BBA Principle Management Formal Planning & Informal Planning Study Material Notes

BBA Principle Management Formal Planning & Informal Planning Study Material Notes: Formal Planning informal planning types of planned Barriers to Effective Planning Measures  for Making Planning Effective features a good plan Planning in Indian organizations Discussion Questions Objectives Questions ( Most Important Notes for BBA I Semester Students )

MCom I Semester Corporate Final Accounts Company Study Material Notes

FORMAL PLANNING AND INFORMAL PLANNING

Classification of planning as formal and informal is based on the degree of formalization which is used in undertaking planning activities. Formal Planning Formal planning is in the form of well-structured process involving different steps. Generally. large organisations undertake planning in formal way in which they create separate corporate planning cell placed at sufficiently high level in the organisation. Generally, such cells are staffed by people with different backgrounds like engineers, statisticians, MBAs, economists, etc., depending on the nature of organisation’s business. These cells monitor the external environment on continuous basis. When any event in the environment shows some change, the cells go for the detailed study of the impact of the event and suggest suitable measures to take the advantages of the changing environment. The planning process that is adopted is rational, systematic, well-documented, and regular.

Informal Planning

As against formal planning, informal planning is undertaken, generally, by smaller organisations. The planning process is based on managers’ memory of events, intuitions and gut-feelings rather than based on systematic evaluation of environmental happenings. Usually, the corporate planning affairs are not entrusted to any single cell or department but become the part of managers’ regular activities. Since the environment for smaller organisations is not complex, they do reasonably well with informal planning process.

TYPES OF PLANS

A plan, as defined earlier, is a commitment of resources to a particular course of action believed necessary to achieve specific results. From this point of view, there may be several types of plans, both major and minor. What managers fail to recognise is that there is a variety of plans. Often they consider a major programme or project as a plan like building a factory or purchasing a new machinery. No doubt, these sometimes, overlooked is that a number of other future courses No doubt, these may be major plans but what is, fact, planning process, in whatever way it is undertaken, future courses of action are also plans. In plans or component parts which are bound together for Long-term objectives, strategies, policies, procedures, and rules. gic-use plans are relevant for a specified time and after the lapse of that time, these plans are formulated again for the next period. Examples of such plans are Pro quotas, targets, etc. Generally, these plans are derived from standing plans. For example organisations set their mission and objectives, out of which strategic actions are determined these actions into operations, projects, budgets, etc., are prepared for specific time period.

Strategic and Operational Plans. Another way of classifying various organisational plans are to group them into strategic and operational plans. Strategic plans are major ones which define the long-term course of action for an organisation in the light of its environment. These include determination of organisational objectives for long-term period, major policies, and strategies. These strategies are implemented through various operational plans, both major and minor. Examples of major operational plans are projects, budgets; minor plans are in the form of quotas and targets to be achieved within a specified period. Procedures are rules provide guidelines to put plans, particularly the operational ones, into action.

Various organisational plans, as discussed above, are interlinked and may be arranged in a hierarchy in which a higher-order plan helps to derive a lower-order plan. In the reverse direction, a lower-order plan contributes to the achievement of the objectives of a higher-order plan. The hierarchical nature of various plans is presented in Figure .

Formal Planning & Informal Planning

A basic feature of these plans is that they provide basis for actions as well as measures for control in organisations. How they provide basis for actions will be discussed in Chapters 7 and 8: how they provide measures for control will be taken up in Part VI (Controlling) of the text.

BARRIERS TO EFFECTIVE PLANNING

Planning as a management function is essential to every manager and every organisation but there are some practical problems in proper planning. The reasons why people tend to fail in planning emphasise that the practical difficulties encountered in planning disclose that effective planning is not easy. Managers can do better if they are aware of these limitations so that they can take adequate precautions against them. Given below are the major limitations to effective planning:

1 Difficulty of Accurate Premising. Planning exercise is undertaken under certain assumptions of future events which are determined by a large number of factors in the environment. Thus, a limiting factor in planning is the difficulty of formulating accurate premises. Since the future cannot be known with accuracy, premising is subject to a margin of error. Though this margin of error can be minimised by making suitable forecast of future events, perfection cannot be expected. It is often suggested that since long-range planning requires peeping into the distant future, and distant future is not certain, it is useless to undertake long-range planning. In fact this is true to some extent and specially under two situations long-range planning cannot be undertaken: first, in the formative stage of the organisation’s development when it may not be possible to take up long-range planning and second, when the environment in which the organisation operates is unstable and uncertain owing to social, technological, and other changes.

