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Chapter 7: Foundations of Planning

Definition of planning Formal vs. informal planning Purposes of planning Planning: Concerned with ends or means? Relationship between planning and organizational performance Types of goals How plans differ Traditional goal-setting vs. Management By Objectives Characteristics of well-defined goals Tips for effective planning

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What Is Planning?

Defining the organization’s goals– Desired outcomes for individuals, groups, or entire

organizations Establishing an overall strategy for achieving those

goals– How shall we achieve the goals?

Developing a comprehensive set of plans to integrate and coordinate organizational work

– Who is going to do what?– How will resources be allocated?

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Formal vs. Informal Goals

Informal: not written down, short-term focus; specific to an organizational unit.

Formal: written, specific, and long-term focus, involves shared goals for the organization

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Purposes of Planning

- Provides direction- Reduces uncertainty- Minimizes waste and redundancy- Sets the standards for controlling

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The Relationship Between Planning And Performance

1. Formal planning is associated with:– Higher profits and returns of assets.– Positive financial results.

But…2. The quality of planning and implementation affects

performance more than the extent of planning.3. The external environment can reduce the impact of

planning on performance4. Formal planning must be used for several years before

planning begins to affect performance.

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Types of Goals

Financial Goals– Are related to the expected internal financial performance of

the organization. Strategic Goals

– Are related to the performance of the firm relative to factors in its external environment (e.g., competitors).

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Stated Objectives from Large U.S. Companies

Financial Objectives • Faster revenue growth• Faster earnings growth• Higher dividends• Wider profit margins• Higher returns on invested

capital• Stronger bond and credit

ratings• Bigger cash flows• A rising stock price• Recognition as a “blue chip”

company• A more diversified revenue

base• Stable earnings during

recessionary periods

Strategic Objectives • A bigger market share• A higher more secure industry

rank• Higher product quality• Lower costs relative to key

competitors• Broader or more attractive

product line• A stronger reputation with

customers• Superior customer service• Recognition as a leader in

technology and/or product innovation

• Increased ability to compete in international markets

• Expanded growth opportunitiesSource: A.A. Thompson Jr. and A.J. Strickland III. Strategic Management 12th ed. (New York: McGraw-Hill/Irwin, 2001), p. 43.

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Velocita Case

What were Velocita’s goals– Strategic?– Financial?

What was Velocita’s strategy/plan? What factors might prevent Velocita from

achieving it’s goal(s)?

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Broadly-worded official statements of the organization (intended for public consumption) that may be irrelevant to its real goals (what actually goes on in the organization)!

Stated versus Real Goals

10Exhibit 7.2Exhibit 7.2

Types of Plans

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Strategic vs. Operational Plans

Strategic Plans– Apply to the entire organization.– Establish the organization’s overall goals.– Positions organization in terms of its environment– Cover extended periods of time.

Operational Plans– Assumes objectives exist– Specifies details of how overall goals will be achieved– Cover short time period

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Long-term vs. Short-term Plans

Long-Term Plans– Plans with time frames extending beyond three years

Short-Term Plans– Plans with time frames on one year or less

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Specific vs. Directional Plans

Specific Plans– Clearly defined– No room for interpretation

Directional Plans– Flexible plans– General guidelines– Provide focus yet discretion in implementation.

14Exhibit 7.3Exhibit 7.3

Specific Versus Directional Plans

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Single-use vs. Standing Plans

Single-Use Plan– A one-time plan specifically designed to meet the

need of a unique situation. Standing Plans

– Ongoing plans that provide guidance for activities performed repeatedly.

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Traditional Goal-Setting

Broad goals set at the top of the organization. Goals broken into sub-goals for each org level Assumes that top management knows best because

they can see the “big picture.” Goals are intended to direct, guide, and constrain

from above. Common Problem:

– Goals often ambiguous, lack clarity– Goals become “reinterpreted” as flow down hierarchy

17Exhibit 7.4Exhibit 7.4

Problems With Traditional Objective Setting

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Problems with Traditional Approach Can Be Solved Via Means-Ends Chain

Establish clearly defined hierarchy of organizational goals

Goals are specific Goals are additive (lower-level goals will

enable you to reach higher-level goals)

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A Means-Ends Chain IllustratedWe need to increase

profits by 10%

We need to reduce costs by 15%

We need to reduce WIP by 10%

I need to reduce defects at my work station by 10% and

accelerate my assembly line by 10%

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MBO Goes One Step Further…

Establishes means-ends chain, but is also MOTIVATING, not just CONTROLLING!

Four elements:– Goal Specificity– Participative decision-making– Explicit time period– Performance feedback

How it works:– Specific performance goals are jointly determined by employees and

managers (increases commitment)– Progress toward accomplishing goals is periodically reviewed.– Rewards are allocated on the basis of progress towards the goals

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Characteristics of Well-Designed Goals

Written in terms of outcomes, not actions– Focuses on the ends, not the

means. Measurable and quantifiable

– Specifically defines how the outcome is to be measured and how much is expected.

Clear as to time frame– How long before measuring

accomplishment.

Challenging yet attainable– Low goals do not motivate.– High goals motivate if they

can be achieved. Written down

– Focuses, defines, and makes goal visible.

Communicated to all– Puts everybody “on the

same page.”

Exhibit 7.6Exhibit 7.6

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Contingency Factors in A Manager’s Planning

Manager’s level in the organization– Strategic plans at higher levels– Operational plans at lower levels

Degree of environmental uncertainty– Stable environment: specific plans– Dynamic environment: specific but flexible plans

Length of future commitments– Current plans affecting future commitments must be

sufficiently long-term to meet the commitments.

23Exhibit 7.7Exhibit 7.7

Planning in the Hierarchy of Organizations

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Tips For Effective Planning…

Don’t let plans create rigidity -- develop plans that are specific but flexible

Focus on quality and implementation, not quantity Don’t relegate planning to “planning department” – it should

become an integrated part of management Make sure you plan long enough to meet future commitments

(“commitment concept”) Persistence in planning eventually pays off because

managers “learn to plan” and quality of planning improves