What are the Basic Concept of Planning and Its Components?

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By: Site Engineer, Staff

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There are two simple and typical definitions are ‘a system is a set of interrelated components directed to some purpose’. ‘The system is a set of parts coordinated to accomplish a set of goals.’ Various other definitions are existing but they all contain the essential elements of parts and relationships and, in the case of organizational systems, they seek to accomplish agreed objectives.

Systems exist in every facet of life. There are mechanical systems, biological systems, information systems, social systems, organizational systems, and innumerable others.

The systems approach avoids taking a piecemeal approach to problems and directs the activities of the components or subsystems of the total system towards meeting overall objectives.

The systems approach recognizes that changes cannot be made to some parts of the system without considering the effect on the system as a whole and that the overall system characteristics are greater than the sum of the separate parts.

About a particular organization the systems approach would require consideration of the following factors:

  • The indicators will be used to measure the performance of the system as a whole.
  • The current and anticipated resources available to operate the system.
  • The parts of the system (i.e the subsystems) their related activities and objectives must be studied to ensure conformity with overall system objectives.
  • The system through information networks.
  • The system must be defined. This requires establishing the boundaries (real or arbitrary) which encompass the system being studied.
  • The real objectives of the system must be specified.
  • The environment in which the system operates, the interactions with the environment, and the constraints which it imposes.

Types of Systems

  1. Adaptive or Self-organizing or Cybernetic Systems: These are highly complex systems that adapt to the environment by altering their structure and/ or parts and/ or behavior. This adaption is of the system itself and not merely the alteration of some parameters (e.g., a stock level) within the system. This class of system includes all living systems – animals, plants, social groups, and organizations. It is a primary task of management to ensure that organizations continually adapt to changes in the environment to ensure survival and development. It is the essence of long-term planning that recognizes the fact that organizations are adaptive systems and that environmental influences are all important.
  2. Deterministic or Mechanistic Systems: These are the simplest systems that are perfectly predictable, i.e., given the inputs the outputs can be predicted accurately. Machines and computer programs are examples of deterministic systems.
  3. Stochastic or Probabilistic Systems: In these systems, some states can be predicted from a previous state but only in terms of probable behavior. Predictions will always have a certain degree of error because of the existence of random variations in the values of the system components caused by internal and external influences. For example, in an inventory control system, the average stock or average demand can be predicted but the exact value of these factors at a future time cannot be predicted. The various control systems (e.g., Inventory Control, Production Control, Quality Control) are installed to detect and control the variations so that they do not become of such magnitude as to endanger the fulfillment of the system objectives.

Closed or Open Systems

  • Open Systems: These are systems that interact and exchange information, energy, and materials with their environment.
  • Closed Systems: These are systems that are self-contained and do not exchange material, information or energy with the environment. In the strict sense no business or organization system can be a closed system but for many planning and control purposes systems are designed to be relatively closed with only minimal interactions with their environment. This greatly aids the prediction and monitoring of system performance.

Sub-optimization

This is where the objectives of sub-systems are pursued to the detriment of the overall system goals. Each sub-system may be working at peak efficiency but this does not necessarily mean that the system as a whole is acting optimally.

Planning – System Concepts

This is probably more common than is realized and may be caused by departmental pressures and rivalries, poor communications, lack of coordination, poor information systems, or lack of centralized direction and control. The avoidance of sub-optimization is an important objective of the planning and control process.

The perfect way to avoiding sub-optimization is to ensure that the overall objectives of the organization dominate the objectives of each of the subsystems. This factor must be borne in mind when planning, controlling and monitoring performance.

Planning and Control

Planning precedes control and planning without consideration of the type, frequency, and method of control will largely be a waste of time. It follows from this, that part of the planning process involves the design of an appropriate control system.

Control is an important element of the work of the management accountant. Planning is an inescapable part of all rational human activity because of its importance to organizations their planning processes have become refined and structured to improve their efficiency.

