization, strategies can exist at all levels – right from the overall business to the individuals working in it. Here are some common types of strategies:

  • Corporate Strategies – These are also explicitly mentioned in the organization’s Mission Statement. They involve the overall purpose and scope of the business to help it meet the expectations of stakeholders. These are important strategies due to the heavy influence of investors. Further, corporate strategies act as a guide for strategic decision-making throughout the business.
  • Business Unit Strategies – These are more about how a business competes successfully in a particular market. They involve strategic decisions about:
    • Choosing products
    • Meeting the needs of the consumers
    • Gaining an advantage over the competitors
    • Creating new opportunities, etc.
  • Operational Strategies – These are about how each part of the business is organized to deliver the corporate and business unit level strategic direction. Therefore, these strategies focus on the issues of resources, people, processes, etc.

Policy vs Procedure – Differences

Differences between Policies and Procedures are presented in the following table.

PoliciesProcedures
1. Policy is a guide for thinking and action.Procedures are guide for action. They show the method of doing a task.
2. Policies are basis for procedures.Procedures follow the policies.
3. Policies are responsibilities of top management.Procedures are responsibilities of middle level and lower level managers.
4. Policies are stable.Procedures can be changes in the short-run.
5. Policies give emphasis on general approach.Procedures give emphasis on stage-by-stage details.
6. Policies are broad and comprehensive.Procedures are more rigid and allow no freedom.
7. Policies are applied in long-range planning.Procedures are applied in short range planning.
8. Policies are directly related to goals.Procedures are indirectly related to goals.
9. Policy does not provide any method of doing a work.Procedure is a standard method of doing a work.

Difference between Policy and Strategy

A policy is a guide to thinking and action for those responsible for making decisions. On the other hand, a strategy deals with the allocation and deployment of physical and human resources so as to achieve the desired goals in the face of environmental pressures.

A strategy may exist without a policy. Strategy and policy may in some cases be coextensive. A strategy deals primarily with environmental constraints and oppor­tunities whereas a policy is concerned mainly with internal management.

A policy is a contingent decision and it lays down the response to be made whenever the specified contingency arises. But a strategy is designed to deal with situations about which all facts are not known and, therefore, alternatives can not be evaluated in advance.

Decision Making

“A Decision is the act of choice wherein an executive forms a conclusion about what must be done in a given situation. A decision represents behaviour chosen from a number of possible alternatives.” —D.E. Mc Farland

Decision making is a process of selecting the best among the different alternatives.

“Decision making can be defined as the selection based on some criteria of one behaviour alternative from two or more possible alternatives. To decide means “to cut off” or in practical, content, “come to conclusion.” —R.S. Davar

Characteristics of Decision Making:

Followings are the characteristics of decision making.

1. Decision making is based on rational thinking. The manager tries to force various possible effects of a decision on before deciding a particular one.

2. It involves the evaluation of various alternatives available. The selection of best alternative will be made only when pros and cons of all of them are discussed and evaluated.

3. It is a process of selecting the best from among alternatives available.

4. It involves certain commitment. Management is committed to every decision it takes.

5. Decision making is the end product because it is preceded by discussions and deliberations.

6. Decision making is aimed to achieve organisational goals.

Importance of Decision Making in Management

1. Better Utilisation of Resources

Decision making helps to utilise the available resources for achieving the objectives of the organisation. The available resources are the 6 Ms, i.e. Men, Money, Materials, Machines, Methods and Markets. The manager has to make correct decisions for all the 6 Ms. This will result in better utilisation of these resources.

Description: importance of decision making

Image Credits © Sameer Akrani.

2. Facing Problems and Challanges

Decision making helps the organisation to face and tackle new problems and challenges. Quick and correct decisions help to solve problems and to accept new challenges.

3. Business Growth

Quick and correct decision making results in better utilisation of the resources. It helps the organisation to face new problems and challenges. It also helps to achieve its objectives. All this results in quick business growth. However, wrong, slow or no decisions can result in losses and industrial sickness.

4. Achieving Objectives

Rational decisions help the organisation to achieve all its objectives quickly. This is because rational decisions are made after analysing and evaluating all the alternatives.

5. Increases Efficiency

Rational decisions help to increase efficiency. Efficiency is the relation between returns and cost. If the returns are high and the cost is low, then there is efficiency and vice versa. Rational decisions result in higher returns at low cost.

6. Facilitate Innovation

Rational decisions facilitate innovation. This is because it helps to develop new ideas, new products, new process, etc. This results in innovation. Innovation gives a competitive advantage to the organisation.

7. Motivates Employees

Rational decision results in motivation for the employees. This is because the employees are motivated to implement rational decisions. When the rational decisions are implemented the organisation makes high profits. Therefore, it can give financial and non-financial benefits to the employees

Techniques /Methods of Decision making

 1. Marginal Analysis:

This technique is used in decision-making to figure out how much extra output will result if one more variable (e.g. raw material, machine, and worker) is added. In his book, ‘Economics’, Paul Samuelson defines marginal analysis as the extra output that will result by adding one extra unit of any input variable, other factors being held constant.

