Smart Business Study

Planning/ Decision-making & Strategy Formulation

Planning/ Decision-making & Strategy Formulation

Meaning and Characteristics of Management

“Management is the process by which managers create, direct, maintain and operate purposive organisations through systematic, coordinated, cooperative human effort.”
                                                                                                     -Dalton E. McFarland

“Management is defined as the process by which a cooperative group directs action towards common goals. This process involves techniques by which a distinguishable group of people (managers) coordinates activities of other people; managers seldom actually perform the activities themselves. This process consists of certain basic functions.”                                 -J.L. Massie            

“Management is guiding human and physical resources into dynamic organisational units which attain their objectives to the satisfaction of those served and with a high degree of morale and sense of attainment on the part of those rendering service.”               -American Management Association 

Characteristics of Management

The salient feature which highlight the nature of management are as follows:

1. Management is Universal: The basic principles of management are universal in character. They apply more or less in every situation. Henry Fayol pointed out that the fundamentals of management are equally applicable in different organisations, business, government, military and others. The functions of management are required at all levels of organisation and in all areas of business.

2. management is Purposeful: Management exists for the achievement of specific objectives. It is a means towards the accomplishment of predetermined goals. All activities of management are goal-oriented. The success of management is measured by the extent to which the desired objectives are attained. Management has no justification to exist in the absence of objectives. Management is creative- a process of achieving results.

3. Management is an Integrative Force: The essence of management lies in the coordination of individual efforts into a team effort. Management reconciles the individual goals with organisational goals. As a unifying force, management creates a whole that is more then the sum of individual parts. It integrates human and physical resources.

4. Management is a Social Process: Management is done by people, through people and for people. It is a social process because it is concerned with interpersonal relations. Human factor is the most important element in management. According to Appley, “management is the development of people, not the direction of things.” A good manager is a leader, not a boss. It is the pervasiveness of the human element which gives management its special character as a social process.

5. Management is Multidisciplinary: Management has to deal with human behaviour under dynamic conditions. Therefore, it depends upon wide knowledge derived form several disciplines like engineering, sociology, psychology, economics, anthropology, etc. The vast body of knowledge in management draws heavily upon other fields of study.

6. Management is a Continuous Process: management is a dynamic and an on-going process. The cycle of management continues to operate so long as there is organised action for the achievement of group goals.

7. Management is Intangible: Management is an unseen or invisible force. It cannot be seen but its presence can be felt everywhere in the form of results. However, the managers who performs the functions of management are very much tangible and visible.

8. Management is an Art as well as Science: it contains a systematic body of theoretical knowledge and it also involves the practical application of such knowledge. management is also a discipline involving specialised training and an ethical code arising out of its social obligations.

On the basis of these characteristics, management may be defined as a continuous social process involving the coordination of human and material resources in order to accomplish desired objectives.

The Process of Management

The process of management consists of several interrelated elements. These elements are known as managerial functions which are planning, organising, staffing, directing and controlling.

A brief description of different functions or elements of management is given brief:

1. Planning: Planning is the most basic or primary function of management. It precedes other functions because a manager plans before he acts. Planning involves determining the objectives and selecting a course of action to achieve them. It implies looking ahead and deciding in advance what is to be done, when and where it is to be done. Planning is a mental process requiring the use of intellectual faculties, foresight, imagination and sound judgement. It consists of forecasting, decision-making and problem-solving. A plan is a predetermined future course of action. It is today’s design for tomorrow and an outline of steps to be taken in future.

The process of planning consists of: (a) determination of objectives, (b) forecasting and choice of a course of action, (c) formulation of policies, programmes, budgets, schedules, etc. to achieve the objectives, and (d) laying down of procedures and standards of performance. Planning may be long-term or short-term. Planning is a pervasive function and managers at all levels have to prepare

plans. Planning is also a continuous or on-going process. Planning enables us to do things in an orderly and efficient manner. It is helpful in more effective achievement of goals. Planning enables an organisation top face uncertainly and change.

2. Organising: Once plans are formulated, the next step is that of organising. Organising is the process of establishing harmonious authority-responsibility relationships among the members of the enterprise. It is the function of creating a structure of duties and responsibilities. The network of authority-responsibility relationships is known as organisation structure. Such a structure serves as the framework within which people can work together effectively for the accomplishment of common objectives. Organising is an important element of management because of common it is through organising that a manager brings together the material and human resources required for the achievement of desired goals. According to Fayol, “to organise a business is to provide it with everything useful to its functioning-raw materials, tools, capital and personnel.” A sound organisation helps to avoid duplication of work and overlapping of effort. However, an organisation structure is not an end in itself. It should, therefore, be designed to fit into the needs and objectives of the particular enterprise. It should ensure material and human order.

The process of organising consists of the following steps:

(a) determining and defining the activities required for the achievement of planned goals;
(b) grouping the activities into logical and convenient units;
(c) assigning the duties and activities to specific positions and people;
(d) delegating authority to these positions and people;
(e) defining and fixing responsibility for performance; and
(f) establishing horizontal and vertical authority-responsibility relationships throughout the organisation.

3. Staffing: Staffing is the process of filing all positions in the organisation with adequate and qualified personnel. According to Koontz and O’Donnell, “The managerial function of staffing involves manning the organisational structure through proper and effective selection, appraisal and development of personnel to fill the roles designed into the structure.” Staffing consists of manpower planning recruitment, selection, training, compensation, integration and maintenance of employees. Staffing function has become important with growing size of organisation, technological advancement and recognition of the human factor in industry. Lawrence Appley remarked, “… managers would be more skilled and more competent if they were carefully selected, specifically trained, continually kept up-to-date in their field of activity, guided in their development for the assumption of greater responsibility and adequately rewarded”.

4. Directing: Directing is the managerial function of guiding, supervising, motivating and leading people towards the attainment of planned targets of performance. In this process of directing his subordinates, a manager takes active steps to ensure that the employees accomplish their tasks according to the established plans. Directing is the executive function of management because it is concerned with the execution of plans and policies. Direction initiates organised action and sets the whole organisational machinery into action. It is, therefore, the life spark of an organisation.

Directing function of management embraces the following activities:

(a) issuing orders and instructions,
(b) supervising (overseeing) people at work,
(c) motivation, i.e., creating the willingness to work for certain objectives,
(d) communication, i.e., establishing understanding with employees regarding plans and their implementation, and
(e) leadership or influencing the behaviour of employees.

5. Controlling: Controlling is the process of ensuring that the organisation is moving in the desired direction and that progress is being made towards the achievement of goals. The process for controlling involves the following steps:

(a) establishing standards for measuring work performance;
(b) measurement of actual performance and comparing it with the standard;
(c) finding variances between the two and the reasons therefore: and
(d) taking corrective action for removing deviations so as to ensure attainment of objectives.

Management is a composite process because its different elements are interrelated and interdependent. It is also an ongoing process as the cycle of management gets repeated again and again. Management is a social or human process because it involves people, their efforts and behaviour. It is a universal process as managerial functions are needed in all organisations irrespective of their nature (business or non-business), size (small or big) and purpose (profit making or not).

Meaning of Planning

Planning is the most fundamental function of management. It precedes other functions. Without setting the goals to be reached and the course of action to be followed, organising, staffing, directing and controlling cannot be effective. Planning provides the framework within which coordinating, motivating and controlling can be undertaken. Every individual and organisation plans the line of action to be followed in future. Action follows planning and there is nothing to do unless the objectives and the ways of achieving them are decided. Planning is in fact a prerequisite to effective management.

Planning is the management function of anticipating the future and the conscious determination of a future course of action to achieve the desired results. A plan is a blueprint of the course of action to be followed in future. Planning involves forecasting because in order to plan the future course of action, it is essential to anticipate the future. While planning, a manager prepares a map of the future, sets the goals to be achieved or the desirable results and decides the activities required to accomplish those results. Planning consists of both problem-solving and decision-making. It requires determination of objectives and the ways of reaching them.

