PLANNING

CONCEPT & DEFINITION OF PLANNING

1. Koontz Odonnel – “Planning is an intellectually demanding

process, it requires conscious determination or course of
action and ---- of decisions on purpose, knowledge and
considered estimates.”
2. Hart – “Planning is the determination in advance of a line of
action by which certain results are to be achieved.”
3. Alfred and Beaty. – “Planning is the thinking process, the
organised forecast, the vision based on fact and experience
that is required for intelligent action.
4. Louis A. Allen – “Management planning involves the
development of forecasts, objectives, policies, programmes,
procedures, schedules and budges.”
Thus, planning is an intellectual exercise of looking into future i.e.
to decide in advance the activities to be undertaken in future and
also to visualise the best course of action to achieve the desired
goal, leading to decision making and controlling.

CHARACTERISTICS OR NATURE OF PLANNING

1. Primary function :
2. A continuous process :
3. Based on objectives and policies :
4. Selective Process :
5. Pervades all managerial activities :
6. Flexibility :
7. An intellectual process :
8. Directed towards efficiency :
9. Forecasting is the essence of planning :
10. Accuracy is essential to planning :
11. Concerns Future Activities :
12. Based on facts :

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SIGNIFICANCE OF PLANNING
1. Primacy of planning :
2. All activities become purposeful and orderly :
3. It helps in economizing by reducing wastage :
4. Useful in facing future changes and uncertainties :
5. Planning imparts accuracy :
6. Focuses attention on objectives of the unit :
7. Planning helps other functions of management :
8. Planning helps to visualize a clear and complete picture of
the business :
9. Secures co-operation from employees :
10. Maintains a balance between various activities :

LIMITATIONS OF PLANNING
1. Lack of accurate information :
2. Time and cost :
3. Inflexibility :
4. Resistance to change :
5. Lack of ability to plans :
6. False sense of security :
7. Environmental constraints :

STEPS IN PLANNING OR PROCESS OF PLANNING

1. Establishing Objectives:
2. Building the Premises:
3. Collecting, Classifying and Analyzing data:
4. Determining Alternative Courses:
5. Evaluating Alternatives:
6. Selection of a Course of Action:
7. Preparing Derivative Plans:
8. Providing Follow-up:

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 TYPES OF PLANNING PREMISES
Planning premises can be classified in the following three ways

1. Internal Premises and External Premises; Internal premises are the forecasts about the
business issues such as sales forecast, investment policy of the company etc. while external premises
are the forecasts about the environment outside the business enterprise which is beyond the control
of the management.
2. Controllable and Non-Controllable Premises: Premises, which are under the control of
management, are called controllable premises. The examples are premises about inventories,
personnel, machinery etc. similarly, expansion and research schemes in business are largely decided
and shaped by the management. Therefore, premises concerning them are also included in the
category of controllable premises. On the other hand, some premises population growth, future price
level, government policy, natural calamities etc. of course, mention should be made also of those
factors which are partly efficiency, company price policy etc. they may be termed as semi
controllable.
3. Tangible and Intangible premises; Premises are tangible if they can be quantified in rupees,
labour hours, machine hours or units of production etc. but there are premises which cannot be
expressed numerically. They are called intangible premises. The examples are prestige of the
company, moral of the employees etc.

INTERNAL AND EXTERNAL PREMISES

As stated above, Internal Premises lie within the business enterprises. It is easy for the managers to
establish a premise about the amount of capital investment of the company in future, because they
have complete control over capital investment. This means the internal premises are controllable
premises. But, in some cases, even internal premises may be beyond the control of managers. For
instance, it may be a long established policy of a company that in any year, its investment should not
exceed a definite proportion of its sales. In this case, though investment is an internal matter,
managers are not in a position to make a change in it. It is uncontrollable for them.

External premises lie outside the firm and therefore they are uncontrollable. These premises exert
their influence on the firm’s business, yet managers cannot alter them as they wish. For this reason, it
is extremely difficult to make forecasts about the factors outside the firm, such as population growth
and government policy. It is possible however, that in some special cases, external premises happen
to be under the control of managers. This is so when they monopolize the whole product market.

