M

anagers in baseball team front offices have discovered certain

factors dictate whether they can charge more for tickets—
namely, weather reports, winning streaks, and a big factor:
pitching matchups.1 The San Francisco Giants are the first Major League
Baseball team to try and ride these shifts in demand by repricing tickets
daily, a technique known as dynamic pricing. How well does it work? In
2009, the Giants were able to earn an extra $500,000 in revenue from
dynamic pricing. In 2010, revenues increased about 6 percent.
As this example shows, managers use planning tools and techniques
to help their organizations be more efficient and effective. In this module,
we discuss three categories of basic planning tools and techniques:
techniques for assessing the environment, techniques for allocating
resources, and contemporary planning techniques.

Techniques for Assessing the Environment

Leigh Knopf, former senior manager for strategic planning
at the AICPA, says that many larger accounting firms have
set up external analysis departments to “study the wider
environment in which they, and their clients, operate.” These
organizations have recognized that, “What happens in India
in today’s environment may have an impact on an American
accounting firm in North Dakota.”2 In our description of the
strategic management process in Chapter 9, we discussed the
importance of assessing the organization’s environment.
Three techniques help managers do that: environmental scan-
ning, forecasting, and benchmarking.
Environmental Scanning
How important is environmental scanning? While looking
around on competitor Google’s company Web site, Bill Gates
found a help-wanted page with descriptions of all the open
jobs. What piqued his interest, however, was that many of
these posted job qualifications were identical to Microsoft’s
job requirements. He began to wonder why Google—a
Web search company—would be posting job openings for
software engineers with backgrounds that “had nothing to do
with web searches and everything to do with Microsoft’s core
business of operating-system design, compiler optimization,
and distributed-systems architecture.” Gates e-mailed an
urgent message to some of his top executives saying that
Microsoft had better be on its toes because it sure looked like
Google was preparing to move into being more of a software
company.3
How can managers become aware of significant environ-
mental changes such as a new law in Germany permitting
shopping for “tourist items” on Sunday; the increased trend
of counterfeit consumer products in South Africa; the precip-
itous decline in the working-age populations in Japan,
Germany, Italy, and Russia; or the decrease in family size in
Mexico? Managers in both small and large organizations use
environmental scanning, which is the screening of large
amounts of information to anticipate and interpret changes
in the environment. Extensive environmental scanning is
likely to reveal issues and concerns that could affect an orga-
nization’s current or planned activities. Research has shown
that companies that use environmental scanning have higher