A plan is a projected course of action. According to Fayol, “the plan of action is at one and the same time the result envisaged, the line of action to be followed, the stages to go through and the methods to use. It is a kind of future picture wherein proximate events are outlined with some distinctiveness, whilst remote events appear progressively less distinct.”

According to Terry, “planning is a method or technique of looking ahead. It is a deliberate conscious search used to formulate the design and orderly sequence of actions through which it is expected to reach the objective.”

In brief, “planning is deciding in advance what to do, how to do it, when to do it and who is to do it.”

These definitions indicate that planning involves the determination of objectives and results, the selection of the best possible course of action to achieve the desired results, the time sequence of activities and the resources required to perform the activities.

Nature of Planning

The nature of planning can be visualised from the following features of planning:

1. Planning is Goal-oriented: Planning is not an end in itself. Rather, it is a means towards the accomplishment of objectives. Planning has no meaning unless it contributes in some positive way to the achievement of desired goals. All plans emanate from objectives. The goals may be implicit or explicit but well-defined goals are essential for efficient planning. Thus, planning is goal-oriented.

2.Planning is a Primary Function: Planning is the basis or foundation of the management process. All other functions of management are designed to attain the goals set under planning. Planning provides the basis for efficient organising, staffing, directing and controlling. It precedes the execution of all other functions. Without planning, there is nothing to organise, no one to actuate and no need to control.

3. Planning is All-pervasive: Planning is the function of each and every manager irrespective of the level and area of his/her operation. It is the job of all managers in all types of organisations. Planning is an essential ingredient in management at all executive levels. However, the scope, extent and the nature of planning tend to decrease as we descend towards the lower levels of management. Managers at the top level prepares long-term plans for the company as a whole, middle-level managers formulate departmental and functional plans for medium-term. At the lowest level, managers prepare operating and short-term plans.

4. Planning is an Intellectual Process: Planning is a mental exercise involving imagination, foresight and sound judgement. It is not guesswork or wishful thinking. It requires a mental disposition of thinking before doing and acting in the light of facts, rather than guesses.

5. Planning is a Continuous Process: Planning is an on-going and dynamic exercise. As the assumptions and events on which plans are based change, old plans have to be revised or new ones have to be prepared. As a manager carries out his functions, he continues to plan, revising his old plans and choosing alternative plans as the need arises.

6. Planning is Forward-looking: All planning is done with an eye on the future. Planning involves looking ahead and preparing for the future. Therefore, forecasting is the essence of planning. Forecasting involves assessing the uncertain future and making provisions for it. A plan is really a synthesis of various forecasts. No plan can be prepared without knowledge of future events. Planning is an attempt to see through the uncertain future.

7. Planning Involves Choice: Planning is basically a problem of decision-making or choosing among alternatives courses of action. Planning presupposes existence of alternatives. There is no need for planning if there is only one way of doing something. Plans are decisions made after evaluation of alternatives courses of action.

8. Planning is an Integrated Process: Planning does not just happen, it has to be initiated. Planning is a structured process and different plans constitute a hierarchy. Different plans are independent and interrelated. Every lower-level plan serves as a means towards the end of higher plans. This is known as the ‘ends-means chain’. Planning is a time-bound concept and every plan has a definite time horizon.

9. Planning is Directed Towards Efficiency: Planning has no relevance if it does not facilitate the achievement of objectives economically and efficiently.

Need and Importance of Planning

Planning is of paramount importance both for an organisation and an economy. Sound plans are essential to effective management, because they serve as guides to all management functions. Lack of well-defined objectives and priorities is the common cause of failure. ‘Failure to plan is planning to fail’. Planning is useful to an organisation in the following steps:

(i) Focuses Attention on Objectives and Results: Every organisation exists to achieve certain objectives. Planning concentrates attention on the dominant goals of the organisation. It forces the members of the organisation not to get lost in the maze of routines activities and lose sight of the broad objectives for which the organisation was established.

(ii) Reduces Uncertainly and Risk: Uncertainly and change are inevitable and planning cannot eliminate them. But planning enables an organisation to cope with uncertainly and change. With the help of planning, an enterprise can predict future events and make due provision for them. Instead of leaving future events to chance, they can be made to occur in a desired manner. Planning seeks to minimise risk while taking advantage of opportunities. It also keeps management alert to the changing environment of business.

(iii) Provides Sense of Direction: Planning saves an organisation from drifting and avoids aimless activities. It directs human efforts into endeavours that contribute to the accomplishment of goals. “If you don’t know where you are going, no road will get you there.” Planning makes work more meaningful and activities more orderly. It bridges the gap between where we are and where we want to go. Without planning action is likely to become random activity, producing nothing but chaos.

(iv) Encourages Innovation and Creativity: Innovation and creativity are prerequisites to continuous growth and steady prosperity of business. Planning is forward looking and it enables an enterprise to cope with technological and other developments. Planning requires continuous monitoring of environment for new ideas and developments. As a result the enterprise becomes dynamic. Being anticipatory in nature, planning improves the adaptability of an organisation to the changing environment.

(v) Helps in Coordination: Planning is the best stage for the integration of diverse forces at work. Sound planning interrelates all the activities and resources of an organisation. It also helps to relate internal conditions and processes to external events and forces. The activities and efforts of various departments and divisions can be harmonised with the help of an overall plan. Planning seeks to achieve a coordinated structure of operations.

(vi) Guides Decision-making: Planned targets serve as the criteria for the evaluation of different alternatives so that the best course of action may be chosen. By predicting future, planning helps in taking future-oriented decisions. Sound plans prevent hasty judgement and haphazard action. “Without planning, business decisions would become random as hoc choices, as though a pilot set out without knowing whether he wished to fly to London, Hong Kong or Johannesburg”. When plans covering future exist, decisions consistent with the future plans are made. therefore, decisions automatically get a future orientation. In the absence of plans, there is no sound basis for making future-oriented decisions.

(vii) Provides a Basis for Decentralisation: Planning helps in the delegation of authority to lower levels of management. Well-established plans serve as guides to subordinates and reduce the risk involved in delegation of authority. Planning also helps to improve the motivation and morale of employees by providing targets of performance.

(viii) Provides Efficiency in Operations: Planning facilitates optimum utilisation of available resources. It makes it possible for things to occur which would not otherwise happen. it improves the competitive strength of an organisation by helping it to discover and exploit opportunities. As a rational solution to problems, planning results in the use of most efficient methods to work. A good plan not only optimises productivity but provides satisfaction to those implementing it. Planned effort is always more efficient than unplanned action. Thus, planning improves organisational effectiveness.

(ix) Facilitates Control: Planning provides the basis for control. Plans serve as standards for the evaluation of performance. Sound planning enables management to control the events rather than be controlled by them. It permits control by exception. Control cannot be exercised plans because the function of control is to ensure that the activities conform to the plans. Any attempt to control without plans is meaningless as there are no gauges for performance.

Limitations of Planning

Planning is not a substitute for executive judgement but merely an aid to it. It suffers from the following limitations:

1. Unreliable Data: Planning is based on forecasts which are never cent per cent accurate. The accuracy and reliability of forecasts diminishes as the forecasting period increases. If reliable forecasts and data are not available, planning becomes unrealistic.

2. Time and Cost: Planning is a time-consuming and expensive process. Time, effort and money are required in the collection and analysis of data and in the formulation and revision of plans. Planning is useful only when the expected gains from the exceed its costs. By the time plans are prepared, conditions might change rendering the entire efforts irrelevant.

3. Rigidity: Planning may result in internal inflexibilities and procedural rigidities which curb initiative and individual freedom. Sometimes, planning may cause delay in decision-making. A manager may be bogged down by rules and procedures when there is need for quick decision.

