CHAPTER 3- PLANNING

TO SET DIRECTION
Planning
 Systematic development of action programs aimed at reaching
agreed business objectives by the process of analyzing,
evaluating and selecting among the opportunities which are
foreseen.
 Scheme to achieve objective by;
 Deciding where you want to go

Deciding how best to go about it

Things to keep in mind when planning:

- Planning should accomplish as effectively and efficiently as
possible the present needs or task while responding to changing
conditions.
Planning is the foundation of Management
Process

Achieving Objectives
Organizing

Influencing

Controlling
PLANNING
Purpose of Planning
 Provides direction
 Reduces uncertainty
 Minimize waste and redundancy
 Establishes goals or standards used in controlling
Indicators of Good & Poor Planning
Indicators of Poor Planning Indicators of Good Planning
 Delivery not met  Jobs turned out on time
 Machines idle  Good relationship with other
 Material wasted departments
 Some machines doing jobs that  People using their highest skills
should be done by smaller  Working knowing how their jobs fit
machines into the total pattern
 Some men overworked, other men  Machines doing their proper jobs
underworked  Equipment in good shape
 Skilled workers doing unskilled  Materials available
work  Waste kept to a minimum
 Men fumbling on jobs for which
they have not been trained
 Quarrelling, bickering, buck-passing
and confusion
Benefits of Planning
 More focus and flexibility
 Organization with focus – knows what it does best, knows the
needs of its customers and knows how to serve them well
 Individual with focus – knows where he wants to go in a career
or situation and is able to retain that objective even in difficult
situation
 Organization with flexibility – able to change and adapt to
shifting circumstances and operates with and orientation toward
the future rather than the past or present
 Individual with flexibility – factors into career plans the
problems and opportunities posed by new and developing
circumstances personal and organizational
Continuation….
 Action Oriented
- avoid the complacency trap of simply being carried along by the
flow of events or being distracted by successes or failures of the
moment
Results orientated – creating a performance-oriented sense of
direction
Priority oriented – making sure that the most important things get
first attention
Advantage oriented – ensuring that all resources are used to best
advantage
Change oriented – anticipating problems and opportunities so they
can be dealt best.
 Improved Coordination
 Better Control
 Better Time Management
Planning Process
 Define your objectives
 Determine where you stand vis-à-vis in your objectives
 Develop premises regarding future conditions
 Analyze possible action alternatives, choose the best
among them and decide how to implement
 Implement the plan and evaluate the results
Goals and Plans in Planning
 Goal/s
- a.k.a objectives are desired outcomes
- guide management decisions and form the criterion
against which actual work being done is measured
- foundation of planning
 Plan/s
- documents that outline how goals are to be met
- includes resource allocation, schedules and other
necessary data to accomplish the goals
Types of Goal
 Financial Goal
 Strategic Goal
 Stated Goal
 Real Goal
Characteristics of Well-designed Goals
Characteristics of Well-Designed Goals
 Written in terms of outcomes rather than actions
 Measurable and quantifiable
 Clear as to a time frame
 Challenging yet attainable
 Written down
 Communicated to all necessary organizational
members
Types of Plan
Types of Plans

Frequency of
Breadth Time Frame Specificity
Use

Strategic Long-term Directional Single-Use

Operational Short term Specific Standing

Approaches to Planning
Approaches to Planning
 Top-down - top management to lower management level
 Bottom-up – initiated from the lower management level
and passed up to the top management
 Inside-out - focuses on the internal strength; that
determine “how” things could be done better
 Outside-in – focuses on the external strength – finding
opportunity from the environment to pursue it to best
advantages
 Traditional – performed entirely by the top management
 Participatory – involve organizational members in the
planning process
Planning Tools & Techniques
 Environmental Scanning
- gathering and screening of information to anticipate and
interpret changes in the environment
 Forecasting
- predict future environmental situations that might
influence the operation of the organization
 Benchmarking
- search for the best practices among competitors or non-
competitors that lead to superior performance
Forecasting Methods
A. Qualitative Forecasting – uses judgment and opinions of
knowledgeable individuals to predict outcomes.
  Judgmental forecasts – rely on the analysis of subjective inputs
obtained from various sources such as consumer surveys, the
sales staff, managers and executives and panels of experts.
Delphi Method – involves circulating a series of questionnaires
among individuals who possess the knowledge and ability to
contribute meaningfully. Responses are kept anonymous
which tends to encourage honest responses that aim to
achieve a consensus forecast.
B. Quantitative Forecasting – applies set of mathematical rules
to a series of past data to predict outcomes.
 Technique Description Application
Qualitative
Jury of opinion Combines and average the Polling the company’s
opinions of experts human resource managers
to predict next year’s
college recruitment needs

Sales Force Combines estimates from Predicting next year’s sales

composition field sales personnel of of industrial lasers
customer’s expected
purchase
Customer Evaluation Combines estimates from Surveying major car dealers
established customers’ by a car manufacturer to
purchases determine types and
quantities of products
desired
Quantitative
Time series Fits a trend line to a mathematical Predicting next quarter’s sales
analysis equation and projects into future on the basis of 4 years of
by means of this equations previous sales data

Regression models Predicts one variable on the basis Seeking factors that will
of known or assumed other predict a certain level of sales
variables (ex. Price, advertising
expenditure, etc.)
Economic Models Uses a set of regression equations Predicting change in car sales
to simulate segments of the as a result of changes in tax
economy law
Economic Uses one or more economic Using change in GNP to predict
indicators indicators to predict a future state discretionary income
of the economy
Substitution effect Uses mathematical formula to Predicting the effect of DVD
predict how, when and under what players on the sale of VHS
circumstances a new product or players
technology will replace an existing
one
Forecast based on Time Series (Historical
Data
 This approach exemplifies forecasts that use historical or
time series, data with the assumption that the future will
be like the past
A. Forecasting Method for Averaging
- Naïve forecasting
- Moving Average
- Weighted Moving Average
- Exponential Smoothing
B. Forecasting Method for Trend
- Linear Equation
Forecasting Method for Averaging
 Naïve forecasts – the forecast for any period equals the
previous period’s actual value.

 Moving Average – technique that averages a number of

recent actual values, updated as new values become
available. The formula is:

n where:

A
i = refers to the most recent period
i n = number of periods (data points) in the
moving average
i=1
MAn = Ai = actual value with age I
n MA = forecast
Continuation…
 Weighted Moving Average – almost similar to moving
average, except that it assigns more weights to the most
recent values in a time series

WMA = ∑WiAi
where:
wi = assigned weight for each Ai
Ai = actual value with age i
Continuation…
 Exponential Smoothing – a sophisticated weighted moving
averaging method that is still relatively easy to use and
understand. Each new forecast is based on the previous forecast
plus a percentage of the difference between that forecast and the
actual value of the series at that point. That is:

Ftt = F -1 + α(At - 1 - Ft - 1)
Where:
Ft = forecast for period t
Ft-1 = forecast for period t-1
α = smoothing constant
At-1 = actual value for period t-1
Example 3.1
National Mixer Inc., sells can openers. Monthly sales for a
seven-month period were as follows:
Month Feb. Mar. Apr. May Jun. Jul. Aug.
Sales 19 18 15 20 18 22 20
(000
units)

Forecast September sales volume using each of the following:

a. Naïve approach
b A five month moving average
c A weighted average using 0.60 for August, 0.30 for July and
0.10 for June
d. Exponential smoothing with smoothing constant equal to 0.20,
and assuming a March forecast of 19(000)
Example 3.2
Given the following data:
Period 1 2 3 4 5
No. of 60 65 55 58 64
Complaints

Prepare a forecast for the next period using each of

the ff. approaches:
a. Naïve approach
b. A five month moving average
c. A weighted average using 0.60 for period 5, 0.30
for period 4 and 0.10 for period 3
d. Exponential smoothing with smoothing constant
equal to 0.20, and assuming a period 2 forecast of 65

 Forecasting Method for Trends
 The trend component of a time series reflects the effects of
any long-term factors on the series. Analysis of trend
involves developing an equation that will suitably
describe trend (assuming that trend is present in the data.
A linear equation in the form:
y t = a + bt
where:
t = specified number of time
periods from t=0 b=
n ty -  t y
a=
 y - b t
n t -   t 
2
yt = forecast for period t
a = value of yt at t=0
2
n
b = slope of the line
 
Sample Problem 3.3
 Calculator sales for a California-based firm over the last
10 weeks are shown in the following table. Determine the
equation of the trend line and predict sales for weeks 11
and 12

Week 1 2 3 4 5 6 7 8 9 10
Unit 700 724 720 728 740 742 758 750 770 775
Sales
Associative Forecasting Method
 The essence of associative technique is the development
of an equation that summarizes the effect of predictor
variables. The primary method of analysis is known as
regression
y x = a + bx
where: n xy   x  y
b
x = predictor (independent)
variable n x  ( x )
2 2

yx = predicted (dependent)
variable
a = value of yx when x=0
b = slope of the line a=
 y -b x
n
Correlation
 measures the strength and direction of relationship
between two variables
n( xy)   x  y
r
[n( x )  ( x) ][n( y )  ( y ) ]
2 2 2 2