Long-term Strategic Planning

This is variously termed ‘long-range planning’, ‘strategic planning’ or when applied to organizations, ‘corporate planning’. Long-term planning covers periods longer than one year and typically embraces 3, 5, 10 years or even longer periods.

Long-term planning is the formulation evaluation and selection of strategies to prepare a long-term plan of action to attain objectives. Also known as corporate planning and long-range planning, it is a systematic identification of all phases of action required for deciding on the future position of the company.

The process of corporate planning consists of various stages which focus attention on four key areas:

  • The environment;
  • The objectives;
  • The factors which influence the achievement of the objectives; and
  • The choice of strategies and tactics to achieve the objectives.

The Assessment Stage

This is also known as a position audit and seeks to provide detailed answers to the following questions.

  • What is the existing state of the organization and the environment in which it operates?
  • What is the environment in which the organization will have to operate the future?

The four aspects of the assessment stage are:

The External Environment

This includes an assessment of:

  1. An assessment of current marketing and distribution policies the degree of market penetration and acceptability and possible market development and product diversification.
  2. Analysis of resources available to the organization including finance, raw materials skilled labor.
  3. Economic, political, social and technological factors affecting the organization.
  4. Detailed analysis of competitive activity for established products and product developments.

The Organization

  1. Analysis of trading results, profits, turnover, and contributions for product groups sales areas and divisions.
  2. Analysis of research and development activities including projects in progress, analysis of the financial procedure, investment policies, working capital management.
  3. This is a detailed study of the organization’s strengths and weaknesses, its results, limitations, and constraints.
  4. Analysis of production facilities, age, and sophistication of plant, bottlenecks, analysis of personnel their qualities, skills, age profiles, industrial relation policies, and record.

The Future

Undoubtedly, the most difficult to assess yet the most crucial over the medium to long-term covered by the corporate plan period. There is a very wide range of factors to be considered including:

  • Economic forecasts of GNP;
  • Disposable income;
  • Markets inflation;
  • Taxation;
  • Political problems relating to raw materials;
  • Energy;
  • Embargoes;
  • Tariffs;
  • Social trends in taste purchasing power;
  • Leisure;
  • Technological forecasting regarding likely developments affecting the organization competitors likely actions mergers and acquisitions; and
  • Other uncontrollable factors.

The Expectations

The major influences on corporate objectives are the expectations of the diverse groups involved, such as the stakeholders. Their expectations of dividends, capital growth, and company expansion’s expansion plan.

  1. General Public: Their motions regarding environmental and pollution matters, the contribution of the organization to the economy and the company’s social responsibility issues.
  2. Employees: Their expectation of job security and satisfaction income rise, conditions of service pensions, leisure.
  3. Customers: Their expectations of quality-delivery price product availability.

The Objectives Stage

Objectives stage is the key stage in the Corporate Planning process and seeks to answer the question “where does the organization want to go?”

The essence of Corporate Planning is to define objectives first then consider how they can be achieved. This approach avoids major errors of sub-optimization by ensuring that the long-term corporate objectives are defined before the short-term tactical objectives covering various facets of operations.

The short-term objectives and targets contribute towards the achievement of the long-term corporate objectives thus encouraging coordination and goal congruence on the part of management.

There are very real problems in establishing corporate objectives because of the multi-faceted nature of modem business.

Below are the areas in which objectives of performance and results have to be set:

  1. Physical and financial resources
  2. Profitability
  3. Manager performance and development
  4. Worker performance and attitude of public responsibility
  5. Market standing
  6. Innovation
  7. Productivity

The setting of objectives is a detailed, interactive, task involving much discussion but eventually, the objectives must be set, within each area, quantifiable and measurable terms.

For example, within the ‘market standing’ area-specific statements would need to be made about such matters as:

  • Target market share of product ranges
  • Target home/export sales of each product/product range
  • Target proportions of sales by distribution channel/industrial sector
  • Target proportion of sales from new/existing products and Target new market development
  • Target sales of each product
  • Target sales of product ranges
  • Target market share of each product

Similar detailed objectives will be set for each of the other areas. The area most familiar to accountants, relating to profitability and finance, include:

  • Target return on capital employed,
  • Earnings per share operating profit,
  • Dividends and asset growth.