4. Resistance to Change: Planning often requires some change in the existing setup. Unless the required change is forthcoming planning may be ineffective.. Resistance to change is an important obstacle in planning. Planning also requires a forward looking attitude. But very often, people have a greater regard for present as future is uncertain.

5. False Sense of Security: Planning may create a false sense of security in the organisation. A manager may feel that all problems will be solved once the plans are put into operation. In reality, management has to continuously revise the plans and regularly check on their execution.

6. Psychological Barriers: Powerful people and other vested interests may exert pressure to ensure that the plans serve their own interests. Moreover, the planners may be unduly influenced by the ‘pet projects’ of the ‘big boss’ and may not make an objective analysis of the available alternatives. It is very difficult to measure accurately the effectiveness of planning.

7. External Limitations: The effectiveness of planning may be affected by external forces which are beyond the control of those responsible for preparing plans. Government control, natural calamities, and other unforeseen events may create hurdles in the implementation of plans. It is very difficult to predict and provide for such external constraints.

That is why it is said “planning is a mere ritual in a fast changing environment.”

Principles of Planning
(Overcoming Limitations of Planning)

Over the years, a number of fundamental principles have been developed to guide the efforts of managers in preparing effective plans. These principles relate to the nature, purpose, process and structure of planning. A brief description of planning principles is given below:

1. Principle of Contribution to Objectives: Every major and derivative plan should contribute positively towards the accomplishment of enterprise objectives. This principle is derived from the raison d’etre of the enterprise.

2. Principle of Efficiency of Plans: The efficiency of a plan is measured by the amount it contributes to objectives minus the costs and other undesirable consequences involves in the formulation and operation of the plans. This principle stresses upon economical use of individual effort to achieve group goals.

3. Principle of Primary of Planning: This principle emphasises that a manager can hardly perform other managerial functions without a road map of plans to guide him. Planning is the primary requisite of other management functions because these functions are designed to support the accomplishment of enterprise objectives.

4. Principle of Planning Premises: Perhaps the main deficiency of planning arises from poorly structured plans. A coordinated structure of plans can be developed only when managers throughout the organisation understand and agree to utilise consistent planning premises.

5. Principle of Policy Framework: A consistent and effective framework of enterprise plans can be developed if the basic policies that guide thinking in decisions are expressed clearly and are understood by managers who prepare the plans. The decisions which lead to plans cannot be accurately focused on enterprise objectives without a framework of policies.

6. Principle of Timing: When the plans are structured to provide an appropriately timed, intermeshed network of derivative and supporting programmes, the plans can contribute effectively and efficiently towards the attainment of enterprise objectives. Both premises and policies are useless without proper timing.

7. Principle of Alternative: In choosing from among alternatives, the best alternative will be that which contributes most efficiently and effectively to the accomplishment of a desired goal.

8. Principle of Limiting Power. While choosing from among alternatives, the planner should focus on those factors which are critical to the attainment of the desired goal. This will help in selecting the most favourable alternatives.

9. Principle of commitment: Logical planning should cover a time period necessary to forecasts the fulfilment of commitment involved in a decision. This is necessary to make reasonably sure of meeting commitments.

10. Principle of Flexibility: This principle deals with the ability to change which is built into plans. The risk of loss due to unexpected events can be reduced by building flexibility into the plans. However, the cost of flexibility should be weighed against the dangers of future commitments made.

11. Principle of Navigational Change: The manager should periodically check on events and expectations and redraw plans to maintain a course toward the desired goal. Unless plans have inbuilt flexibility, navigational change is difficult or costly. But inbuilt flexibility should not be an excuse for periodic revision of plans, if circumstances so warrant.

12. Principle of Competitive Strategies: While formulating plans, a manager should take into account the plans of rivals or competitors. The plans should be chosen in the light of what competitor will do in the same situation.

Essential Requirements of a Sound Plan

A sound plan is one which helps the organisation in achieving its desired objectives. Such a plan must satisfy the following requirements:

(i) Clear and Specific: The plan must clearly specify the objectives and the means of achieving these objectives.

(ii) Complete and Integrated: The plan must be comprehensive enough to cover all actions expected from different sections of the enterprise. Different components of the plan must be properly integrated to maximise the efficiency and effectiveness of the enterprise.

(iii) Logical: The plan should be based on available facts and reasonable assumptions about the likely future, rather than an guesses. It should be realistic.

(iv) Flexible: the plan must be capable of being modified to suit changes in the environment and other contigencies.

(v) Controllable: The plan must be capable of being controlled. It should facilitate effective administrative control by differentiating between controllable and uncontrollable events in the external environment of business.

Steps in Planning Process

Organisations differ in terms of their size and complexity. Therefore, there is no single planning procedure applicable to all organisations. However, the main steps in planning process are as follows:

1. Identify Goals: Plans are formulated to achieve certain objectives. Therefore, the first step in the planning process is to identify the goals of the organisation. The organisation fixed must clearly indicate what is to achieved, where action should take place and who is to perform it and when it is to be accomplished. Objectives set must be stated clearly and in measurable terms. For example, quantity standards, cost targets and quality specifications are measurable objectives. Objectives should be established in all key areas where performance affects the health of organisation. Objectives should be laid down after an analysis of the external and internal environment of the organisation.

2. Develop Planning Premises: Planning is done for the future which is uncertain. Therefore, certain assumptions are made about the future environment. These assumption are known as planning premises. Planning premises lay down the boundary or limitations within which plans are to be implemented. In order to develop good planning premises, it is necessary to collect data on the current status of the organisation and to forecast future changes.

3. Determine Alternative Courses of Action: Generally, there are alternatives ways of achieving the same goal. For example, in order to increase sales, an enterprise may launch advertising campaign or reduce prices or improve the quality of products. Therefore, alternative course of action should be determined. This requires imagination, foresight and ingenuity. In determining alternatives, the critical or limiting factors must be kept in view.

4. Evaluate the Alternatives: Once alternative courses of action have been determined, they must be evaluated. Alternative courses of action can be evaluated against the criteria of cost, risks, benefit and organisational facilities. The strong and weak points of every alternative should be analysed carefully. Computer oriented mathematical techniques may Be used wherever necessary.

5. Select a Course of Action: The most appropriate alternative is selected as the plan. This is the point of decision where a plan is adopted for accomplishing identified goals.

6. Formulate Derivative Plans: The final step in planning process is to develop sub-plans. In order to give effect to and support the basic plan, several sub-plans are required. Once a choice is made and the master plan is adopted, functional and tactical plans and action programmers are decided. The break-down of the master plan into departmental and sectional plan provides a realistic picture of the actions to be taken in future. A time sequence of activities should also be decided.

Types of Planning

`1. Strategic Planning: Strategic planning refers to comprehensive and integrated planning. It is based on long-term forecasts and is usually done at higher levels of management. It involves appraising the external environment and results of the organisation. According to Anthony, “Strategic planning is the process of deciding on objectives of the organisation, on changes in these objectives, on the resources used to attain these objectives and on the policies that are to govern the acquisition, use and disposition of these resources.”
Strategic planning encompasses all the functional areas of business. It defines the manner in which the resources of the enterprise are to be developed. It also determines the direction in which the company is to grow and diversify. Strategic planning serves as the framework for the formulation of detailed operational plans. Types of products to be offered, diversification of business into new lines, planned growth rate in sales are examples of strategic planning. Strategic plans are formulated mainly at the top level of management after taking into account the firm’s strengths and weaknesses as well as the opportunities and threats in the environment.

2. Operational Planning: Operational planning involves the conversion of strategic plans into detailed and specific action plans. It provides content and form to strategic planning. Operational plans are designed to sustain the organisation in its current products and existing markets. An operational plan is the blue print for current action and it supports the strategic plan. Operational planning is concerned with the efficient use of the resources already allocated and with the development of a control mechanism to ensure efficient implementation of the action so that organisational objectives are achieved.

