Reading: Lesson 5 - The Planning Function

2.5.A - The Planning Function

1. THE VALUE OF A BUSINESS PLAN

1. New businesses are started every day, and existing businesses regularly look for opportunities to expand. At the same time, many new and existing businesses fail. Lack of planning is often one of the reasons for business failures. Owners and managers who can effectively plan for a business’s future are much more likely to be successful than those who concentrate only on day-to-day operations. Planning is a specific management activity and needs to be done carefully. Managers need to know how to plan and how to use some specific planning tools and procedures.
   
2. In the Reality Check scenario, Eldron Huntley’s banker reminded him that he had to plan carefully in order to make the best decisions about developing and managing business expansion through Internet sales. Poor planning could result in huge losses and the possible failure of his existing successful business. However, the correct decision could result in a much larger business, higher profits, and a great deal of personal satisfaction.
   
3. Eldron’s banker asked him to develop a business plan before she would consider approving the loan. A business plan is a written description of the nature of the business, its goals and objectives, and how they will be achieved. A business plan is an important tool for any business that is planning a major change. Planning how to achieve objectives includes analyzing the opportunities and risks the business faces. A business plan includes a detailed financial analysis showing the potential profitability that is expected to result from the planned operations.
   
4. Business plans may be brief and simple for a new small business. On the other hand, written plans for a large, existing business may be very long and complex. Large multinational businesses generally have more than one business plan. Each part of the business develops its own plan to guide its operations. However, all of the plans must work toward the same overall objectives. The top corporate executives and planning specialists work with all parts of the business to coordinate planning and to approve each unit’s plans.
   
5. When Eldron Huntley develops a written business plan, he will have long-range goals and direction for his new online ordering system as well as specific plans for operations, marketing, financial management, and human resource decisions. The plan will address the new online business activities but also provide plans for the continuing operation of the existing business. As a result of completing the business plan, Eldron will have given much more thought to both the new and current business activities. He will have a greater understanding of what will be required to make both parts successful. His banker will have the information needed to determine if granting the requested loan is a wise business decision. The business plan will give the banker greater confidence that Eldron has carefully considered the new opportunity and knows what needs to be done to add an Internet presence to the existing business. The banker is much more likely to make a positive decision about the loan when there is a carefully developed written plan. 
   

   
   

2. THE IMPORTANCE OF PLANNING

1. Planning is probably the most important management activity. It sets the direction for the business and establishes specific goals. Plans serve as guides for making decisions about business operations. Managers use plans to determine whether the business is making progress. Planning helps managers communicate with each other and with employees to coordinate activities. Careful planning encourages managers to be more precise and objective in their decisions.
   
2. As a result of planning, senior managers are able to determine the sources of competitive advantage and leverage that advantage to the benefit of the company. Competitive advantage refers to the special capabilities of a company that allow it to create a product or service that is measurably better than any competing company. For instance, designing a product in a way that cannot be replicated by competitors would create a long-term competitive advantage. A competitive advantage allows the company to profit in a way the competition cannot.
   
3. Planning in a large, complex business is somewhat like assembling a jigsaw puzzle. Each piece must mesh with the others around it in order to assemble the entire puzzle. One missing or broken piece affects the look of the entire puzzle. Large businesses require a great deal of coordination to avoid problems, conflicts, and missed opportunities. Shared planning allows managers from various parts of the business to understand how their work affects other parts of the business. They are also able to recognize when coordinated efforts are needed. Each part of the organization’s plan must “fit together” in order for the business to succeed.
   

3. STRATEGIC PLANNING

1. Strategic plans are critical because all resources are limited. While a company or individual would like to undertake an unlimited number of tasks, there are limits to time, staffing, budgets, and other needed resources. A strategic plan for a company focuses on the highest-priority tasks for the next three or more years. Closely following the strategic plan allows all employees and managers of an organization to dedicate time to the most critical, highest-priority tasks.
   