It will be apparent that objectives covering the whole range of organizational activities are extremely diverse and because of this, it is unlikely that a single performance measure, such as return on capital employed could adequately represent the whole spectrum of corporate objectives.

Top management will also establish corporate policies that provide guidelines on how the organization expects its objectives to be achieved. Policy statements reflect the organization’s culture and belief system and can be powerful influences on the ways activities are carried out and decisions are taken. For example, the difference in policies between two local authorities; on a labor controlled inner-city authority and the other one a conservative controlled rural area.

The Appraisal Stage

This is colloquially known as SWOT analysis (i.e. Strengths, Weaknesses, Opportunities, and Threats). SWOT involves an analysis and comparison of internal factors. The planning team should attempt to rank what are considered to be the main strengths and weaknesses of the organization.

These could be found in any area of the organization. They could, for example, relate to the price, range reliability (or otherwise) of the products the training, age structure, morale of the workforce; size capability of equipment and so on.

The planning team should consider the environment within which the organization operates to try to identify the trends and factors which will have a material effect on the organization in the medium to long term.

This process will involve considerable discussion with outside experts and analysts, perhaps special investigations, the examination of national and international statistics and so on. Depending on the size and scope of the organization the appraisal could include local national or international factors. Threats and opportunities may be identified in various aspects of the environment, for example:

  • Economic and social factors, such as unemployment, inflation, social mobility and so on.
  • Technology factors such as automation and robotics, new materials, process and so on. Political factors such as privatization, changes of government at home and abroad legislation wars and so on.
  • Market factors such as new and current competitors, market share, changes in distribution (e.g city center to out of town shopping) and so on.

It has to be recognized that all these appraisals mean trying to peace into a misty and uncertain future. When change is in a continuous pattern, it is possible to project existing trends and thus make reasonable assumptions as to the actions and reactions required.

The problem is that much change is discontinuous and unexpected. It has been said that the only thing we know for certain about the future is that the unexpected will happen. This unpredictability means that judgment and intuition play an important part in long-term forecasting.

Statistical forecasting of whatever level of sophistication is based on the implicit assumption that existing trends patterns and cycles will continue. Of course, they may but on the other hand, they may not.

Evaluating Alternatives

By this stage the planning team will be aware of:

  • The aspects of the organization are strong and those which are weak.
  • The scale of the strategic task ahead.
  • The major forecast trends and factors which are expected to influence organization either as threats opportunities.

The team is then able to consider alternative corporate strategies which will form the basis of the agreed corporate plan. The strategies should be sufficient so that they can be evaluated as to whether they have been achieved or not, but not so specific that they constrain the organization. Specific targets can only set at tactical and operational levels for shorter periods of, say up to one year.

The information system of the organization can be of considerable assistance to the planning team when considering alternative strategies. The team will continually require answers to a series of questions beginning, with what would happen if possible answers to these and similar questions are provided by the process.

The Corporate Plan

At this stage, the corporate plan is a consensus on the strategies for the organization so that the remaining stages add increasing amounts of practical details. The task is to prepare action plans for the various departments and functions of the organization. These plans contain targets and in sufficient detail so that tactical level management knows the task they have to perform.

The plan should show only the new tasks, but how existing operations will merge into the new targets over, say, the next five years. The strategic plan will be used by tactical management to prepare operational plans budgets set short term targets and so on.

Monitoring and Control

There is no point in any planning exercise if progress is not monitored after the plans have been implemented. This is to see whether activities need to be adjusted to bring them into line with the original strategies or to see whether, because of unforeseen circumstances, it is time to review the strategies themselves.

Monitoring and control at all levels work by the feedback of information which is a major function of the information system of the organization.

Formal and Informal Planning

Informal systems are more flexible and adaptable. They deal with information which is more current and significant and, because of the social contact involved they can convey a nuisance which formal systems cannot handle. They do, however, suffer from bias, noise and do not always provide a complete picture.