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EXTERNAL PREMISES
Koontz and O’Donnell classify external premises into the following three groups.
A. General Business Environment
B. Product Market
C. Factor Market.

The general business environment includes political, economic, social and Technological
conditions. The product market includes conditions influencing demand for the firm’s product as also
the aggregate demand in the industry a whole. the factor market is concerned with land, labour,
capital and raw materials etc. we shall now consider each of these external premises in detail.

General Business Environment: It includes the following

(i) Political Stability: Perhaps political stability has a greater impact on business than
government control. If political stability is maintained for a long period of time, planning is
considerably facilitated. Political instability makes forecasting difficult and therefore it
become; difficult to prepare planning premises. Whether it is a situation of war or cold water,
whether political party power is likely to change etc. are the forecasts which has a great
influence to business. Hence plans cannot be prepared without these forecasts. Under the
present day situation in India, for instance, planning has become a tough in those states
where the government is changed twice or thrice during the year.
(ii) Government controls: Government controls must be considered as very important premise of
planning. The degree of government control spends on the nature of business. Generally, the
government on the eatables and provision imposes stringent controls in order to safeguard the
health of the general public. Similar is the case with the institutions providing public service
also. The greater the number and intensity of the Government controls, the greater is their
significance as the planning premises.

It should be remembered well that not only present policy of the government but future
policy as well is to view as one of the premises of planning. Whether the government is to
increase or reduce the extent of controls and whether the controlling authority is to change in
future are important issues, which should be considered. It is true that answers to these
questions are difficult to obtain if plans cover too long period of time. The difficulty is the
greater; the more a business is subject to controls, which are unstable and more detailed. For
example, the difficulty of forecasting what the government may do that will affect the
business of a Bus company is greater than the difficulty encountered by a toy manufacture.

(iii) Government Fiscal Policy: The managers ought to take seriously the policy of the
government financial and tax policy. Government fiscal policy has considerable impact on
the present day business. Since taxes take way a large part of their income, they have to be
aware of the continuance or otherwise of their income, they have to be aware of the
continuance otherwise of tax policy and of a company’s product and if the management of
this company assume that government demand for their product is to be maintained forever
at its current level, then their company will be put in difficulty in case of a sudden large
curtailment of government’s orders for its product.

For business units, a government monetary is as important as its fiscal policy. If government
imposes strict controls on bank lending through a change in bank rate policy or open market
operations, demand for a large number of products tends to decline considerably. The
management should not therefore ignore possibilities of changes in monetary policy of the
government.

(iv) Population trends: A study of population trends is highly useful for projecting market
demand. The size of population and its age structure both are relevant and hence are to be
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 observed minutely by the management. The estimates of population trends covering 10 to 20
years though difficult and comparatively less reliable, can also serve as useful premises in
long run planning. As against this, projections about population in the next five-year period
can be comparatively fairly accurate. On the basis of the estimated growth of population, it is
possible to predict the future trend of demand for industry as a whole.

(v) Employment, productivity and national income: The government and semi government
institutions publish reliable data on these variables. On the basis of the information about
population growth and government economic policies, it is possible to estimate the level of
employment and output in the economy in future. On the basis of this estimate the
management should try to estimate the probable effect on market demand for their product.

(vi) Price level: The business manager must premise future price level and its influence on market
demand for his product. It is possible to obtain reasonably accurate estimates of price level in
the next three to five years on the basis of the magnitude of deficit financing earmarked in
the five-year plan. But for periods beyond a few years, the course of price level is not so
clear. It is not incorrect, however, to base planning on the premises of a rising level of price
over a long period. There may be intermittent periods of price fall, but the average tendency
of prices is to move up continuously.

(vii) Technological Change: Since the pace of technological changes at present is rapid and since
new products and processes are being invented swiftly, it is necessary for business managers
to take a close look at their technological environment. Most of the companies maintain a
permanent research staff, which is, supposes to be constantly in touch with technological
changes and to make forecasts of their effects on business. Even small companies take care to
keep in contact with their customers and suppliers etc. to be able to forecast future changes in
business technology.