2. Problems of Rapid Change. Another problem which is related to the external environment is the rapid change which takes place in the environment. In a complex and rapidly changing environment, complications that make planning extremely difficult often magnify the succession of new problems. The problem of change is more complex in long-range planning than in short-range planning. Present conditions tend to weigh heavily in planning. and by overshadowing future needs may sometimes result in error of judgement. In rapidly changing conditions, planning activities taken in one period may not be relevant for another period because the conditions in two periods are quite different.

3. Internal Inflexibilities. Managers while going through the planning process have to work in a set of given variables. These variables often provide less flexibility in planning which is needed to cope up with the changes in future events. Such inflexibilities may be either internal to the organisation or may lie outside. The major internal inflexibilities are psychological, policies and procedures, and capital investment.

Formal Planning & Informal

(O) Psychological Inflexibility. Psychological inflexibility is in the form of resistant to change. Managers and employees in the organisation may develop patterns of thought and behaviour that are hard to change. They look more in terms of present rather than future. For them, present is not only more certain but is also more desirable and more real. They believe that “if they do not take care of present, future will not be there”. For them, planning tends to accelerate change and unrest. Thus, this approach works against planning because planning often depends on the willingness of people to accept change. (td Policu and Procedural Inflexibility. Another internal inflexibility emerges because of organisational policies and procedures. Once these are established, they are difficult to change. Though these policies, procedures, and rules are meant to facilitate managerialaction by providing guidelines, they often tend to be too exacting and numerous tha leave very little scope for managerial initiative and flexibility. Since managers have to pa for future which is not static but changing, they often find themselves in great consum Such problems are more prominent in bureaucratic organisations where rules and procedures become more important than results. (ill) Capital Investment. In most cases, once funds are invested in fixed assets, the ability to switch future course of action becomes rather limited, and investment itself become planning premise. During the entire life of the fixed assets, this inflexibility continues unless the organisation can reasonably liquidate its investment or change its course of action, of it can afford to write off the investment.

4. External Inflexibilities. Besides the internal inflexibilities, managers are confronted with many external inflexbilities and they do not have control over these. For example, managers have little or no control over social, economic, technological, and political forces. Whether these change quickly or slowly, they do stand in the way of effective planning. Three environmental factors generate inflexibilities for an organizational planning: political climate, trade unions, and technological changes. (0) Political Climate. Every organisation, to a greater or lesser degree, is faced with the inflexibility of the political climate existing at any given time. Attitudes of government towards business, taxation policy, regulation of business, etc., generate constraints on the organisational planning process. Government, being the major supplier of certain raw. materials, finances through financial institutions may affect the business organisations considerably.

(1) Trade Unions. The existence of trade unions, particularly those organised at the national level, tends to restrict freedom of planning. Apart from wages and other associated benefits. they affect the planning process by putting limitations on the work that can be undertaken by the organisation. They set up the work rule and productivity. To that extent, managers are not free to make decisions of their choice. (iii) Technological Changes. The rate and nature of technology changes also present very definite limitations upon planning. An organisation is engaged in its process with a given technology. When there is a change in technology, it has to face numerous problems resulting in higher cost of production and less competitive competence in the market. However, the organisation cannot change its technology so frequently. Thus, higher the rate of technology changes, more would be the problem of long-range planning,

5. Time and Cost Factors. Planning process is quite a costly and time-consuming process. The various steps of planning may go as far as possible because there is no limit of precision in planning tools. Managers can spend unlimited amounts of time in forecasting, evaluating alternatives, developing supporting plans, or attending other aspects of planning, if they do not have limitations of time and money. Planning process suffers because of time and cost factors. Time is a limiting factor for every manager in the organisation. If managers are busy in preparing elaborate reports and instructions beyond certain level, they are risking their effectiveness. Excessive time spent on securing information and trying to fit all of it into a compact plan is dysfunctional in the organisation.