What is required is a blend of formal and informal so that the completeness, accuracy, and detail of the formal systems complement the flexibility the adaptability of the informal. To achieve the right mixture is difficult for both managers and information specialists but to be aware that there is no single all-embracing simple solution is an important first step.

Various reviews of formal planning procedures suggest that they encourage inflexibility whereas the real requirements, especially at the strategic level are responsiveness and adaptability. The greatest care must be taken to ensure that the environment is continually scanned and monitored so that the organization can adapt in a progressive, controlled fashion. This is always more efficient than enforced traumatic changes made after a period of stagnation.

Types and Sources of Planning Information

The types of information and their sources will naturally vary from organization to organization but there is one general principle. For long-term planning, environmental information is of critical importance. At lower levels and in the short-term, internal information is important but for planning the long-term direction of the organization and ensuring survival and success, external information is all-important.

The following questions provide examples of the types of information that might be required for strategic planning and typical sources of such information.

Types of External Information

Markets and Competition:

  • Is the market segment increasing or decreasing?
  • Where should our products/services be positioned?
  • What are our competitors doing?

Social Factors:

  • What will be the effect of the changing family patterns, the role of women in society?
  • What changes are expected in attitudes towards consumption and savings? etc.

Political Factors:

Technological Change:

  • Can the organization adapt to/take advantage of new technology?
  • How will it affect the organization?
  • Are staff to be trained to meet up with changes in technology?

Demographic Trends:

  • How is the population structure changing?
  • Can we deal with an aging population?
  • Is the age profile of our customers changing?
  • What is the behavior of our consumers because of the aging profile?

Economic Conditions:

  • What are the forecasts for growth, inflation, GDP, etc?
  • What will be the effect of the European Community Single Market? etc.

Industrial Structure:

  • Is there a process of rationalization/concentration taking place?
  • What will be the consequences of privatization?
  • How many are new firms entering the industry? etc.

Types of Internal Information

  • Financial information on profits, costs, margins, cash flows, investments, etc.
  • Personnel information on labor skills and availability training labor relations etc.
  • Research and development information on new products and developments patents knowledge base etc.
  • Marketing and sales information on performance revenues, market distribution channels, etc.
  • Production and operational information on assets capacities lead times, quality standards, etc.

Typical Sources of Information

External to the Organization

  • Informal: Discussions, social contact of all types, media coverage, conferences, business and holiday trips at home and abroad, correspondence.
  • Formal: Published reports, government statistics, scientific and technical abstracts, company reports, commercial data banks, trade associations, and special investigations.

Internal to the Organization

  • Informal: Discussions, meetings social contact, telephone conversations personal record-keeping correspondence.
  • Formal: All outputs of the organization’s management information system including control and monitoring reports, forecasting and inquiry systems, modeling and simulation, investigative reports, budgets, job descriptions, organization charts, correspondence video displays.

In spite of the wealth of external information available and its obvious importance in planning, there is evidence that organizations fail to explore the sources in a thorough comprehensive manner.

The Need for Flexibility

Corporate plans are developed using forecasts, judgments, and assumptions about an increasingly uncertain future. This uncertainty must be recognized and frequently forecasts and assumptions are shown as ranges of values rather than a single point estimate. The inherent uncertainty also requires that the plan itself may need modification and adjustment in the light of unexpected major occurrences. The process of corporate planning must be dynamic and flexible and not static and inflexible.

The process of reviewing the plan would be done regularly and typically plans might require updating:

  • At longer-term intervals (say 3 or 5 years), the underlying objectives may require redefining with appropriate revisions to corporate strategies.
  • When an unexpected event occurs which has a significant effect on the organization? For example, the sudden loss of a large market or source of supply of raw materials caused by a coup or war, the merger of major competitors a major technological breakthrough.
  • In the light of the organization’s actual progress forms part of the annual review of the plan when the year’s results are known.