3. Tactical Planning: Tactical planning refer to short term moves and manoeuvres which are decided to support the firm’s operational plans. These help to face challenges arising out of sudden changes in the external environment. For example, a firm has to decide some tactics in order to minimise the adverse impact of an unexpected move by a competitor or a sudden fall in demand. Tactical plans are largely made at the operating level of management which is in direct and continuous touch with environmental forces. The nature and scope of tactical plans depend on the threats and opportunities created by environmental changes.

Components of Planning

Components of planning are also known as the types of plans. Depending on their use, management plans may be classified into two broad categories as shown in following Figure.

Standing Plans: Standing plans are used again and again. These are therefore called multi-use plans. These are used for an indefinite period. They are meant to remain relatively stable or enduring. They are formulated in advance to serve as criteria, constraints or guidelines for the orderly functioning of the organisation. Standing plans serve as ready frames of reference for executive and organisational actions. Objectives, strategies, policies, procedures, and rules are important standing plans.

Single use or ad hoc Plans: A single use plan is used once and then it is discarded. It is designed to meet the demands of a specific situation and is scrapped when the situation is over. Programme, budget, schedule project, etc. are examples of single use plans.

The various types of plans are explained in detail in the following steps:

1. Objectives: Objectives are the ends towards which the activities of an organisation are directed. Objectives are known by different names, e.g.., goals, aims, purposes, missions, targets, etc. They are the endpoints of planning as planning is done to achieve objectives. Objectives are established to guide the efforts of an organisation and each of its constituents. Setting up of objectives is the first step in planning:

The nature of objectives is reflected in the following features of objectives:

  1. Objectives are the most basic type of plans and all other plans are based upon objectives.
  2. Objectives are plural as every organisation exists to achieve several rather than a single goal.
  3. Objectives form a hierarchy, i.e., they can be arranged in order of importance. Lower level objectives serve as ‘means’, towards the higher level objectives.
  4. Objectives differ in time span, i.e., some are long-term in nature while others are of short duration.
  5. Objectives may be general or specific.

2. Policies: A policy is a general guide to thinking and action rather than a specific course of action. It defines the area or limits within which decisions can be made to achieve organisational objectives. Policies are flexible and broad plans providing scope for judgement and interpretation on the part of subordinate managers. “Policies are general statements or understandings which guide or channel thinking in decision-making of subordinates.”

Policies are routes to the realisation of objectives. They prescribe the broad ways in which objectives can be attained. Policies decide the line of action along which subordinate executives are expected to work in order to accomplish the goals of the organisation. A policy is a continuing decision as it provides answer to problems of a recurring or repetitive nature. For example, if management has adopted the policy of seniority based promotion, the departmental managers need not seek guidance from top management again and again with respect to promotional decisions.

Policies provide the following benefits: (a) they facilitate quick and correct decisions by serving as guides to thinking and action, (b) they save time and effort by predeciding problems, (c) they permit delegation of authority to managers at lower levels, (d) they delimit the area within which decisions are to be made, (e) they facilitate uniformity of action and coordination of efforts, and (f) policies assist in administrative control by providing a rational basis for evaluating actions.

Types of Policies: Policies may be classified into the following categories:

1. Organisational and Functional Policies: In terms of scope, policies may be classified as organisational policies and departmental policies. Organisational policies are the overall policies of an organisation and they are formulated by top[ management. Departmental or functional policies are meant for specific functions or departments of business, e.g., sales policy, production policy, financial policy, personal policy, etc. They are derived from organisational policies to guide the efforts of people in particular departments. Organisational or basic policies are used uniformly throughout the organisation whereas departmental policies are applied in particular departments.

2. Originated, Appealed and Imposed Policies: On the basis of origin, policies may be classified as originated, appealed and imposed policies. Originated policies are deliberately formulated by top managers on their own initiative in order to guide the actions of their subordinates. They are generally put in writing and embodied in a policy manual. Appealed policies are formulated on the appeal or request of subordinates. Subordinates make an appeal to deal with a particular case which is not covered by earlier policies. Imposed policies arise from the influence of outside forces like government, trade unions, trade associations, etc. These forces either impose a policy or create conditions for the adoption of a particular policy.

3. General and Specific Policies: As to the area of freedom,. policies may be classified as general and specific. General policies are stated in broad terms to give freedom to units of the organisation. On the other hand, specific policies are intensively defined to restrict freedom of action.

4. Written and Implied Policies: Written policies may explicit declarations in writing. Implied policies are those inferred from the behaviour or conduct of organisational members, particularly of top executives. Where no written policy exists on a particular topic or the expressed policy is not enforced, subordinates interpret the actions of their superiors and make decisions accordingly. For instance, if promotions are made on the basis of seniority, there is an implied promotional policy, even though nothing is expressed in writing. Written policies are always better guides than implied policies. But written policies tend to be rigid and flexible.

Characteristics of a Sound Policy (Principles of Policy Making)

A policy can be called sound when it contains the following characteristics:

(i) Policies should be based on objectives and they should contribute towards the attainment of objectives.

(ii) A sound policy should be clear, unambiguous and explicit. It should not leave scope for misinterpretation.

(iii) As far as possible a policy should be expressed in writing. Written policies tend to be more clear and precise. They can be communicated and understood better. Their compliance can easily be checked.

(iv) Policies should be based on careful consideration of the resources and environment of the organisation.

(v) Policies should be reviewed and revised regularly to keep them up-to-date and relevant. But policies must be reasonably stable and before revising them serious thought and consideration should be given.

(vi) Policies should be in the form of general guidelines allowing scope for decisionmaking at lower levels. Policies should be general and flexible guides rather than detailed procedures.

(vii) All policies should be communicated to the concerned persons so that the policies and the objective of their formulation are properly understood by those who are supposed to implement them.

(viii) A sound policy should make for consistency in the operations of the organisation.

(ix) policies must conform to the norms of ethical behaviour which prevail in society and tot he ethical standards of business.

Policy Formulation: The process of policy formulation involves the following steps:

(a) Definition of Policy Area: The area of policy-making should be decided keeping in view the objectives and needs of the organisation.

(b) Identification of Policy Alternatives: various alternative policies are developed in the light of the data concerning the internal and external environment of the enterprise.

(c) Evaluation of Alternatives: Each of the available policy alternative is examined in the light of its possible contribution to objectives. Policy alternatives are tested on the basis of their costs and implications.

(d) Choice of Policy: After evaluation, the most appropriate policy is chosen. The choice of policy alternative is the most important step in policy-making.

(e) Communication of Policy: The chosen policy is communicated and explained to all those who are to implement it. A periodic review of the policy should be made to keep it up-to-date.

3. Procedures: A procedure is a chronological sequence of steps to be undertaken to enforce a policy and to attain an objective. It lays down the specific manner in which a particular activity is to be performed. It is a planned sequence of operations for performing repetitive activities uniformly and consistently. According to George R. Terry, a procedure is a series of related tasks that make up the chronological sequence and the established way of performing the work to be accomplished. In business, procedures are generally established for purchase of raw materials, processing of orders, selection of employees, redressal of grievances, holding and conducting of meetings, etc. Procedures are generally laid down for repetitive work so that same steps are taken each time the activity is performed.

     Procedures are different from policies and methods. A policy is a broad and general guide to decision-making while a procedure is an operational guide to action. The former provides scope for judgement while the latter leaves hardly any room for interpretation and judgement. A policy delineates an area of operation, a procedure lays down the path through that area. For instance, a company may have the policy of promoting employees on the basis of merit. In order to implement this promotion policy, the procedure may consist of definition of merit, records of performance, tests and interviews to identify the most meritorious employee. A policy helps in achieving an objective while a procedure shows the way to implement the policy. Thus, a policy is wider in scope and more flexible in nature than a procedure.