Besides time factor, planning is also limited because of cost factor. Planning cost increases if planning becomes more elaborate and formalised. Additional staff is to be appointed. Looking at the cost aspect, many people have commented that planning consumes more but contributes less. Thus, planning cannot be undertaken beyond a certain level. It should be taken at a level where it justifies its cost. Apart from direct cost involved in managers’ time, financial compensation for those who are involved in planning, paper work, etc., also make planning costly to the organisation indirectly. Plans provide rigidity of action, though the action is based on future projection. If future events change, the organisation does not have any alternative except to sustain loss on the investment committed for planning period.

6. Failure of People in Planning. Apart from the above factors, sometimes, people involved in planning process fail to formulate correct plans. There are many reasons why people fail in planning at the formulation level as well as implementation level. Some of the major reasons for failure are lack of commitment to planning, failure to formulate sound strategies, lack of clear and meaningful objectives, tendency to overlook planning premises, failure to see the scope of plan, failure to see planning as a rational approach, excessive reliance on the past experience, lack of top management support, lack of delegation of authority, lack of adequate control techniques, etc. These personnel factors are responsible for either inadequate planning or wrong planning in the organisation.

MAKING PLANNING EFFECTIVE

Various limitations of planning should not lead one to believe that planning is unnecessary in the organisation, or it is the luxury that only large organisations can afford. The fact is otherwise. It must be recognised that planning is an essential managerial function in all organisations irrespective of their size. Therefore, it should be given proper emphasis. The question is not whether to plan or not, but the question is how well to plan. In making planning effective, managers have to make attempts in two directions: understanding the features of a good plan which results from the planning process and taking actions for making planning process effective.

Formal Planning & Informal Planning

Features of a Good Plan

There may be various features of a good plan which help in achieving the objectives for which it is prepared. Though some of these features may vary according to the type of plans, in general, a good plan has the following features:

1 Linked to Long-term Objectives. All the plans whether falling in the category of strategic or operational must be linked to long-term objectives of the organisation. Though a short-term plan may focus more on the immediate objectives, these objectives must be derived from the long-term objectives of the organisation. We have seen earlier that various plans can be arranged in hierachy and a lower-level plan contributes to the realisation of the objectives of a next higher-level plan. As we move up in the hierarchy of plans, more orientation is towards long-term objectives. For example, a budget is a short-term plan. mostly for one year. However, while allocating resources to various units and functions of the organisation, the focus must be on the achievement of long-term objectives through annual resource allocation.

Formal Planning & Informal

2. Direction for Action. A good plan is one which provides direction for future course of action clearly and specifically. For providing direction for action, the plan must specify the actions which should be taken and the outcomes of these actions so that progress towards completion of the plan can be measured and suitable corrective actions can be initiated if the present actions are not in accordance with the plan. From this point of view, the plan must have a feedback system so that the progress of the plan can be measured for taking! suitable actions.

3. Consistent. A plan must be consistent in terms of external and internal factors which considered at the time of plan formulation. External consistency involves alignment of he external environmental factors because the successful implementation of the plan to the external plan depends on the behaviour of these factors. Though it may be difficult to predict exact likely behaviour of these factors, the forecast of these factors should be based reanty as far as possible. Similarly, the plan must be consistent in terms of vario organisational factors which may be in the form of organisational resources both human and physical, organisation structure, and various other organisational plans.

4. Feasible. A good plan is not necessarily highly ambitious but it must be based on reality of the situations. It must be feasible to be implemented. While addition of amibition is a welcome feature because it puts pressure for better performance, it should not be at the cost of feasibility. A highly ambitious plan, sometimes, adds frustration specially when the targets are set too high. We often find more misses in Government’s plans because, most of the times, these are not based on reality.

5. Simplicity. A good plan must be simple to understand. Simplicity is required because the plan is formulated by one group of personnel and is implemented by another group of personnel. Sometimes, there may not be frequent communication between these two groups of people and plan implementation may hamper. Often, plans fail because of lack of proper coupling between plan formulation and its implementation. To the extent a plan is simple to understand, the degree of this coupling will be high and plan implementation is facilitated.