248
 | PLANNING TOOLS AND TECHNIQUES MODULE
performance.4 Organizations that don’t keep on top of envi-
ronmental changes are likely to experience the opposite!
COMPETITOR INTELLIGENCE. A fast-growing area of envi-
ronmental scanning is competitor intelligence.5 It’s a
process by which organizations gather information about their
competitors and get answers to questions such as Who are
they? What are they doing? How will what they’re doing
affect us? Let’s look at an example of how one organization
used competitor intelligence in its planning. Dun & Bradstreet
(D&B), a leading provider of business information, has an
active business intelligence division. The division manager
received a call from an assistant vice president for sales in one
of the company’s geographic territories. This person had been
on a sales call with a major customer and the customer hap-
pened to mention in passing that another company had visited
and made a major presentation about its services. What was
interesting was that, although D&B had plenty of competi-
tors, this particular company wasn’t one of them. The manag-
er gathered together a team that sifted through dozens of
sources (research services, Internet, personal contacts, and
other external sources) and quickly became convinced that
there was something to this; that this company was “aiming its
guns right at us.” Managers at D&B jumped into action to
develop plans to counteract this competitive attack.6
Competitor intelligence experts suggest that 80 percent
of what managers need to know about competitors can be
found out from their own employees, suppliers, and cus-
tomers.7 Competitor intelligence doesn’t have to involve spy-
ing. Advertisements, promotional materials, press releases,
reports filed with government agencies, annual reports, want
ads, newspaper reports, and industry studies are examples
of readily accessible sources of information. Attending trade
shows and debriefing the company’s salesforce can be other
good sources of competitor information. Many firms regu-
larly buy competitors’ products and have their own engineers
study them (through a process called reverse engineering)
to learn about new technical innovations. In addition, the In-
ternet has opened up vast sources of competitor intelligence
as many corporate Web pages include new product informa-
tion and other press releases.
Managers need to be careful about the way competitor
information is gathered to prevent any concerns about
whether it’s legal or ethical. For instance, at Procter & Gam-
ble, executives hired competitive intelligence firms to spy on
its competitors in the hair-care business. At least one of these
firms misrepresented themselves to competitor Unilever’s
employees, trespassed at Unilever’s hair-care headquarters in
Chicago, and went through trash dumpsters to gain informa-
tion. When P&G’s CEO found out, he immediately fired the
environmental scanning competitor intelligence
The screening of large amounts of Environmental scanning activity by
information to anticipate and interpret which organizations gather information
changes in the environment about competitors
249
individuals responsible and apologized to Unilever.8 Com-
petitor intelligence becomes illegal corporate spying when it
involves the theft of proprietary materials or trade secrets by
any means. The Economic Espionage Act makes it a crime
in the United States to engage in economic espionage or to
steal a trade secret.9 The difficult decisions about competi-
tive intelligence arise because often there’s a fine line between
what’s considered legal and ethical and what’s considered legal
but unethical. Although the top manager at one competitive
intelligence firm contends that 99.9 percent of intelligence gath-
ering is legal, there’s no question that some people or companies
will go to any lengths—some unethical—to get information
about competitors.10
GLOBAL SCANNING. One type of environmental scanning
that’s particularly important is global scanning. Because
world markets are complex and dynamic, managers have
expanded the scope of their scanning efforts to gain vital
information on global forces that might affect their organi-
zations.11 The value of global scanning to managers, of
course, largely depends on the extent of the organization’s
global activities. For a company that has significant global
interests, global scanning can be quite valuable. For
instance, Sealed Air Corporation of Elmwood Park, New
Jersey—you’ve probably seen and used its most popular
product, Bubble Wrap—tracks global demographic changes.
Company managers found that as countries move from agri-
culture-based societies to industrial ones, the population
tends to eat out more and favor prepackaged foods, which
translates to more sales of its food packaging products.12
Because the sources that managers use for scanning the
domestic environment are too limited for global scanning,
managers must globalize their perspectives. For instance, they
can subscribe to information clipping services that review
world newspapers and business periodicals and provide
summaries of desired information. Also, there are numerous
electronic services that provide topic searches and automatic
updates in global areas of special interest to managers.
Forecasting
The second technique managers can use to assess the envi-
ronment is forecasting. Forecasting is an important part of
planning and managers need forecasts that will allow them
to predict future events effectively and in a timely manner.
Environmental scanning establishes the basis for forecasts,
which are predictions of outcomes. Virtually any component
in an organization’s environment can be forecasted. Let’s
look at how managers forecast and the effectiveness of those
forecasts.
forecasts
Predictions of outcome
250 PART THREE | PLANNING

FORECASTING TECHNIQUES. Forecasting techniques fall into
two categories: quantitative and qualitative. Quantitative
forecasting applies a set of mathematical rules to a series of
past data to predict outcomes. These techniques are preferred
when managers have sufficient hard data that can be used.
Qualitative forecasting, in contrast, uses the judgment and
opinions of knowledgeable individuals to predict outcomes.
Qualitative techniques typically are used when precise data are
limited or hard to obtain. Exhibit PM-1 describes some popu-
lar forecasting techniques.
Today, many organizations collaborate on forecasts using
an approach known as CPFR, which stands for collaborative
planning, forecasting, and replenishment.13 CPFR provides a
framework for the flow of information, goods, and services
between retailers and manufacturers. Each organization re-
lies on its own data to calculate a demand forecast for a par-
ticular product. If their respective forecasts differ by a certain
amount (say 10%), the retailer and manufacturer exchange
data and written comments until they arrive at a more accu-
rate forecast. Such collaborative forecasting helps both
organizations do a better job of planning.
FORECASTING EFFECTIVENESS. The goal of forecasting is
to provide managers with information that will facilitate
decision making. Despite its importance to planning, man-
agers have had mixed success with it.14 For instance, prior to
a holiday weekend at the Procter & Gamble factory in Lima,
Ohio, managers were preparing to shut down the facility
early so as not to have to pay employees for just sitting
around and to give them some extra time off. The move
seemed to make sense since an analysis of purchase orders
and historical sales trends indicated that the factory had
already produced enough cases of Liquid Tide detergent to
meet laundry demand over the holiday. However, managers
got a real surprise. One of the company’s largest retail cus-
tomers placed a sizable—and unforeseen—order. They had
to reopen the plant, pay the workers overtime, and schedule
emergency shipments to meet the retailer’s request.15 As this
example shows, managers’ forecasts aren’t always accurate.
In a survey of financial managers in the United States,
United Kingdom, France, and Germany, 84 percent of the
respondents said their financial forecasts were inaccurate by
5 percent or more; 54 percent of the respondents reported
inaccuracy of 10 percent or more.16 Results of another sur-
vey showed that 39 percent of financial executives said they
could reliably forecast revenues only one quarter out. Even
more disturbing is that 16 percent of those executives said
they were “in the dark” about revenue forecasts.17 But it is