A method outlines the specific way in which a particular step in the procedure is to be performed. For example, it may be laid down that promotion interview will be taken by a committee of our executives. This may called the method of interviewing. A method is more limited in scope but more detailed because it specifies the standardised way by which an operation is to be performed. Methods helps in increasing the usefulness and effectiveness of a procedure.

       A procedure plays an important role in the daily operations of an organisation: (a) it simplifies work by eliminating unnecessary steps; (b) it avoids chaos or random activity by ensuring consistency in operations; (c) it indicates a standard way of performing a work and therefore, ensures uniformity of action; (d) it eliminates the need for further decision-making by laying down a standard path to follow; (e) it facilitates coordination between various units in the organisation; (f) it provides a standard for the appraisal of employees.

       Procedures, however, suffer from several limitations: (i) they create rigidity in work performance and discourage initiative and innovation, (ii) they tend to become obsolete with changes in business operations, (iii) they may cause delay in the completion of tasks.

4. Rules: Rules are rigid and definite plans that specify what is to be done or not done in given situations. A rule provides no scope for discretion and judgement. It is a prescribed guide to conduct or action. No deviation is expected from the rule. A rule may or may not be a part of a procedure. The rule ‘no smoking in the factory’ is not a part of any procedure. But the rule that ‘all orders must be acknowledged within 48 hours of their receipt’ is a part of the procedure for processing orders. A rule generally lays down penalty for its violations. Rules help to regulate behaviour and to facilitate communication. They facilitate uniformity of action and avoid the need for repeated approval from higher levels for routine matters.  

5. Programmes: A programme is a concrete scheme of action designed to accomplish a given task. It specifies the steps to be taken, resources to be used, time limits for each step and assignments of task. It is a sequence of action steps arranged in the priority necessary to implement a policy and achieve an objective. A programme is thus a combination of objectives, policies, budgets, task assignments and procedures. It defines the contents and scope of activities. Programmes are prepared for various activities, e.g., development of a new product, training of employees, purchase of machinery, issue of securities, etc. Programmes help to ensure economy and uniformity in day-to-day operations. Programmes may be major or minor.

6. Budgets: A budget is a statement of expected results expressed in numerical terms for a definite period of time in the future. It expresses a plan in precise terms. Budgets serve as means of coordination and control. They provide clarity, direction and purpose in the activities of an organisation by laying down verifiable and measurable goals for a specified period of time. Budgeting coordinates the activities of different departments by adjusting departmental budgets into the master budget. Budgets serve as standards of measuring actual performance. Budgets may be prepared for various groups of activities, e.g., production, sales, personnel, capital outlay, advertising, finance, cash, etc. Budgets may be prepared in terms of time, money or physical terms like tons.

7. Schedules: A schedule specifies time limits within which activities are to be completed. Scheduling is the process of establishing a time sequence for the work to be done. Schedules are essential for avoiding delays and for ensuring continuity of operations. A schedule lays down a time-table fixing starting and finishing dates for different activities.

8. Projects: A project is a distinct cluster of functions and facilities for a definite purpose. It is designed and executed as a distinct plan. It is integrated into a unity and is designed to achieve a stated objective. A project is defined in terms of capital investment, specific objective, interdependence of tasks. For instance, installation of a computer may be designated as a project. It is marked separate from the normal operations because of special significance. Projects help to facilitate coordination and control by identifying an integrated work package within a heterogeneous mass of activities and resources. A project has a definite purpose and specific starting and finishing dates.


Strategy Formulation

The term ‘strategy’ is derived from the Greek word which means “the art of the general.” The concept of strategy was used in military science where it implies the art of the military commander to win the battle. The term began to be used in business management with increase in the size and complexity of operations and turbulent environment. Strategy may be defined as a comprehensive and integrated plan designed to assure that the mission and objectives of the organisation are achieved. It is broad plan for bringing the organisation from the present position to the desired position in future. It links the organisation with its environment and provides long-term direction to its activities.

                     According to Alfred Chandler, strategy implies the determination of basic long-term objectives and goals of the enterprise and formulation of a unified course of action for the organisation, allocation and utilisation of resources necessary to achieve these objectives. Strategy providesanswers to the following questions.

(a) What business are we in?

(b) What should be our business?

(c) Where are our customers?

(d) What do they buy and why?

(e) Why should society accept us?

Strategy should be differentiated from tactics. Tactics are specific ways of implementing a strategy and are formulated on the basis of a strategy. Tactics are short-term in nature whereas strategy is a long-range plan. Strategy is formulated generally at the top level whereas tactics are formulated at operating level.

These definitions reveal the following features of strategy:

(i) Strategy is a comprehensive and integrated plan for the allocation of scarce organisational resources.

(ii) Strategy is designed to improve  the organisation’s relations to its environment. This is known as environmental adaption. Strategic decisions are primarily concerned with the external forces.

(iii) Strategy involves choices that determine the nature and direction of the organisation’s activities towards the attainment of goals.

(iv) Strategy sets the direction while other plans decide how this direction is put into action. Therefore, strategy must be formulated before plans are made.

(v) Strategy is an interepretative plan in the sense that it provides meaning and content to other plans.

(vi) Strategy making is primarily the responsibility of top management. However, people at all levels are involved in strategy implementation.

(vii) Strategy is a standing and long term plan.

(viii) Every organisation needs a strategy to achieve its objectives. Strategy provides a unified and coherent framework for setting long-term directions and for making major decisions on the optimum development of critical resources.

Need and Importance of Strategies

Strategy defines the way in which an organisation will react to its environment.

  1. Helps in Facing Environmental Challenges: Every organisation operates within the overall socio economic and political environment of a country. Business environment has become increasingly turbulent. The long-term success of a business enterprise depends, to a great extent, upon how it responds to the changes in its environment. Need for strategy arises due to the dynamic environment. Strategies are helpful in facing environmental challenges. While formulating strategies, an organisation identifies the threats and opportunities posed by the likely future environment. It prepares itself to successfully face the threats and exploit the opportunities by formulating strategies.
  2. Provides Direction: Corporate strategy serves as the long-term guide towards the achievement of objectives. It provides answers to some vital and crucial questions such as: (a) What business are we in? (b) What business should we be in ? (c) Who are our customers? etc.
  3. Optimum Utilisation of Resources: Corporate strategy indicates how the resources of the organisation should be marshalled and deployed for best results. It ensures more efficient and effective utilisation of organisational resources, e.g., time, money, talents, etc.
  4. Facilitates Coordination and Control: Master strategy interrelates the different departments and groups of the organisation. It provides a unifying force by focussing attention on common objectives. Strategy also simplifies control by prescribing broad standards of performance.
  5. Competitive Strength: Strategies are specifically designed to counter the actions of competitors. A competitive strategy is formulated keeping in view likely moves of competitors. It helps in maintaining or increasing the firm’s market share in the face of competition.

Process of Strategy Formulation

Main steps in the strategy formulation process are given below:

  1. Spelling Out the Business Mission and Values: Mission is the overall purpose of an organisation and the expressed reason for its existence. The mission should be clearly expressed and effectively communicated to the members of the organisation. It serves as a reference point from which objectives can be derived for managerial decision – making. Mission provides unity of purpose, specifies the identity of the firm and provides guidelines for making strategies at various levels in the organisation. Business mission also spells out the products and services the firm proposes to offer and the activities it will undertake in pursuit of its objectives. Mission provides a vision of the future.

Mission of a business enterprise can be defined by answering two questions Who
are our customers and “What needs of these customers are we able to fultil? For
example, Henry Ford defined his mission as providing the public with low cost
transportation. Mission should not be too narrow as it may reduce the effectiveness ot the organisation. For example, railways failed to remain highly competitive because they defined their misSion as the railroad business instead of the transport business. Mission may be detailed in terms of goals in such areas as profitability, market share, growth, technology, human resource development, social obligations, and so on. A firm should review its business mission at periodical intervals to ensure its continued relevance and soundness. The statement of mission of an organisation must convey the following:

(a) The existence of the firm-its purpose in terms of its basic product or service. its
primary markets and its major technologies. Simply, what business is the firm in?