Advantages of Corporate Planning

  • The Corporate Planning process exposes weaknesses in the organization’s information systems and forces improvements to be made.
  • The all-important psychological effect on the motivation of having clear targets any be substantial. Furthermore, goal congruence by middle and senior management may be improved.
  • The processes and discussions involved in setting corporate objectives clarify policies and strategies and provide the essential framework for realistic operational planning and budgeting.
  • The processes of Corporate Planning and the associated operational planning help to coordinate the different aspects of the organization and helps to avoid sub-optimality.
  • Having Corporate Planning, in the background avoids undue concentration on short-term factors and facilitates those policies which by their nature are long-term in nature, for example, capital investment, organizational restructuring, acquisitions and divestment, career and planning.

Disadvantages of Corporate Planning

  • The processes may become somewhat bureaucratic and absorb a considerable amount of management time.
  • Unrealistic objectives may be a disincentive.
  • A corporate plan which is rigidly applied may make the organization inflexible and less capable of responding to major changes.

Corporate Planning and the Systems Approach

The systems approach emphasizes objective setting the necessity of taking an overall view, the avoidance of sub-optimization and the installation of appropriate controls to monitor performance against the plan. It will be apparent that Corporate Planning aligns itself very closely indeed to the systems approach and is the prime organizational example of systems principles being applied in practice.

Corporate Planning and Budgeting

A budget is a short-term plan (usually extending over a year), developed within the framework of the medium to long-term Corporate Planning. The budgetary process provides for estimates of income and expenditure for the year. It is futuristic and as such a viable instrument in Corporate Plan. Budgets provide the comprehensive Corporate Plan qualitatively in dollar and cent/naira or kobo. Without a budget, a firm cannot operate at all.

Computer-based Planning Models

The preparation of a full Corporate Plan complete with comprehensive statements of all the financial consequences is a daunting task to carry out manually. It becomes even more difficult and time-consuming to prepare if it is also required to show the effects of changes in the assumptions upon which the plan has been based.

For example, a minor change in the assumed inflation rate from 10% to 12% projected over the life of the Corporate Plan is likely to involve many thousands of calculations, changes in operating, statements, balance sheets, cash flow projections, and many other such alterations.

It is because of this that many organizations use computer-based models to assist in the overall corporate planning process. The models are sometimes called corporate models or financial models or planning models.

Simply these models are computer programs that depict the operations and relationships of the organization. Usually, the model consists of a large number of interrelated equations representing various facets of the organization’s activities. The input of primary assumptions (e.g., sales level, sales price, wages cost, etc) into the model enables the resulting operating statements projections balance sheets to be quickly and easily produced by the machine.

The real power and advantage of such computer-based models are not merely to produce a single result but to enable management to ask and obtain answers to the following questions.

  • What would happen if?
  • What would be the result of for example, what would be the result of the sales volume growing by 10% annum, costs increasing by 12% per annum and selling prices increasing by 14%?

The computer would speedily calculate the results of such questions and it is this capacity to handle enormous data with speed and efficiency that makes this development so important for the management accountant.

It should be recognized that whilst computer-based models help to illustrate and quantify the uncertainties attached to long-term planning they do not eliminate them. Managerial judgment and expertise are still key factors.

Model Development

To develop a model that is realistic and has adequate predictive qualities is a collaborative effort between management and information specialists such as systems analysts and accountants.

The key points are:

  • Model building is an iterative, creative process to identify those variables and relationships which must be included in the model so that it is capable of predicting overall system performance. It is not essential or indeed possible, to include all variables in a model. The variables in a model of greatest importance are those which govern. To a greater or lesser extent, the achievement of the specified objectives. There are critical variables.
  • The model should have a purpose and be objective oriented.

The best model is the simplest one with few variables that have adequate predictive qualities. To obtain this ideal, there must be a thorough understanding of the system. The management who operates the system has this understanding and must be involved in the model building otherwise over-elaborate and overly mathematical models may result if this exercise is left to systems professionals.

 

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