Marginal analysis is particularly useful for evaluating alternatives in the decision-making process.

2. Financial Analysis:

This decision-making tool is used to estimate the profitability of an investment, to calculate the payback period (the period taken for the cash benefits to account for the original cost of an investment), and to analyze cash inflows and cash outflows.

Investment alternatives can be evaluated by discounting the cash inflows and cash outflows (discounting is the process of determining the present value of a future amount, assuming that the decision-maker has an opportunity to earn a certain return on his money).

3. Break-Even Analysis:

This tool enables a decision-maker to evaluate the available alternatives based on price, fixed cost and variable cost per unit. Break-even analysis is a measure by which the level of sales necessary to cover all fixed costs can be determined.

Using this technique, the decision-maker can determine the break-even point for the company as a whole, or for any of its products. At the break-even point, total revenue equals total cost and the profit is nil.

Decision-Making: Technique # 4. Ratio Analysis:

It is an accounting tool for interpreting accounting information. Ratios define the relationship between two variables. The basic financial ratios compare costs and revenue for a particular period. The purpose of conducting a ratio analysis is to interpret financial statements to determine the strengths and weaknesses of a firm, as well as its historical performance and current financial condition.

Decision-Making: Technique # 5. Operations Research Techniques:

One of the most significant sets of tools available for decision-makers is operations research. An operation research (OR) involves the practical application of quantitative methods in the process of decision-making. When using these techniques, the decision-maker makes use of scientific, logical or mathematical means to achieve realistic solutions to problems. Several OR techniques have been developed over the years.

Decision-Making: Technique # 6. Linear Programming:

Linear programming is a quantitative technique used in decision-making. It involves making an optimum allocation of scarce or limited resources of an organization to achieve a particular objective. The word ‘linear’ implies that the relationship among different variables is proportionate.

The term ‘programming’ implies developing a specific mathematical model to optimize outputs when the resources are scarce. In order to apply this technique, the situation must involve two or more activities competing for limited resources and all relationships in the situation must be linear.

Some of the areas of managerial decision-making where linear programming technique can be applied are:

i. Product mix decisions

ii. Determining the optimal scale of operations

iii. Inventory management problems

iv. Allocation of scarce resources under conditions of uncertain demand

v. Scheduling production facilities and maintenance.

7. Game Theory:

This is a systematic and sophisticated technique that enables competitors to select rational strategies for attainment of goals. Game theory provides many useful insights into situations involving competition. This decision-making technique involves selecting the best strategy, taking into consideration one’s own actions and those of one’s competitors.

The primary aim of game theory is to develop rational criteria for selecting a strategy. It is based on the assumption that every player (a competitor) in the game (decision situation) is perfectly rational and seeks to win the game.

In other words, the theory assumes that the opponent will carefully consider what the decision­-maker may do before he selects his own strategy. Minimizing the maximum loss (minimax) and maximizing the minimum gain (maximin) are the two concepts used in game theory.

8. Simulation:

This technique involves building a model that represents a real or an existing system. Simulation is useful for solving complex problems that cannot be readily solved by other techniques. In recent years, computers have been used extensively for simulation. The different variables and their inter­relationships are put into the model.

When the model is programmed through the computer, a set of outputs is obtained. Simulation techniques are useful in evaluating various alternatives and selecting the best one. Simulation can be used to develop price strategies, distribution strategies, determining resource allocation, logistics, etc.

 9. Decision Tree:

This is an interesting technique used for analysis of a decision. A decision tree is a sophisticated mathematical tool that enables a decision-maker to consider various alternative courses of action and select the best alternative. A decision tree is a graphical representation of alternative courses of action and the possible outcomes and risks associated with each action.

In this technique, the decision-­maker traces the optimum path through the tree diagram. In the tree diagram the base, known as the ‘decision point,’ is represented by a square. Two or more chance events follow from the decision point. A chance event is represented by a circle and constitutes a branch of the decision tree. Every chance event produces two or more possible outcomes leading to subsequent decision points.

The decision tree can be illustrated with an example. If a firm expects an increase in the demand for its products, it can consider two alternative courses of action to meet the increased demand:

(a) Installing new machines,

(b) Introducing a double shift.

There are two possibilities for each alternative, i.e. output may increase (positive state) or fall (negative state). The probabilities associated with each state are taken as 0.6 and 0.4 respectively. This information can be presented in a tabular form, known as a pay-off matrix (see Table 13.2).

Additional machines

= (Rs. 3,00,000 × 0.6) + (Rs. 2,00,000 × 0.4)

= Rs. 2,60,000

Double shift

= (Rs. 2,80,000 × 0.6) + (Rs. 2,40,000 × 0.4)

= Rs. 2,64,000

Since the pay-off from introducing a double shift is higher, it may be selected. Though, the decision tree does not provide a solution to the decision-maker, it helps in decision-making by showing the alternatives available and their probabilities.

The decision tree allows the decision-maker to see the application of most of the steps in the decision-making process in one single diagram. The effectiveness of this decision-making technique depends on the assumptions and the probability estimates made by the decision-maker.

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