(b) The external environment that determines the operating philosophy of the firm.

(c) The organisation’s culture-what type of working climate exists within the firm?
and what type of people does this climate attract?

In addition to mission, values of top management influence strategy making.
Values are the preferences and they are shaped by socioeconomic background,
education and experience. Values guide managers when they are confronted with critical decisions.

From the mission and values of the organisation, its objectives can be identified. Objectives provide the guidelines for formulating strategies.

2. Appraisel of External Environment. Business mission defines the external environment and relevant range of variables of the firm. Eternal environment of an enterprise consists of the various market, economic, social, technological, political and other forces which significantly affect its functioning and future. Environmental analysis is the diagrammatic phase of the strategic planning process. The external environment is in a state of flux and managers must systematically monitor it to determine opportunities and threats to the enterprise and their implications. For example, development of new technology may provide the firm an opportunity to reduce cost and improve quality of products. On the other hand, emergence of strong competition in the market may be a potential threat. Management must establish a system for forecasting, monitoring and evaluating the external environment on a continuing basis. Such an early warning system will provide time to prepare for the contingencies and to develop strategies for converting threats into opportunities. Through environmental analysis, the organisation can create an environmental threat and opportunity profile (ETOP). Thr ETOP includes both a weighing of the factors and an assessment of their impact on the enterprise. Table Provides a sample ETOP.

The greatest opportunity lies in technological strength and the greatest threat comes from the multinational connection.

3. Appraisal of the Internal Environment. In case of an established and ongoing enterprise a thorough appraisal of its current Position is essential to identify its strengths (internal capabilities) and weaknesses (deficiencies). A detailed analysis and evaluation of the Functional areas of the enterprise will throw a profile of its abilities and disabilities. For
example, the enterprise may have a sound distribution network and state ot the art technology but it may be deficient in its communication system and control mechanism. Analysis ol the internal environment is popularly known as corporate appraisal or self-appraisal. It should cover marketing (market share, competitive position, product mix, distribution network, pricing policy, promotional mix, market research, etc.), financial (debt equity ratio, dividend policy, price earning ratio), operations (plant location, cost structure, raw material supply, inventory management, research and development, technology, repairs and maintenance system), human resources (quantity and quality of manpower), organisation culture, etc. Once the strengths and weeknesses of the enterprise are identified, each of them should be assigned weights according to its degree of importance. Management can then identify the areas that need immediate attention.

4. Examining Strategic Alternatives. An organisation can justify the strategic options by matching environmental threats and opportunities with internal strengths and weaknesses. Such a matching will reveal the strategic gap between desired and actual state of affairs and the problem areas requiring decisions and action initiatives. Management has to search for and evolve alternative strategies to bridge the strategic gap and to reach its goals. For example, if the objective of the firm is rapid growth, development of new markets, introduction of new products, acquisition of outside firms may be the strategic alternatives. Each strategic alternative has its own merits and demerits. It is therefore necessary to analyse carefully and evaluate against some predetermined criteria the implications of each alternative.

5. Choice of Strategy. Once the available strategic alternatives are evaluated and compared, management selects the strategic alternative that will maximise the long-run effectiveness of the organisation. Selection of overlap strategy is both the right and the duty of top management by the resulting choice permeates deeply into the organisation. In order to make an effective strategic choice, top management must have a clear shared conception of the firm and its future. The strategic choice must be clear and unambiguous. Commitment to a given choice often limits future strategy, the decision must be thoroughly researched and evaluated. Several factors influence the strategic choice:

(a) degree of risk acceptable to management,

(b) knowledge of past strategy,

(c) response of owners,

(d) values and preferences of top managers,

(e) timing of the decision.

Modes of Strategy Making

According to Mintzberg, there are three modes of formulating strategies:

1. Entrepreneurial Mode. In this mode power is centralised in the hands of the chief executive who is usually the founder of the business or descendant. He makes bold and risk taking decisions largely on the basis of intuition. He relies on personal judgement formed through experience. The entrepreneur is motivated by one overriding goal, namely constant growth. An active search for new opportunities dominates the strategy making process. Choice of the alternative is guided by the entrepreneur’s personal preferences rather than by any rule. The entrepreneurial organisation leaps forward in the face of uncertainty. The entrepreneur constantly seeks to beat competitors to the punch.

2. Adaptive Mode. In this mode the strategy maker reacts to each situation as it arises. He confirms the environment as a force to be controlled. Ab adaptive organisation moves ahead timidly in a series of small and disjointed steps. The adaptive manager generally reacts defensively to the actions of competitors.

3. Planning Mode. In this mode the strategy maker analyses the environment and the organisation so as to develop a plan for moving into the future. This is formal strategic planning. It provides the strong sense of direction and the framework, which is lacking in the earlier modes. Whereas entrepreneurs depend on the hunches and personal judgement and adaptive managers wait for the future to arrive so that they can observe its shape, planners follow a systematic procedure. Planners also make risk taking decisions. But their choices are based on rational estimates of cost and benefits. In other words, they use a systematic and structured approach.

Concept of Decision – making

A decision is a course of action which is consciously chosen from among a set of alternatives to achieve a desired result. It represents a judgement and a commitment to action. It is the outcome of hunch, intuition, reasoning and planning. Decisions are made to achieve goals. A decision is an act of choice wherein an executive forms a conclusion about what must or must not be done in a given situation. To decide means to cut off or to come to a conclusion.

Decision-making is the process of choosing a course of action from among alternatives to achieve a desired goal. It consists of activities a manager performs to come to a conclusion. According to Haynes and Massie,” Decision-making is a process of selection from a set of alternative courses of action which is thought to fulfil the objective of the decision problem more satisfactorily than others.” Decision-making is a process of selection and the aim is to select the best alternative. This process consists of four interrelated phases, explorative (searching for decision occasion), speculative (identifying the factors affecting the decision problem), evaluative (analysing and weighting alternative courses of action), and selective (choice of the best course of action).

There is a close relationship between planning and decision making. First, both are mental processes including reasoning and judgement. Secondly, both are goal-oriented designed to achieve the desired aims. Thirdly, decision-making like planning is an ongoing or continuous process. Just as old plans have to be modified and new plans have to be formulated to meet changing demands, similarly sone decisions may have to be revised and sone new decisions may have to be taken in the light of changing situations. Fourthly, planning and decision-making both involve choice among alternative courses of action. Lastly, planners and decision-makers both need information about the internal and external environment of the organisation. In fact, decision-making is a particular type of planning. A decision is a plan involving commitment of resources. It is based upon forecasts and assumptions about the future.

Decision-making and problem-solving are directly related with planning. Planning involves the most significant and far-reaching decisions a manager can make. In the planning process, managers decide the goals to be pursued, what resources will be used and what actions will be taken to achieve the goals. The entire planning process involves managers in a continual series of decision-making situations. The quality of decisions will determine how effective the plans will be.

From the foregoing description, the following characteristics of decision-making can be identified:

(i) Decision-making is a goal-oriented process. Decisions are made to achieve certain goals, i.e., to bridge the gap between the present position and the desired position. A decision is good to the extent it helps in attaining the desired goal.

(ii) Decision-making involves choice or selection of the most appropriate course of action out of various alternatives. Unless there are two or more alternatives there is no need for decision-making.

(iii) Decision-making is an ongoing or continuous process. Managers regularly make decisions and managerial job is perpetually a decision making exercise. Decision-making is a recurring activity.

(iv) Decision-making is an intellectual process. Decisions are the outcome of deliberations, reasoning, judgement and evaluation. It also involves intuition and experience.

(V) Decision-making is a dynamic process. It involves a time dimension and a time lag. The techniques used for making decisions may vary with the type of problem involved and the time available for its solution.