EXHIBIT PM-1 Technique Description Application

Forecasting Techniques
Quantitative
Time series analysis Fits a trend line to a mathematical
equation and projects into the
future by means of this equation
Regression models Predicts one variable on the basis
of known or assumed other
variables
Econometric models Uses a set of regression equations
to simulate segments of the
economy
Economic indicators Uses one or more economic
indicators to predict a future
state of the economy
Substitution effect Uses a mathematical formula to
predict how, when, and under
what circumstances a new
product or technology will
replace an existing one
Qualitative
Jury of opinion Combines and averages the
opinions of experts
Salesforce Combines estimates from field
composition sales personnel of customers’
expected purchases
Customer evaluation Combines estimates from
established customers’
purchases
Predicting next quarter’s sales on
the basis of 4 years of previous
sales data
Seeking factors that will predict a
certain level of sales (e.g., price,
advertising expenditures)
Predicting change in car sales as a
result of changes in tax laws
Using change in GNP to predict
discretionary income
Predicting the effect of DVD
players on the sale of VHS
players
Polling the company’s human
resource managers to predict next
year’s college recruitment needs
Predicting next year’s sales of
industrial lasers
Surveying major car dealers by a car
manufacturer to determine types
and quantities of products desired
 | PLANNING TOOLS AND TECHNIQUES MODULE 251

important to try to make forecasting as effective as possible,
because research shows that a company’s forecasting ability
can be a distinctive competence.18 Here are some sugges-
tions for making forecasting more effective.19
First, it’s important to understand that forecasting tech-
niques are most accurate when the environment is not
rapidly changing. The more dynamic the environment, the
more likely managers are to forecast ineffectively. Also,
forecasting is relatively ineffective in predicting nonsea-
sonal events such as recessions, unusual occurrences, dis-
continued operations, and the actions or reactions of
competitors. Next, use simple forecasting methods. They
tend to do as well as, and often better than, complex meth-
ods that may mistakenly confuse random data for meaning-
ful information. For instance, at St. Louis–based Emerson
Electric, chairman emeritus Chuck Knight found that fore-
casts developed as part of the company’s planning process
indicated that the competition wasn’t just domestic any-
more, but global. He didn’t use any complex mathematical
techniques to come to this conclusion but instead relied on
the information already collected as part of his company’s
planning process. Next, look at involving more people in
the process. At Fortune 100 companies, it’s not unusual to
have 1,000 to 5,000 managers providing forecasting input.
These businesses are finding that as more people are
involved in the process, the more the reliability of the out-
comes improves.20 Next, compare every forecast with “no
change.” A no change forecast is accurate approximately
half the time. Next, use rolling forecasts that look 12 to
18 months ahead, instead of using a single, static forecast.
These types of forecasts can help managers spot trends
better and help their organizations be more adaptive in
changing environments.21 It’s also important to not rely on
a single forecasting method. Make forecasts with several
models and average them, especially when making longer-
range forecasts. Next, don’t assume that you can accurately
identify turning points in a trend. What is typically per-
ceived as a significant turning point often turns out to be
simply a random event. And, finally, remember that fore-
casting is a managerial skill and as such can be practiced
and improved. Forecasting software has made the task
somewhat less mathematically challenging, although the
“number crunching” is only a small part of the activity. In-
terpreting the forecast and incorporating that information
into planning decisions is the challenge facing managers.
Benchmarking
Suppose that you’re a talented pianist or gymnast. To make
yourself better, you want to learn from the best so you watch
outstanding musicians or athletes for motions and techniques
they use as they perform. That same approach is involved in
the final technique for assessing the environment we’re going
to discuss—benchmarking, the search for the best practices
among competitors or noncompetitors that lead to their
superior performance.22 Does benchmarking work? Studies
show that users have achieved 69 percent faster growth and
45 percent greater productivity.23
The basic idea behind benchmarking is that managers
can improve performance by analyzing and then copying the
methods of the leaders in various fields. Organizations such
as Nissan, Payless Shoe Source, the U.S. military, General
Mills, United Airlines, and Volvo Construction Equipment
have used benchmarking as a tool in improving performance.
In fact, some companies have chosen some pretty unusual
benchmarking partners! IBM studied Las Vegas casinos for
ways to discourage employee theft. Many hospitals have
benchmarked their admissions processes against Marriott
Hotels. And Giordano Holdings Ltd., a Hong Kong–based
manufacturer and retailer of mass-market casual wear, bor-
rowed its “good quality, good value” concept from Marks &
Spencer, used Limited Brands to benchmark its point-of-sales
computerized information system, and modeled its simpli-
fied product offerings on McDonald’s menu.24
What does benchmarking involve? Exhibit PM-2 illustrates
the four steps typically used in benchmarking.

