Chapter 3: Planning and Forecasting

The general who wins a battle makes many calculations in his temple ere the battle is
fought. The general who loses a battle makes few calculations before hand. It is by
attention to this point that I can see who is likely to win or lose.

It is probably the most important of the identified managerial functions. It focuses you on how
best to achieve the desired results. Thus, without it organizing, leading, and controlling have
little purpose.

Planning: To decide in advance…

 What to do
 How to do it
 When to do it
 Who is to do it

The Planning/Decision-Making Process:

The Foundation for Planning:

Vision, Purpose, Mission

Clear vision of the basic purpose or mission for which an organization exists is essential for
long-term success of any enterprise.

Vision is the basic purpose of the organization. For example, the vision of AT&T (our business
is service) or the Vietnam war.

Mission needs to be revised from time to time to ensure the underlying assumptions are still
valid. Example of how the “Sears” mission evolved with time to meet new challenges. Sear
began with “service to the isolated farmer”, then with the advent of cars and mail-order, farmers
were no longer isolated. So the mission became “quality at a good price”

Strategic Planning:
Once a mission is chosen, an organization needs to achieve that mission. Strategic planning is
the organized process for selecting these strategies.
Strategic planning is the strategy which defines how the organization plans to move from its
current state to the state envisioned in its mission and vision frameworks.

Goals and Objectives:

Specific targets the achievement of which is essential for achieving strategic aims.

There are essentially eight key areas for which clear objectives should be articulated:
2. Market share: ratio of sales of an enterprise in a particular market to the total sales of all
competitive products and services in that market.
3. Innovation: Critical for high-tech organizations. Organizations can choose to be
followers or leaders in this area.
4. Productivity: A measure of an organization’s ability to produce more goods and services
per unit of input (labor, materials, and investment).
5. Physical and Financial Resources: Organizations need to establish goals for the
resources needed to perform effectively.
6. Manager Performance and Development: Need to plan for the development and
availability of needed managers and manpower.
7. Worker Performance and Attitude: There is a need for clear and strong measures for
ensuring the well-being of workers.
8. Profitability: Critical for any for-profit organization
9. Social Responsibility: What role will the organization play in society.

Management by Objectives:
 Develop work assignments based on organizational needs and objectives.
 Plans are agreed between manager and subordinate.
 Objectives should be stretch objectives
 Objectives should be quantifiable (increase income by 5%) or at least tangible
(written policy).
  Needed resources should be determined and agreed to.
 Plans should include employee development as well.
 Plans are for a 6 month to 1year time span.

Some Planning Concepts:

Responsibility for Planning:
 It is the continuing responsibility of each manager.
 The higher managers rise the more time they spend on planning.
 Ultimate responsibility lies with top and middle management.
 Plans must lead to action.

Planning Premises:
 These are the assumptions under which the developed plans are expected to be
executed.
 Assumptions are based on forecasts and trends in market and technology.
Example of how Monsanto divested from the its mature products into new more
technically advanced products.
 When there is uncertainty, there is a need to develop contingency plans.

Planning Horizon:
 How far into the future do you want to plan
 Varies depending on:
i. The nature of the business
ii. The market organization is in
iii. The required details for the plans

Forecasting:

To predict/approximate what a certain future event or condition will be.

One can forecast:

 Production levels
 Technological developments
 Needed manpower
 Governmental regulations
 Needed Funds
 Training needs
 Resource needs
 Sale levels.  The most critical information to forecast.

Two types of information to forecast:

Qualitative Information:

Used when:
1. Past data cannot be used reliably to predict the future.
  Technological trends
 Regulations
2. When no past data is available, usually because the situation is very new.
 Entry into new markets
 Development of new products

Methods:
 Jury of executive opinion
 Sales Force Composite
 User’s Expectations
 Delphi Method

Quantitative Information:
Used when data is tangible, can be used reliably to predict the future, and there is sufficient
historical data upon which to base forecasts.
 Sales
 Profits
 Production levels

Methods:
1. Moving Average:
Assumptions:
 Time series has a level and a random component only
 No Trend
 No seasonal or cyclical variations

If there is “Trend” then there will be “Bias”

Period Actual Value

1 A
2 B
3 C
4 D

Trend per Period = {|Avg. (A, B) – Avg. (C, D) |}/2

Age of Moving Average = Number of periods by which it lags behind the forecast value

Age of Moving Average =

Correction Value for Trend =

The larger the averaging period “n” the smaller the forecasting variations will be, but the less the
forecast now responds to recent events. A larger averaging period gives stability but has less
connection with recent events. Larger averaging periods might hide cyclical variations. Larger
averaging periods will reveal trends in the data.

To gain smoothing, and overcome the problems of larger “n” we can use:
 Weighted Moving Average: Like Simple Moving Average, but give weights to
the data.
 Exponential Smoothing

Disadvantages:
 Several periods have to pass before an average can be taken, so a trend for the
period of the whole series cannot be found.
 A large amount of data, equal to the period over which the average is being taken,
has to be retained.
 The trend is based on arithmetic averages, so it is influenced by extreme values. If
the cyclical or seasonal variations are large this means that it may not be possible
to smooth them out effectively and arrive at the underlying trend.
 All data (in the simple moving average technique) are weighted equally and data
which are too old to be included are weighted by zero. Generally, it is probable
that recent data are more important and should have higher weights.
2. Exponential Smoothing:
 Same data assumptions as Moving Average
 It overcomes disadvantages of Moving Average.
 Forecast for current period is found as the forecast for the last period plus a
proportion of the error made in the last forecast.

Period Forecast = Last Period Forecast + α (Last Period Actual – Last Period Forecast)

 α = Smoothing Constant (value varies between 0 and 1) (usually 0.1 to 0.2)

 Choose α which gives least bias (error) and deviations on forecasts.

Age of Average =
Advantages:
 No waiting period before reliable forecasts can be calculated.
  The values of the weights decrease with time and there is no cut-off period after
which data are not considered.
 It is only required to retain three figures for any forecast: the past forecast for
current period, the current actual, and the smoothing constant.
 The value of α can be made to change or adapt to changed circumstances, such as
for example to make the series more sensitive to rapidly changing data

3. Regression Analysis
 This is an “Exploratory Forecasting Method”.
 It develops “logical” relationships between variables.
 Tries to minimize sum of the squares of the deviations.
 Gives best fit for a line passing through the data.

There are different types of regression:

 Multiple Regression: When there is more than one independent variable
 Simple Regression: When there is only one independent variable.

where: