Foundations of Planning

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LEARNING OUTLINE
Follow this Learning Outline as you read and study this
chapter.
What Is Planning?
• Define planning.
• Differentiate between formal and informal planning.
• Describe the purposes of planning.
• Discuss the conclusions from studies of the relationship between
planning and performance.
How Do Managers Plan?
• Define goals and plans.
• Describe the types of goals organizations might have.
• Explain why it’s important to know an organization’s stated and
real goals.
• Describe each of the different types of plans.
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LEARNING OUTLINE
(cont’d)
Follow this Learning Outline as you read and study this chapter.

Establishing Goals and Developing Plans

• Discuss how traditional goal setting works.
• Explain the concept of the means–end chain.
• Describe the management by objective (MBO) approach.

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What Is Planning?
 As we stated in Chapter 1, planning involves defining the organization’s goals,
establishing strategies for achieving those goals, and developing plans to integrate
and coordinate work activities.

 It’s concerned with both ends (what) and means (how).

 In formal planning, specific goals covering a specific time period are defined.

 These goals are written and shared with organizational members to reduce
ambiguity and create a common understanding about what needs to be done.

 Finally, specific plans exist for achieving these goals.

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 Why Do Managers Plan?
 Planning seems to take a lot of effort. So why should managers plan?

 We can give you at least four reasons.

 First, planning provides direction to managers and nonmanagers alike. When

employees know what their organization or work unit is trying to accomplish and
what they must contribute to reach goals, they can coordinate their activities,
cooperate with each other, and do what it takes to accomplish those goals.
Without planning, departments and individuals might work at cross-purposes and
prevent the organization from efficiently achieving its goals.

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Why Do Managers Plan?
 Next, planning reduces uncertainty by forcing managers to look ahead, anticipate
change, consider the impact of change, and develop appropriate responses.
Although planning won’t eliminate uncertainty, managers plan so they can respond
effectively.

 In addition, planning minimizes waste and redundancy. When work activities are
coordinated around plans, inefficiencies become obvious and can be corrected or
eliminated.

 Finally, planning establishes the goals or standards used in controlling. When

managers plan, they develop goals and plans. When they control, they see whether
the plans have been carried out and the goals met. Without planning, there would be
no goals against which to measure work effort.

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Planning and Performance
 Is planning worthwhile? Numerous studies have looked at the relationship
between planning and performance. Although most showed generally
positive relationships, we can’t say that organizations that formally plan
always outperform those that don’t plan. What can we conclude?

 First, generally speaking, formal planning is associated with positive

financial results—higher profits, higher return on assets, and so forth.

 Second, it seems that doing a good job planning and implementing those
plans play a bigger part in high performance than does how much planning
is done.

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Planning and Performance
 Next, in those studies where formal planning didn’t lead to higher
performance, the external environment often was the culprit. When external
forces—think governmental regulations or powerful labor unions—
constrain managers’ options, it reduces the impact planning has on an
organization’s performance.

 Finally, the planning-performance relationship seems to be influenced by

the planning time frame. It seems that at least four years of formal planning
is required before it begins to affect performance.

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Goals and Plans
 Planning is often called the primary management function because it
establishes the basis for all the other things managers do as they organize,
lead, and control.
 It involves two important aspects: goals and plans.
 Goals (objectives) are desired outcomes or targets. They guide
management decisions and form the criterion against which work results
are measured. You have to know the desired target or outcome before you
can establish plans for reaching it.

 Plans are documents that outline how goals are going to be met. They
usually include resource allocations, schedules, and other necessary actions
to accomplish the goals. As managers plan, they develop both goals and
plans.
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Types of Goals
 It might seem that organizations have a single goal. Businesses want to make a
profit and not-for-profit organizations want to meet the needs of some constituent
group(s).

 However, a single goal can’t adequately define an organization’s success. And if

managers emphasize only one goal, other goals essential for long-term success are
ignored.

 Also, as we discussed in Chapter 5, using a single goal such as profit may result in
unethical behaviors because managers and employees will ignore other aspects of
their jobs in order to look good on that one measure. In reality, all organizations
have multiple goals.