(viii) International political situation: The present day world has become so integrated that no
country can remain unaffected when political changes in any other country are taking place.
The political changes at international level influence the market demand for our products. For
example, outbreak of war between two or more nations, the stopping of war, sudden death of
an important political leader in an influential country, overthrow of the existing government
through military coup and closing of an international waterway etc. are the happenings which
affect the market demand for products and availability of raw materials and other resources
as well. Though forecasting such happenings is a difficult job, an attempt at this direction can
be made on the basis of the current situation.

(ix) Social revolution: Business is affected by social changes also. Such events as trade unions’
agitations, adult education programmes, students’ agitations etc. create upheavals in the
society and these upheavals can have deep influence in business also. Similarly, some social
institutions are set up to bring about favorable changes in the customs and habits of the
people and these change can also bring about a large change in the pattern of consumption.
Consequently, there can be considerable variations in the market demand for products.

(x) Trade Cycles: Regular ups and downs in business activities are known as trade cycles.
Business managers have to make a systematic study of cycles to be able to forecast the
business conditions in near future. It is of course true that all trade cycles are not perfectly
alike, nor is there any regularity of stages in trade cycles. Hence accurate estimates of future
changes in business conditions are not so easy. Besides, any error in forecasting can ruin the
business. Hence business managers must make such forecasts with utmost care.

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(B) Product Market: This constitutes one of the important premises of business planning. The
product demand is influenced by a number of factors such as population trends, level of
national income, wage rate, stages of trade cycle etc. these factors determine the industry
demand as well as demand for the product of an individual firm. It is therefore necessary to
consider premising of industry demand and individual firm demand separately.

(i) Industry Demand: A number of factors affect the demand of the whole industry. Hence, a
careful estimate has to be made about the extent to which each factor will affect the
industry demand. For most industries, statistics on product, national income, employment
and price level are available through such sources as government and semi government
sources. These statistics furnish a good basis for forecasting industry demand. It may be
said with some degree of confidence, for instance, that industry demand for primary
necessities of life would increase with the increase in incomes of lower income group
people in the society. Industry demand for comforts would increase If there is an
increase in the incomes of the middle class people industry demand. for luxuries would
increase following an increase in the incomes of the upper class people. While dealing
with industry demand, a study of the inter industry relationship will also be quite helpful.
The input output analysis, which describes how products move between industries, can
also be worthwhile in forecasting industry demand.

(ii) Individual Firm Demand: Individual firm demand should be estimated in the context of
industry demand. The price elasticity of demand for the product of my individual firm
depends on its own policy, on the policy of the rival firms, consumes preference etc.
Hence a survey of consumer’s behaviour would be necessary in forecasting individual
firm demand. An assessment of the potential customers, their statues and the methods of
sales would be of much relevance. The premise about individual firm demand may be
based on the survey conducted by the firm itself or in the data available through external
sources or on the data available through external sources or on the strategy adopted by the
rival firms in the market.

(C) Factor market: The ease with which factors of production such as labour, capital and raw
materials can be obtained when required is an important consideration in business planning.
From the viewpoint of business management, more relevant issues in factor market are as
follows

(i) Business London: The choice of location of a business unit is affected by several factors
among which notable ones are the availability of raw materials and skilled labour,
transportation, local environment, existence of auxiliary industries, availability or capital
etc.
(ii) Labour Availability: Availability of skilled plays an important role in determining
business location. The quality of labour available for production varies between regions
and between areas in a region. The stability of labour also varies between regions and
between areas. Labour unrest is more pronounced and common in some states than in
other. West Bengal is a point in case. Even price of labour, i.e., wage rate is significant
for business planning. Although wage differentials in different industries and in different
regions have been considerably reduced due to the growth of trade unionism, yet wage
differences that exist at present should be given due consideration in business planning.
(iii) Sources of Materials and Parts: If transportation costs constitute a large portion in total
costs of production. Sources of materials and parts become an important as a deciding
factor is reduced, however, due to the improvement in the efficiency of transportation
nowadays.
(iv) Availability of capita: capital availability is also a controlling external premise in business
planning. A firm, in general has several sources of finance open to it. But in all industries
capital cannot be obtained with equal ease. Particularly small units and medium units find