Techniques for Allocating Resources

Once an organization’s goals have been established, it’s im-
portant to determine how those goals are going to be accom-
plished. Before managers can organize and lead as goals are
implemented, they must have resources, which are the as-
sets of the organization (financial, physical, human, and in-
tangible). How can managers allocate these resources
effectively and efficiently so that organizational goals are
met? Although managers can choose from a number of tech-
niques for allocating resources (many of which are covered
in courses on accounting, finance, and operations manage-
ment), we’ll discuss four techniques here: budgeting, sched-
uling, breakeven analysis, and linear programming.

quantitative forecasting benchmarking

Forecasting that applies a set of mathematical
rules to a series of past data to predict outcome
qualitative forecasting
Forecasting that uses the judgment and
opinions of knowledgeable individuals to
predict outcomes
The search for the best practices among
competitors or noncompetitors that lead to their
superior performance
resources
The assets of the organization including financial,
physical, human, intangible, and structural/cultural
252 PART THREE | PLANNING

EXHIBIT PM-2
Steps in Benchmarking Identify:
• What is to be benchmarked
1 • Comparative organizations
• Data collection methods
Form a benchmarking
planning team.

Prepare and implement BEST Gather internal and

4 PRACTICES 2
action plan. external data.

Analyze data to identify

performance gaps.

Source: Based on Y. K. Shetty, “Aiming High: Competitive Benchmarking for Superior Performance,” Long
Range Planning, February 1993, p. 42.

Budgeting monthly activities. Exhibit PM-3 describes the different types

Most of us have had some experience, as limited as it might
be, with budgets. We probably learned at an early age that
unless we allocated our “revenues” carefully, our weekly
allowance was spent on “expenses” before the week was
half over.
A budget is a numerical plan for allocating resources to
specific activities. Managers typically prepare budgets for
revenues, expenses, and large capital expenditures such as
equipment. It’s not unusual, though, for budgets to be used
for improving time, space, and use of material resources.
These types of budgets substitute nondollar numbers for dol-
lar amounts. Such items as person-hours, capacity utilization,
or units of production can be budgeted for daily, weekly, or
of budgets that managers might use.
Why are budgets so popular? Probably because they’re
applicable to a wide variety of organizations and work activ-
ities within organizations. We live in a world in which almost
everything is expressed in monetary units. Dollars, rupees,
pesos, euros, yuan, yen, and the like are used as a common
measuring unit within a country. That’s why monetary budg-
ets are a useful tool for allocating resources and guiding work
in such diverse departments as manufacturing and informa-
tion systems or at various levels in an organization. Budgets
are one planning technique that most managers, regardless
of organizational level, use. It’s an important managerial
activity because it forces financial discipline and structure

EXHIBIT PM-3
Cash Budget
Types of Budgets Forecasts cash on hand Revenue Budget
and how much will Projects future sales
be needed

Variable Budget Fixed Budget

Takes into account OR Assumes fixed
the costs that vary level of sales
with volume or production

Profit Budget Expense Budget

Combines revenue and expense Lists primary activities
budgets of various units to determine and allocates dollar
each unit’s profit contribution amount to each

Source: Based on R. S. Russell and B. W. Taylor III, Production and Operations Management (Upper Saddle
River, NJ: Prentice Hall, 1995), p. 287.
 | PLANNING TOOLS AND TECHNIQUES MODULE 253

• Collaborate and communicate.