(vi) Decision-making is situational. A manager may take one decision in a particular situation and opposite decision in another situation. There may also be a decision not to act.

(vii) Decision-making involves commitment of time, efforts and resources. Once a decision is taken the organisation commits itself in a particular manner.

(viii) Decision-making is pervasive. Managers at all levels take decisions though the nature and significance of decisions taken vary from one level to another.

Role of Decision-making

Decision making is the vehicle for carrying managerial workload and discharging managerial responsibilities. It is through decision-making that mangers strive to achieve organisational goals. They attempt to bridge the gap between the existing situation and the desired situation by taking and executing decisions. The quality of judgement in decision-making determines the quality of management.

The life of a manager is a perpetual decision-making activity. The business executive is by profession or decision-maker and the moment of decision is the most creative event in the life of the executive. Administration is essential decision-making process. The task of a manager is to make decisions and to get these decisions implemented. Decision-making (selection of a suitable course of action) is the heart of planning.

Decision-making underlines the entire process of management because every managerial function involves decisions. It pervades virtually everything a manager does. In the words of Peter Drucker, “Whatever a manager does he does it through making decisions and getting them implemented in an effective manner.” The quality of decisions reflects the competence and character of management and determines the success of organisation.

Decision-making is an essential part of the managerial process: Setting up goals, formulating strategies, and policies, designing the organisation Structure, motivation and leadership process, communication and control process and so on. Decision-making rund through all the managerial functions. There exists a close relationship between the decisions made in various functions of management. For example, planning decisions affect control decisions and vice versa. Long-range and company wide decisions provide the framework for making short term and departmental decisions. Table shows that each of the managerial functions has several vital decisions associated with it.

Types of Managerial Decisions

Managerial decisions may be classified into the following categories:

1. Programmed Decisions. Programmed decisions are concerned with relatively routine and repetitive problems or issues. The possible alternatives are limited in number and the choice must fall within the established guidelines. Therefore, a specific sequence of steps can be laid down in advance so that the decisions become highly structured. They are programmed because information on them is already available and can be processed in a pre-planned manner. Decision rules and procedures for taking such problems can be formulated in advance to reduce the time and effort to ensure decisions on the right lines. Programmed decisions are relatively simple and have a short term impact. They are, therefore, made at lower levels of management. Such decisions demand a relatively low amount of Managerial judgement because the predetermined decision rules can be applied. For example, the top management might instruct the finance manager to invest surplus cash in short term securities so as to earn the highest return. Whenever there is surplus cash the finance manager can easily make the choice by calculating the yield of different securities and selecting the most profitable.

Non- programmed Decisions. These are concerned with novel and non-repetitive problems. Full information is rarely available and the number of alternatives is very large. Therefore, such problems cannot be tackled in a predetermined manner. Readymade decisions are not available and a high degree of managerial judgement is required. A specific solution has to be created for each non programmed problem through an unstructured process. How to improve a product, how to increase employee motivation, how to improve community relations are examples of non programmed decisions.

2. Strategic Decisions. Strategic or basic policy decisions involve lon- term commitments and exercise an enduring influence on the future of the organisation. These decisions define the relationship between the organisation and its environment. Much deliberation and judgement are required for strategic decision-making. Therefore, responsibility for such decisions lies mainly with the top management. Location of a new plant, launching a new product, taking over running firm are examples of strategic decisions.

Administrative Decisions. Strategic decisions involve formulation of goals and strategies. On the other hand, administrative decisions are directed towards developing divisional plants, structuring workflows, distribution channels, developing material sources, acquisition of facilities, personal training and so on. They are primarily middle management oriented.

Routine or Operating Decisions. These are concerned with routine and repetitive problems. They involve short-term commitment and exercise a minor influence on the future of the organisation. They are concerned with maximising the performance of current operations. They do not require much managerial judgement or deliberations. Therefore, authority for making these decisions is usually delegated to lower level executives. Top management lays down rules and procedures for such decisions. For example, departmental heads can easily decide the pay of new workers on the basis of the established salary scales for different grades of employees.

3. Individual and Group Decisions. Individual decisions are taken by a single individual. These are concerned mainly with routine problems for which broad policies are available. In such decisions analysis of various variables is relatively simple. However, in some cases important decisions may be made by an individual. Group decisions are those taken by a group of persons constituted for this purpose. Decisions taken by the Board of Directors or a committee are examples of group decisions. These decisions are generally important for the organisation. Group Decision-making generally results in more realistic and well-balanced decisions and encourages participative decision-making. But it involves delay and makes it difficult to fix responsibility for such decisions.

Process of Rational Decision-making

Decision-making can be rational or irrational. Rational decision-making means taking decisions on the basis of facts and logical reasoning. A decision-maker is said to be rational when he identifies and analyses the problem systematically, identifies alternatives and selects the most appropriate alternative on the basis of relevant data. On the other hand, decision-making becomes irrational when the decision-maker depends purely on hunch and intuition without using the relevant facts and figures.

Rational decision-making is a systematic process consisting of the following steps:

1. Identify the Problem. The decision-making process begins with the recognition of a problem that requires a decision. The problem may arise due to gap between present and desired state of affairs. The threats and opportunities created by environmental changes may also create decision problems. At this stage, a manager should identify and define the real problem. A problem well defined is half solved. In order to recognise the problem quickly, a manager must continuously monitor the decision-making environment. Imagination, experience and judgement are required for detection of problems that require managerial decisions.

2. Diagnose the Problem. Diagnosing is the real problem implies analysing it in terms of its elements, its magnitude, its urgency , its causes, and its relation with other problems. In order to diagnose the problem correctly, a manager must obtain all pertinent facts and analyse them carefully. The most important part of diagnosing the problem is finding out the real causes or sources of the problem. Symptoms must not be mistaken for real problems. For example, management may see a problem of manufacturing costs and may start cost reduction drive when the real problem is poor engineering design.

The problem may be analysed in terms of the following:

(a) Nature of the decision ~ routine or strategic,

(b) Impact of the decision,

(c) Futurity of the decision,

(d) Periodicity of the decision, and

(e) Limiting or strategic factor relevant to the decision.

3. Discover Alternatives. The next step is to search for the various possible alternatives. An executives should not jump on the first feasible alternative to solve the problem quickly. The course of action open to decision-maker are not always evident. A decision-maker has to use his ingenuity and creativity to spot and interrelate them. A reasonably wide range of alternatives increases the manager’s freedom of choice. But it is wise for management to limit itself to the discovery of those alternatives which are critical or strategic to the problem. The principle of the limiting factor should be followed for this purpose. According to Barnard, “Strategic factors refer to those that are most important in determining the action to be taken in solving a given problem.” For example, in a decision to expand operations, capital or government control or size may be the limiting factors. “In choosing from alternatives, the more an individual can recognise and solve those factors which are limiting or critical to the attainment of the desired goals, the more clearly and accurately he or she can select the most favorable alternative.” The idea is to keep the range of alternatives within a manageable limit. Time and cost constraints should be kept in mind. Development of alternatives is a creative process requiring research and imagination. Management must ensure that the best alternatives are considered before a course of action is selected. Relevant information must be collected and analysed for this purpose.

4. Evaluate Alternatives. Once the alternatives are discovered, the next stage is to evaluate or screen each feasible alternative. Evaluation is the process of measuring the positive and negative consequences of each alternative. Management must balance the costs against possible benefits. Considerable knowledge and judgement are required to measure the plus and minus points and to find out the net benefit of each alternative. Both quantitative and qualitative evaluation is needed to ensure that all tangible and intangible factors are taken into account. The element of risk involved in each alternative and the resources available for its implementation should also be considered. Management must set some criteria against which the alternatives can be evaluated. Peter Drucker has suggested the following criteria to weigh the alternative courses of action:

(a) Risk. Degree of risk involved in each alternative.