6. Flexible. A plan should be flexible enough to incorporate unforeseen future events. Though a forecast can be made in respect of future uncertainties, unforeseen future changes require a change in planning. Thus, planning cannot be static, but flexible. There are two principles of flexibility in planning:

(1) Principle of Flexibility. The more the flexibility can be built into plans, the less the danger of losses incurred by unexpected events; but the cost of flexibility should be weighed against the risks involved in future commitments made. The planning should be in such a way that a change in it, because of changes in planning premises, can be made without undue costs or friction. Flexibility is required generally in long-range planning when there may be fundamental changes. Sometimes, it might be required in short run also; for example, change in production schedule in case of strike.

(it) Principle of Navigational Change. This is based on the principle of a navigator checking constantly where his ship is going in this vast ocean. If it is not going on the right path, he changes it according to planned path to reach at the destination. Similarly, a manager should constantly check his plans that these are proceeding in the right way. He may redraw the plans to meet the objectives, if required. Since the distant future is generally more uncertain than the immediate future, long-range planning requires such constant checking. If the future could be accurately predicted, managers could be able to plan ahead without fear. This uncertainty of future places limitations on the practicability of forward planning. A plan which is soundly conceived and evaluated for feasibility, desirability, and practicability provides the basis for day-to-day decisions and actions. However, it requires a constant watch.

Formal Planning & Informal Planning

Measures for Making Planning Effective

After identifying the essential features of a good plan, managers can adopt various measures to make their planning exercise effective. Though these measures and their effectiveness depend mostly on the work culture of individual organisations, managers, particularly at higher levels, may adopt the following measures to make planning effective:

1 Establishing Climate for Planning. Managers should create a climate where every person in the organisation takes planning action. Every superior manager should remove obstacles to planning and present facilities for planning. This can be done by setting goals. establishing and communicating planning premises, involving all managers in planning process, reviewing subordinates’ plans and their performance, and ensuring that managers have appropriate staff assistance and information. All these steps add to recognising that planning will not occur unless it is forced and the facilities required to undertake planning are provided.

2.Initiative at Top Level. Planning to be effective must originate at top level. It must be supported by top management. In fact, in any organisation, the role of top management in planning is quite unique and important. It is the top management which is responsible for the success or failure of any organisational process, and planning is no exception. For planning process, basic goals from which plans stem must be organisation-wide and therefore, goals must be set at the top management level. The example and drive of top management are the most important single force in the planning process. When top management rigorously reviews subordinates programmes, It naturally stimulates planning interest throughout the organisation. Effective planning may start at the top level and get support from lower-level managers. But this should not mean that subordinate managers can do nothing in initiating the planning process. There is something to encouraging an ‘upward push’ as well as a ‘downward press’: superiors may be pushed into setting goals and premises and approving plans if a well-reasoned programme is presented to them.

3. Participation in Planning Process. No doubt, top management can initiate planning process by providing goals and planning premises, effective planning can take place by the participation of subordinate managers. The best planning is likely to be done when managers are given opportunities to contribute to plans affecting areas over which they have authority. Participation in planning affecting managers’ areas of authority at all levels through their being informed, contributing suggestions, and being consulted leads to their commitment, loyalty to planning, and enthusiasm to implement the plan.

There are several ways of getting participation from subordinates in planning process. If corporate planning is based on management by objectives, the participation of subordinates with superiors is a key factor in making this program work. Another method of participation is through the formation of a planning committees at various levels. The role of such a committee would be to transmit planning information, getting suggestions and reactions of subordinate managers over planning efforts, and formulating plans. Help can be taken from corporate planning staff if organised separately. A third method of participation in planning may be in the form of ‘grass-root budgeting’ in which budgets are prepared for every small unit of the organisation and then move upward. Thus, instead of preparing budgets at the top management level and transmitting to the lower levels, these must be prepared at the lower levels and transmitted upward for integration and adjustment. Various methods of participation can be adopted in planning process depending on the situations in the organisation.

4. Communication of Planning Elements. Many planning efforts fail because managers do not really understand their goals and other planning premises which affect their planning efforts. Similarly, lack of proper understanding of organizational policies and strategies affects planning, particularly at the lower levels. In order to avoid this impediment, it is highly desirable that these aspects of planning are communicated properly. If planning division has been created, it can communicate planning aspects to various level managers. If no such division exists, there should be direct communication between various levels of managers whose planning efforts are directly related. While communicating, it should be borne in mind that information about planning should be specific and clear. Those who execute a plan can do their best if they understand their own assignment and the plan in its entirety-including its objectives, the general and specific means of attaining them, and jobs others are expected to do.