 For instance, businesses may want to increase market share, keep employees
enthused about working for the organization, and work toward more
environmentally sustainable practices.
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Types of Goals
 We can classify most company’s goals as either strategic or financial.

 Financial goals are related to the financial performance of the organization,

while strategic goals are related to all other areas of an organization’s
performance.

 For instance, McDonald’s states that its financial targets are 3 to 5 percent
average annual sales and revenue growth, 6 to 7 percent average annual
operating income growth, and returns on invested capital in the high teens.

 Here’s an example of a strategic goal from Bloomberg L.P.: “We want to

be the world’s most influential news organization.

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Types of Goals
 The goals just described are stated goals—official statements of what an organization says,
and what it wants its stakeholders to believe, its goals are.

 However, stated goals— which can be found in an organization’s charter, annual report,
public relations announcements, or in public statements made by managers—are often
conflicting and influenced by what various stakeholders think organizations should do.

 For instance, Nike’s goal is “delivering inspiration and innovation to every athlete.”
 Canadian company EnCana’s vision is to “be the world’s high performance benchmark
independent oil and gas company.”
 Deutsche Bank’s goal is “to be the leading global provider of financial solutions, creating
lasting value for our clients, our shareholders and people and the communities in which we
operate.”

 Such statements are vague and probably better represent management’s public relations skills
than being meaningful guides to what the organization is actually trying to accomplish. It
shouldn’t be surprising then to find that an organization’s stated goals are often irrelevant to
what actually goes on.
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Types of Goals
 If you want to know an organization’s real goals—those goals an
organization actually pursues—observe what organizational members are
doing.

 Actions define priorities.

 For example, universities may say their goal is limiting class sizes,
facilitating close student-faculty relations, and actively involving students
in the learning process, but then they put students into 300+ student lecture
classes!

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Types of Plans

 The most popular ways to describe organizational plans are

 breadth (strategic versus operational),
 time frame (short term versus long term),
 specificity (directional versus specific),
 and frequency of use (single use versus standing).

 As Exhibit 8-1 shows, these types of plans aren’t independent. That is, strategic
plans are usually long term, directional, and single use whereas operational plans
are usually short term, specific, and standing. What does each include?

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Exhibit 7–2 Types of Plans

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Types of Plans
 Strategic plans are plans that apply to the entire organization
and establish the organization’s overall goals.

 Plans that encompass a particular operational area of the

organization are called operational plans.

 These two types of plans differ because strategic plans are

broad while operational plans are narrow.

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Types of Plans (cont’d)
 The number of years used to define short-term and long-term plans has declined
considerably because of environmental uncertainty.

 Long-term used to mean anything over seven years. Try to imagine what you’re
likely to be doing in seven years and you can begin to appreciate how difficult it
would be for managers to establish plans that far in the future.

 We define long-term plans as those with a time frame beyond three years.
Short-term plans cover one year or less. Any time period in between would be
an intermediate plan.

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Types of Plans (cont’d)
 Specific plans are clearly defined and leave no room for interpretation.

 A specific plan states its objectives in a way that eliminates ambiguity and
problems with misunderstanding.

 For example, a manager who seeks to increase his or her unit’s work output
by 8 percent over a given 12-month period might establish specific
procedures, budget allocations, and schedules of activities to reach that
goal.

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Types of Plans (cont’d)
 However, when uncertainty is high and managers must be flexible in order to
respond to unexpected changes, directional plans are preferable.

 Directional plans are flexible plans that set out general guidelines. They provide
focus but don’t lock managers into specific goals or courses of action.

A specific plan might aim to cut costs by 10 percent and increase revenues by
8 percent in the next six months.

A directional plan might aim at improving corporate profits between 6 and 12

percent during the next six months.

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Exhibit 7–3 Specific Versus Directional Plans

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Types of Plans (cont’d)
 Some plans that managers develop are ongoing while others are used only
once.

 A single-use plan is a one-time plan specifically designed to meet the needs

of a unique situation.
 For instance, when Walmart wanted to expand the number of its stores in
China, top-level executives formulated a single-use plan as a guide.