EXHIBIT PM-4
• Be flexible. How to Improve Budgeting
• Goals should drive budgets—budgets should not determine goals.
• Coordinate budgeting throughout the organization.
• Use budgeting/planning software when appropriate.
• Remember that budgets are tools.
• Remember that profits result from smart management, not because you budgeted for them.

throughout the organization. However, many managers don’t
like preparing budgets because they feel the process is time
consuming, inflexible, inefficient, and ineffective.25 How can
the budgeting process be improved? Exhibit PM-4 provides
some suggestions. Organizations such as Texas Instruments,
IKEA, Hendrick Motorsports, Volvo, and Svenska Handels-
banken have incorporated several of these suggestions as they
revamped their budgeting processes.
Scheduling
Jackie is a manager at a Chico’s store in San Francisco. Every
week, she determines employees’ work hours and the store area
where each employee will be working. If you observed any
group of supervisors or department managers for a few days,
you would see them doing much the same—allocating re-
sources by detailing what activities have to be done, the order
in which they are to be completed, who is to do each, and when
they are to be completed. These managers are scheduling. In
this section, we’ll review some useful scheduling devices in-
cluding Gantt charts, load charts, and PERT network analysis.
GANTT CHARTS. The Gantt chart was developed during
the early 1900s by Henry Gantt, an associate of Frederick
Taylor, the scientific management expert. The idea behind
a Gantt chart is simple. It’s essentially a bar graph with
time on the horizontal axis and the activities to be sched-
uled on the vertical axis. The bars show output, both
planned and actual, over a period of time. The Gantt chart
visually shows when tasks are supposed to be done and
compares those projections with the actual progress on
each task. It’s a simple but important device that lets man-
agers detail easily what has yet to be done to complete a
job or project and to assess whether an activity is ahead of,
behind, or on schedule.
Exhibit PM-5 depicts a simplified Gantt chart for book
production developed by a manager in a publishing com-
pany. Time is expressed in months across the top of the
chart. The major work activities are listed down the left
side. Planning involves deciding what activities need to be
done to get the book finished, the order in which those
activities need to be completed, and the time that should be
allocated to each activity. Where a box sits within a time
frame reflects its planned sequence. The shading represents
actual progress. The chart also serves as a control tool
because the manager can see deviations from the plan. In
this example, both the design of the cover and the review of
first pages are running behind schedule. Cover design is

EXHIBIT PM-5
Activity Month A Gantt Chart
1 2 3 4
Copyedit manuscript
Design sample pages
Draw artwork
Review first pages
Print final pages
Design cover

Actual progress
Goals Reporting Date

budget scheduling Gantt chart

A numerical plan for allocating resources Detailing what activities have to be done, A scheduling chart developed by
to specific activities the order in which they are to be completed, Henry Gantt that shows actual and
who is to do each, and when they are to be planned output over a period of time
completed
254 PART THREE | PLANNING
about three weeks behind (note that there has been no ac-
tual progress—shown by blue color line—as of the report-
ing date), and first pages review is about two weeks behind
schedule (note that as of the report date, actual progress—
shown by blue color line—is about six weeks, out of a goal
of completing in two months). Given this information, the
manager might need to take some action to either make up
for the two lost weeks or to ensure that no further delays
will occur. At this point, the manager can expect that the
book will be published at least two weeks later than
planned if no action is taken.
LOAD CHARTS. A load chart is a modified Gantt chart.
Instead of listing activities on the vertical axis, load charts
list either entire departments or specific resources. This
arrangement allows managers to plan and control capacity
utilization. In other words, load charts schedule capacity by
work areas.
For example, Exhibit PM-6 shows a load chart for six
production editors at the same publishing company. Each
editor supervises the production and design of several
books. By reviewing a load chart, the executive editor, who
supervises the six production editors, can see who is free
to take on a new book. If everyone is fully scheduled, the
executive editor might decide not to accept any new proj-
ects, to accept new projects and delay others, to make
the editors work overtime, or to employ more production
editors. As this exhibit shows, only Antonio and Maurice
are completely scheduled for the next six months. The other
editors have some unassigned time and might be able to
accept new projects or be available to help other editors
who get behind.
PERT NETWORK ANALYSIS. Gantt and load charts are use-
ful as long as the activities being scheduled are few in num-
ber and independent of each other. But what if a manager
had to plan a large project such as a departmental reorgani-
zation, the implementation of a cost-reduction program, or
the development of a new product that required coordinat-
ing inputs from marketing, manufacturing, and product
design? Such projects require coordinating hundreds and
EXHIBIT PM-6
A Load Chart Editors
1 2
Annie
Antonio
Kim
Maurice
Dave
Penny
Work scheduled
even thousands of activities, some of which must be done
simultaneously and some of which can’t begin until preced-
ing activities have been completed. If you’re constructing a
building, you obviously can’t start putting up the walls
until the foundation is laid. How can managers schedule
such a complex project? The program evaluation
and review technique (PERT) is highly appropriate for
such projects.
A PERT network is a flowchart diagram that depicts
the sequence of activities needed to complete a project
and the time or costs associated with each activity. With a
PERT network, a manager must think through what has to
be done, determine which events depend on one another,
and identify potential trouble spots. PERT also makes it
easy to compare the effects alternative actions might have
on scheduling and costs. Thus, PERT allows managers to
monitor a project’s progress, identify possible bottlenecks,
and shift resources as necessary to keep the project on
schedule.
To understand how to construct a PERT network, you
need to know four terms. Events are end points that represent
the completion of major activities. Activities represent the
time or resources required to progress from one event to
another. Slack time is the amount of time an individual
activity can be delayed without delaying the whole project.
The critical path is the longest or most time-consuming se-
quence of events and activities in a PERT network. Any delay
in completing events on this path would delay completion of
the entire project. In other words, activities on the critical path
have zero slack time.
Developing a PERT network requires that a manager
identify all key activities needed to complete a project, rank
them in order of occurrence, and estimate each activity’s com-
pletion time. Exhibit PM-7 explains the steps in this process.
Most PERT projects are complicated and include numer-
ous activities. Such complicated computations can be done
with specialized PERT software. However, let’s work through
a simple example. Assume that you’re the superintendent at
a construction company and have been assigned to oversee
the construction of an office building. Because time really is
money in your business, you must determine how long it will
take to get the building completed. You’ve determined the
Month
3 4 5 6
 | PLANNING TOOLS AND TECHNIQUES MODULE 255