2. When Eldron Huntley prepares his business plan, he will be involved in strategic planning. The banker told him that he should not make the decision to expand his business quickly without carefully considering how to do it. Managers need a great deal of information to determine if a particular decision is expected to be profitable. Strategic planning provides the needed information and procedures for making effective decisions about the direction and goals of a business. 
   

   
   

3. The external and internal analyses, steps 1 and 2, are often referred to as SWOT analysis. SWOT analysis is the examination of the organization’s internal Strengths and Weaknesses as well as the external Opportunities and Threats. Internal factors are all of those things within a business that managers can influence and control to help accomplish business plans. External factors are those things operating outside of the business that managers cannot control that may influence the success of business plans.
   

4. In step 1 of the analysis, managers identify any opportunities for expanding and improving the business and any threats the company faces from competition, changes in the economy, new laws and regulations, technology improvements, and other factors outside the company. For example, Eldron Huntley identified an opportunity when he noticed that customers from outside his local area wanted to have meals shipped to them. The seminar he attended helped him recognize that technology provided a low-cost way to communicate with those customers.
   

5. In step 2, managers evaluate the organization’s own capabilities to determine strengths and potential weaknesses. A company has successful products, experienced employees, financial resources, and well-organized operations. On the other hand, it may be experiencing low sales or may have outdated facilities and equipment. Each factor can contribute to the success or failure of business plans. Eldron Huntley identified his company’s strengths as the unique menu items along with dependable quality and taste. His banker questioned whether Eldron currently had the capability to distribute his products to a large number of customers across the country while maintaining the quality. Managers want to build on the company’s strengths and reduce its weaknesses whenever possible.
   

6. In step 3, managers describe and agree on the business’s mission. A mission (or mission statement) is a short, specific statement of the business’s purpose and direction. The mission flows out of a broad, long-term, and often inspirational vision, the company’s reason for existing. For example, Eldron’s vision statement for his company might be “to conveniently provide memorable meals to celebrate life’s special occasions.” His mission statement, then, might be “to prepare high-quality, memorable meals from unique recipes to satisfy the tastes of our customers no matter when or where they want them.” Once a clear mission and vision are created, these statements might exist for the entire lifetime of the company. Steps 4 and 5 then use the planning information and the mission to set specific goals for the company and descriptions of activities and resources needed to achieve the goals.
   

7. The top executives in a business are responsible for strategic planning. A careful and objective process is followed to prepare the strategic plan. The executives use information collected from lower-level managers, from the company’s employees and operations, and from other sources. Large companies may have a special planning and research department to collect and analyze information and to develop proposals for executives to consider. Smaller companies may hire research firms or consultants to help with strategic planning. New and small businesses may be able to obtain planning assistance from government agencies such as the Small Business Administration and local/regional economic development offices. The business departments of area colleges and universities are also a useful resource for planning assistance.
   

4. OPERATIONAL PLANNING

1. A strategic plan tells managers where the business is going. The managers must then take action to move the business toward those goals. Operational planning determines how work will be done, who will do it, and what resources will be needed to get the work done in each area of the business.
   
2. Operational plans in a factory could include developing department budgets, planning inventory levels and purchases of raw materials, setting production levels for each month, and preparing employee work schedules. Operational planning in a marketing department might include developing promotional plans, identifying training needed by salespeople, deciding how to support retailers who will handle the product, and selecting pricing methods. A great deal of the operational planning in a business is the responsibility of middle-level managers and supervisors, and even some experienced employees.
   
3. Operational plans are based on the business’s strategic plan and are developed after the strategic plan is completed. Operational plans determine what resources will be required and how they will be used. Therefore, operational planning influences the amount and type of equipment and supplies needed, the number of employees and the training they require, work schedules, payroll, operating budgets, and many other factors. Operational plans direct the day-to- day activities of a business and largely determine whether the strategic plan of the business will be successful.