5. Integration of Long-term and Short-term Plans. To be effective, it is necessary that both long-term and short-term plans are fully integrated in which short-term plans should be taken as contributing to long-term plans. If managers emphasise only short-term plans, they cannot set direction for their future course of action. Long-term and short-term plans can best be integrated if the latter is prepared in the light of the former. Similarly, if the long-term plans are prepared keeping in view what the organisation can implement by way of its short-term plans, coordination between the two can be achieved.

Formal Planning & Informal

6. An Open System Approach. Planning can be made effective by taking it as an open system approach. It suggests that managers must take into account interactions with their total environment in every aspect of planning. Objectives, a starting point in planning, should be set taking into account the various environmental forces. Planning premises represent a clear recognition that plans cannot be constructed in the vacuum of an internal system. The interfaces and interactions of plans with every element of the conditions and influences surrounding an organisation are many and complex. This fact should be recognised in the planning process. Therefore, it should not be taken as simple process, but the process of many interactions and influences.

Formal Planning & Informal Planning

PLANNING IN INDIAN ORGANISATIONS

Since planning is the basis for managerial actions, it has existed in all organisations, either formally or informally. However, it has been emphasised during 1990s with the process of liberalisation of economy. With the increased competition, more and more organisations are undertaking strategic planning approach. In fact, many companies have established separate corporate planning divisions or cells to provide aid in arriving strategic decisions. Exhibit 6.1 shows the corporate planning process in ACC (Associated Cement Companies) Limited

Case: Excel Oxygen Limited

Excel Oxygen Limited (EOL) is engaged in the business of producing industrial Bar and equipments, cryogenic and process plants, and health care gases and accessories. It has adopted a formal corporate planning process. For its systematic corporate planning process, EOL has adopted a five-year period which is normally the case with most of the companies in India. For implementing the long-term plans, shortterm plans are prepared in the form of annual budgets. Both long-term and short-term plans are closely interlinked. This has been done to integrate the company’s long-term activities with its actual operations. Thus, the long-term plans are taken on rolling concept basis whereby it is subject to review and modifications during the budget exercise whenever necessary. This system provides both basic documents and guidelines for the company to follow but at the same time provides adequate flexibility.

The company prepares its planning document for long-term period which is known as ‘corporate strategy and growth plan.’ This document defines corporate mission, managerial philosophy, and corporate objectives. Corporate objectives are defined more sharply so as to include overall objectives as well as functional objectives. Thus, objectives also include targets for sales, volumetric growth, operating efficiencies, and profit performance. At the same stage, functional policies are defined in the areas of operations, finance, marketing, personnel, research and development, and public relations. The document defines corporate strategy and growth plans for various product divisions as well as for corporate divisions. Further, it also prescribes the process of strategy implementation, monitoring, and controlling of foregoing activities.

Within the framework of the above document, the company undertakes annual plans in the form of budget preparation. Managers at all levels in divisions, departments, and units are involved in this process. Since the financial year of the company begins from April, the planning cycle begins in October every year. The annual plan exercise begins with an appraisal of recent economic and other environmental factors. From this appraisal, broad generalizations and assumptions along with corporate objectives and other major directions are issued to all people concerned with the planning process. The process is completed by November. On the basis of these documents, various divisions carry SWOT (strengths. weaknesses, opportunities, and threats) analysis for their specific business activities. This analysis is done for the budget period, that is, for the year April-March as well as for the succeeding four years. Therefore, the five-year plan is reviewed every year. Divisional budgets and projections are formulated and successively presented to various management committees. They agree after due discussion and modification wherever necessary. When divisional budgets are agreed upon, these are consolidated into the corporate budget for the consideration of the Board of Directors in the month of February. When this is approved by the Board, this forms the charter of operations and action plans for the company to follow in the financial year and also in the plan period.

Questions

1 Discuss the nature of corporate planning practices of Excel Oxygen Limited.

2. What type of suggestions will you like to make to improve the corporate planning practices of the company?

Formal Planning & Informal