Interpretation:
+1.00 indicates that changes in one variable are always matched by
changes in the other
-1.00 indicates that increases in one variable are matched by decreases in
the other
a correlation close to zero indicate little linear relationship between two
variables
 Sample Problem 3.4
 Healthy Hamburgers has a chain of 12 stores in Northern
Illinois. Sales figures and profits for the stores are given
(in millions of dollars) in the following table. Obtain a
regression line for the data and predict profit for a store
assuming sales of $10M

Sales 7 2 6 4 14 15 16 12 14 20 15 7

Profit 0.15 0.10 0.13 0.15 0.25 0.27 0.24 0.20 0.27 0.44 0.34 0.17
Techniques for Allocating Resources
 Budgeting – process of making a numerical plan for
allocating resources to specific activities

Cash Budget Expense Budget

forecasts cash on lists primary activities and
hand and how much Revenue Budget allocate peso amount to each
will be needed projects future sales

Variable Budget Fixed Budget

Takes into account the costs OR Assumes fixed level of sales
that vary with volume or production

Profit Budget
combines revenue and expense budget of
various units to determine each unit’s
profit contribution
Suggestions for Improving Budgeting

Collaborate and communicate.

Be flexible.
Goals should drive budgets – budgets should not
determine goals.
Coordinate budgeting throughout the organization.
Use budgeting/planning software when appropriate
Remember that budgets are tools
Remember that profits result from smart management,
not because you budgeted from them.
Continuation….
 Scheduling – process of formulating a detailed listing of
activities that must be accomplished to attain an objective.
It’s detailing what activities to be done, the order in
which they are to be completed, who is to do each and
when they are to be completed. Two popular scheduling
methods are Gantt Chart and PERT-CPM
 Breakeven analysis – technique for identifying the point
at which total revenue is just sufficient to cover total costs
Gantt Charts
 A scheduling device developed by Henry Gantt that shows
actual and plan output over a period of time.
 It is composed of a bar chart with time on the horizontal
axis and the resource/activity to be scheduled on the
vertical axis.
 A scheduling device developed by Henry Gantt that shows
actual and plan output over a period of time. It is
composed of a bar chart with time on the horizontal axis
and the resource/activity to be scheduled on the vertical
axis
Program Evaluation Review Technique
and Critical Path Method (PERT-CPM)
 flowchart diagram that depicts the sequence of activities
needed to complete a project and the time or cost
associated with each activity.
 It is the most widely used method for planning and
coordinating large-scale projects
 using this method managers are able to obtain:
 A graphical display of project activities.
 An estimate of how long the project will take.
 An indication of which activities are the most critical to timely
project completion.
 An indication of how long any activity can be delayed without
lengthening the project.
PERT-CPM Procedure:
1. Develop a list of activities that make up the project.
2. Determine the immediate predecessors for each
activity in the project.
3. Estimate the completion time for each activity.
4. Draw the project network depicting the activities and
immediate predecessors listed in step 1 and 2.
5. Use the project network and the activity time estimates
to determine the earliest stat and the earliest finish
time for each activity by making a forward pass
through the network. The earliest finish time for the
last activity in the project identifies the total time
required to complete the project.
PERT-CPM…..
6. Use the project completion time identified in step 5 as
the latest finish time for the last activity and make a
backward pass through the network to identify the
latest finish time for each activity.
7. Use the difference between the latest start time and
the earliest start time for each activity to determine
the slack (float) for the activity.
8. Find the activities with zero slack, these are the
critical path activities.
9. Use the information from step 5 to 6 to develop the
activity schedule for the project
Sample Problem 3.5
 The owner of the Western Hills Shopping Center is planning to modernize and expand
the current 32-business shopping complex. The project is expected to provide room for
8 to 10 new businesses. Financing has been arranged through a private investor. All that
remains is for the owner of the shopping center to plan, schedule and complete the
expansion project. The table below shows the pertinent information for the project
Activity Activity Description Immediate Activity Time
Code Predecessor (in weeks)
A Prepare architectural drawings - 5
B Identify potential new tenants - 6
C Develop prospectus for tenants A 4
D Select contractor A 3
E Prepare building permits A 1
F Obtain approval for building permits E 4
G Perform construction D,F 14
H Finalize contracts with tenants B,C 12
I Tenants move in G,H 2
Activity Description 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Prepare architectural
drawings
Identify potential new
tenants
Develop prospectus for
tenants
Select contractor
Prepare building
permits
Obtain approval for
building permits
Perform construction
Finalize contracts with
tenants
Tenants move in
CRITICISMS OF PLANNING
 Planning may create rigidity
 Planning can’t be developed for a dynamic environment
 Formal plans can’t replace intuition and creativity
 Planning focuses managers’ attention on today’s
competition, not on tomorrow’s survival
 Formal planning reinforce success, which may lead to
failure
 Just planning isn’t enough.