(b) Economy of Effort. Cost, time and effort involved in each alternative.

(c) Timing. Whether the problem is urgent.

(d) Limitation of Resources. Physical, financial and human resources available with the organisation.

5. Select the Best Alternative. After evaluation, the optimum alternative is selected. Optimum alternative is the alternative that will maximize the results under given conditions. Choice of the best alternative is the most critical point in decision making. The ability to select the best course of action from several possible alternatives separates the successful managers from the unsuccessful ones. Past experience, experimentation, research and analysis are useful in selecting the best alternative.

6. Implementation and Followup. Once a decision is made, it needs to be implemented. Implementation involves several steps. First, the decision should be communicated to those responsible for its implementation. Secondly, acceptance of the decision should be obtained. Thirdly, procedures and time sequence should be established for implementation. Necessary resources should be allocated and responsibility for specific tasks should be assigned to individuals. The implementation of the decision should be constantly monitored. The effects of the decision should be judged through periodic progress reports. In case the feedback indicates that the decision is not yielding the desired results, necessary changes should be made in the decision or in its implementation.

Herbert Simon has identified three phases in the decision making process:

  • Intelligence activity involves a search for the conditions underlying the decision. It includes identification and diagnosis of the problem, definition of objectives and collection of information.
  • Decision activity is concerned with the generation and evaluation of alternative courses of action.
  • Choice activity implies selection of the best course of action. Post choice activity involves implementation of the decision.

Bounded Rationality

Managers differ in their decision-making behaviour. Experts have developed two alternative models of human behaviour in decision-making: (i) Economic man model, and (ii) Administrative man model

The Rational Economic Man Model

Adam Smith and other classical economists suggested that managers are fully rational and choose the alternative which provides maximum gain. Therefore, the classical theory of economics is based on the goal of profit maximisation. A rational decision-maker has a clear idea of the problem to be solved and he is fully objective and logical in his approach. Rationality implies a consistent and value-maximising choice. According to Simon, rationality is the selection of preferred behaviour alternatives and terms of values whereby the consequences of behaviour can be evaluated. A rational business decision is one which effectively and efficiently assures the attainment of aims for which the means are selected. It means that the decision-maker as an economic been tries to maximize the advantage by selecting the best or optimum solution to a problem. It is called a normative approach because it is idealistic and advocates perfect and fully scientific decisions. It is based on the following assumptions:

  1. The decision-maker has a clear and well-defined goal that he is trying to maximise.
  2. He is fully objective and rational, uninfluenced by emotions.
  3. The decision-maker can identify the problem clearly and precisely.
  4. He knows all the alternatives available to him as well as the consequences of each alternative. He has full information and is able to analyse it intelligently.
  5. The decision-maker can rank all consequences according to preference and knows which consequence is the best.
  6. He has the full freedom to choose the alternative that best optimises the decision.

According to Hebert Simon, economic man model is normative. It only describes how a person should make a decision. In real life, people do not behave in this ideal manner. Human beings cannot be fully rational decision-makers in practice. Therefore, the economic man model is not descriptive of actual decision-making behaviour. It is rather prescriptive of how decision-makers should behave. Perfect rationality is only a norm which can rarely be attained in practice. Several practical problems come in the way of totally rational decision-making behaviour. In other words, rationality is bounded by several limitations. Herbert Simon proposed the term ‘bounded rationality ‘ to describe the actual behaviour of decision-makers.

The Administrative Man Model

Prof. Herbert Simon, a wellknown economist and the Nobel laureate, suggested the principle of bounded rationality to explain the decision-making behaviour in real life. His model of Administrative man is a descriptive model of decision-making behaviour. This model recognises the fact that due to several constants, managers are unable to make perfectly rational decisions. There are several boundaries to rationality in decision-making. The principle of bounded rationality has the following implications :

  1. A decision-maker does not make an exhaustive search for alternatives. Rather he stops when he is able to identify the alternatives that meet his standards. He makes his choice without first determining all possible alternatives.
  2. A decision-maker does not search for the best solution but for ‘good enough ‘ solutions. In other words, he aims at satisfying rather than maximising. The administrative man seeks satisficing (not optimal) decisions which are satisfactory for his practical purposes. He makes decisions which are good enough and do not make undue demands on his time, talent and money.
  3. An individual does not have complete knowledge of alternative courses of action and their consequences. Simon’s administrative model represents the real situation of decision-making behaviour. It is realistic while economic man model is hypothetical. Example of satisfying decision making is ‘acceptable level of profit’ as against maximum profits. It recognises environmental and behavioural influences on decision-making process. It reveals that reality is far more complex than theory. By recognising the internal and external limitations under which decision makers operate, the model provides a flexible approach to decision-making.

According to Simon, a manager takes decisions not absolutely through logical reasoning but on his intuition and values too. A decision may be called objectively rational if it is really the correct behaviour for maximising given values in a given situation. It is subjectively rational if it maximises attainment relative to the actual knowledge of the subject. It is consciously rational to the extent that the adjustment of means to ends is a conscious process. It is deliberately rational to the extent that the adjustment of means to ends has been deliberately brought about. A decision is organisationally rational if it is oriented to the goals of the organisation. It is personally rational if it is oriented to the individual’s goals.

Causes of Bounded Rationality

It is just not possible to be fully rational and objective in making decisions in real life due to the following extent:

  1. Inadequate Goal Formulation. In most decision situations, goals cannot be formulated explicitly. Organisational goals are often no more than vague aspirations or expectations mixed with personal values and bias of top managers. As goals of the top management percolate down to lower levels, they tend to become distorted and diluted. Moreover, multiple goals may conflict with and contradict each other. Therefore, the decision-maker does not fully understand the goals to be maximised by decision-making.
  2. Vaguely Defined Problems. It is often impossible to define the problem precisely and clearly. So long as current performance is satisfactory, managers may think that there is no problem.
  3. Imperfect Knowledge. In practice, managers do not have full information on all alternatives and their consequences. Their information is fragmented and incomplete. Many uncontrollable and unknown factors influence the outcome of a choice. Therefore, it is impossible to anticipate the consequences of various alternatives with percent accuracy. Consequences of a decision occur in future which is uncertain. Therefore, the decision-maker has to depend upon his imagination and judgement. He cannot be fully rational and objective.
  4. Limited Time and Resources. Managers are required to make decisions within limited time or quickly. They cannot wait till the full information is collected. Moreover, gathering full information may be too costly. In such a situation, the search for facts is limited and does not continue until all the data are obtained. Under severe time and cost constraints, managers have to make decisions on the basis of partial data. They cannot waste time and effort in finding out the ideal solution.
  5. Human Limitations. Most of the decision-makers do not have the ability to process the information intelligently. They are invaded with so many details that they become overloaded. In order to avoid confusion, they select only those details which they consider pertinent to the decision. Therefore, the choice is made within a restricted area. Human beings are not always rational in the decisional process. The understanding and approach towards the problem is affected by the perceptions, beliefs and basis of the decision-maker. The personal value systems of the decision-maker also affect the significance he attaches to various alternatives. Therefore, human beings cannot be completely objective and rational while making decisions.
  6. Power Politics. The normative model ignores the influence of power groups in the decision-making process. Very often a decision has to be a compromise accomodating conflicting interests of different groups. The information which a decision-maker needs may be distorted to suit vested interests. The decision-maker has to depend upon filtered data. He may not have the full freedom to choose rationally.
  7. Environmental Dynamics. The environment of decision-making is very uncertain and turbulent. It keeps on changing rapidly. It is probabilistic, not deterministic. Moreover, managers prefer to choose paths of least resistance and hesitate to take unfamiliar postures. Thus, the rational economic model is based on defective reasoning and on unrealistic assumptions. It is a native model that does not allow for the impact of numerous environmental forces. The complexities of the real world force us to reject the concept of full rationality in decision-making.

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