 In contrast, standing plans are ongoing plans that provide guidance for
activities performed repeatedly. Standing plans include policies, rules, and
procedures.

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Establishing Goals and
Developing Plans
 As we stated earlier, goals provide the direction for all management
decisions and actions and form the criterion against which actual
accomplishments are measured.

 Everything organizational members do should be oriented toward

achieving goals.

 These goals can be set either through a traditional process or by using

management by objectives.

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Establishing Goals and Developing
Plans
 In traditional goal setting, goals set by top managers flow down
through the organization and become sub goals for each organizational
area.
 This traditional perspective assumes that top managers know what’s best
because they see the “big picture.” And the goals passed down to each
succeeding level guide individual employees as they work to achieve those
assigned goals.
 If Taylor were to use this approach, she would see what goals the dean or
director of the school of business had set and develop goals for her group
that would contribute to achieving those goals.

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Establishing Goals and Developing
Plans
 Or take a manufacturing business, for example. the president tells the vice president
of production what he expects manufacturing costs to be for the coming year and
tells the marketing vice president what level he expects sales to reach for the year.

 These goals are passed to the next organizational level and written to reflect the
responsibilities of that level, passed to the next level, and so forth.

 Then, at some later time, performance is evaluated to determine whether the

assigned goals have been achieved.

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Establishing Goals and Developing
Plans
 Although the process is supposed to happen in this way, in reality it doesn’t
always do so.
 Turning broad strategic goals into departmental, team, and individual goals
can be a difficult and frustrating process.
 Another problem with traditional goal setting is that when top managers
define the organization's goals in broad terms—such as achieving
“sufficient” profits or increasing “market leadership”—these ambiguous
goals have to be made more specific as they flow down through the
organization.
 Managers at each level define the goals and apply their own interpretations
and biases as they make them more specific. However, what often happens
is that clarity is lost as the goals make their way down from the top of the
organization to lower levels.
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Exhibit 7–4 The Downside of Traditional Goal
Setting

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Establishing Goals and Developing
Plans
 But when the hierarchy of organizational goals is clearly defined, it forms
an integrated network of goals, or a means-ends chain. Higher-level goals
(or ends) are linked to lower-level goals, which serve as the means for their
accomplishment.

 In other words, the goals achieved at lower levels become the means to
reach the goals (ends) at the next level. And the accomplishment of goals at
that level becomes the means to achieve the goals (ends) at the next level
and on up through the different organizational levels.

 That’s how traditional goal setting is supposed to work.

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Establishing Goals and Developing
Plans
 Instead of using traditional goal setting, many organizations use
management by objectives (MBO), a process of setting mutually
agreed-upon goals and using those goals to evaluate employee
performance.
 If Francisco were to use this approach, he would sit down with each
member of his team and set goals and periodically review whether progress
was being made toward achieving those goals.
 MBO programs have four elements: goal specificity, participative decision
making, an explicit time period, and performance feedback.
 Instead of using goals to make sure employees are doing what they’re
supposed to be doing, MBO uses goals to motivate them as well.

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Establishing Goals and Developing
Plans
 The appeal is that it focuses on employees working to accomplish goals they’ve had
a hand in setting.

 Does MBO work?

 Studies have shown that it can increase employee performance and organizational
productivity.

 But is MBO relevant for today’s organizations?

 If it’s viewed as a way of setting goals, then yes, because research shows that goal
setting can be an effective approach to motivating employees.

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Exhibit 7–5 Steps in a Typical MBO Program

1. The organization’s overall objectives and strategies are formulated.

2. Major objectives are allocated among divisional and departmental units.
3. Unit managers collaboratively set specific objectives for their units with
their managers.
4. Specific objectives are collaboratively set with all department members.
5. Action plans, defining how objectives are to be achieved, are specified
and agreed upon by managers and employees.
6. The action plans are implemented.
7. Progress toward objectives is periodically reviewed, and feedback is
provided.
8. Successful achievement of objectives is reinforced by performance-based
rewards.

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