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 it more difficult to raise capital beyond a certain limit. Sometimes it is not the availability
of capital itself, but the desire of the suppliers of capital to assume controlling power in
management of the unit, which is not acceptable to the owners. The owners of the firm
often are not ready to give up their controlling power. In addition, there are various other
limits to the availability of capital depending on the prestige of the firm and the
receptiveness of the market to new financing at any given time.

INTERNAL PREMISES
Of all internal premises of business planning, the major one is sales forecast. Though sales forecast
itself is a basic planning document, it sets the framework on which most internal plans are
constructed. In this sense, sales forecast is regarded as a premise of business planning.

(i) Sales Forecast : It is a projection of future sales by product and price for a number of months
or years. Accurate estimates of profit and cash flow can be made on the basis of the sales
forecast over a long enough period in which management has some confidence. Usually,
revenue side is more difficult to forecast as it is least subject to control by the management.
But once revenue side is estimated, cost side can be easily predicted, as it is within the
control of management to a large extent. In any case sales forecast cannot be ignored because
it is a key element in planning. Even the companies which usually receive large orders for
their products need to evolve some arrangement for sales forecast. Smaller companies often
make the mistake of believing that sales forecasts are too expensive. A little reflection will
show however that majority of their own personnel do already possess information relevant
to sales forecast. The information which the sales man, production manager and purchase
agent etc. possess can make an acceptable forecast, if it is gathered together systematically.
Moreover the wide range of information available from the government and industry sources
is neither expensive nor difficult to obtain.
(ii) Capital Investment : It is difficult to recover investment made in fixed assets in a short time.
Hence attempt should be made to recover it through best possible use of these assets.
Although capital so invested can be recovered by sale of the assets, this is often not a
practical alternative. Hence, it is necessary that business managers frame the plans to ensure
best use of their fixed assets. They should make a comparative evaluation of various
alternative scheme of investment they should also examine whether capital would be
available in required amount. The sources of capital and terms on which capital would be
available should be taken into consideration.
(iii) Basic Policies : Some business policies cannot be readily changed. For instance once profit
sharing a firm introduces scheme, it is difficult to stop it later. If a policy of keeping the
existing customers pleased even at the cost of profitability is decided upon, it is not possible
to ignore existing customers and look for new just to raise the profitability.
(iv) Supply of materials and parts : Though sources of materials and parts are treated as external
premises in the above discussion, they may also be regarded as internal premises, because
these sources are to some extent within the control of the firm. The business managers have
to premise whether materials and parts would be produced internally or must be bought from
outside. Often a company decides to persuade some firm to act as a supplier of materials or
parts. Sometimes it makes purchases from more than one firm. In short, the managers must
clearly decide in advance which policy will be adopted to procure materials and parts.
(v) Development of Unit : The planning must also take into account the probability of
development of business unit. A business unit started on small scale, will develop in future, if
properly managed. This calculation will give an idea about problem that may arise due to
expansion and necessary steps may be taken.
(vi) Ability of employees : Employees contribution is a very important fact in implementing the
plan. They have to work for achieving the targets laid down. Sometimes employees may
oppose some of the plans. In such cases their suggestions must be invited at the time of
preparing plans and must be taken into consideration if found useful.
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To summaries, planning is simplified and chances of its success are increased if premises are clearly
set forth. Planning tends to be accurate to the extent its premises are accurate. It is important to note,
however that future being uncertain, cannot be foreseen with accuracy. Hence it is advisable to have
alternative premises and alternative plans based upon them. This will ensure that even if situation
undergo to basic charge in future, the firm will be ready to face them with plans already prepared in
advance.