EXHIBIT PM-7
1. Identify every significant activity that must be achieved for a project to be completed. The
accomplishment of each activity results in a set of events or outcomes. Steps in Developing a PERT
2. Determine the order in which these events must be completed. Network
3. Diagram the flow of activities from start to finish, identifying each activity and its
relationship to all other activities. Use circles to indicate events and arrows to represent
activities. This results in a flowchart diagram called a PERT network.
4. Compute a time estimate for completing each activity. This is done with a weighted
average that uses an optimistic time estimate (to) of how long the activity would take
under ideal conditions, a most likely estimate (tm) of the time the activity normally
should take, and a pessimistic estimate (tp) that represents the time that an activity
should take under the worst possible conditions. The formula for calculating the
expected time (te) is then
to + 4tm + tp
te =
6
5. Using the network diagram that contains time estimates for each activity, determine a
schedule for the start and finish dates of each activity and for the entire project. Any
delays that occur along the critical path require the most attention because they can delay
the whole project.

specific activities and events. Exhibit PM-8 outlines the
major events in the construction project and your estimate of
the expected time to complete each. Exhibit PM-9 shows the
actual PERT network based on the data in Exhibit PM-8.
You’ve also calculated the length of time that each path of
activities will take:
A-B-C-D-I-J-K (44 weeks)
A-B-C-D-G-H-J-K (50 weeks)
A-B-C-E-G-H-J-K (47 weeks)
A-B-C-F-G-H-J-K (47 weeks)
Your PERT network shows that if everything goes as
planned, the total project completion time will be 50 weeks.
This is calculated by tracing the project’s critical path (the
longest sequence of activities): A-B-C-D-G-H-J-K and
adding up the times. You know that any delay in completing
the events on this path would delay the completion of the en-
tire project. Taking six weeks instead of four to put in the
floor covering and paneling (Event I) would have no effect
on the final completion date. Why? Because that event isn’t
on the critical path. However, taking seven weeks instead of

Event Description Expected Time (in weeks) Preceding Event EXHIBIT PM-8
Events and Activities in
A Approve design and get permits 10 None Constructing an Office
B Dig subterranean garage 6 A Building
C Erect frame and siding 14 B
D Construct floor 6 C
E Install windows 3 C
F Put on roof 3 C
G Install internal wiring 5 D, E, F
H Install elevator 5 G
I Put in floor covering and paneling 4 D
J Put in doors and interior decorative trim 3 I, H
K Turn over to building management group 1 J

load chart events slack time

A modified Gantt chart that schedules capacity
by entire departments or specific resources
PERT network
A flowchart diagram showing the sequence of
activities needed to complete a project and
the time or cost associated with each
End points that represent the completion of The amount of time an individual activity
major activities in a PERT network can be delayed without delaying the
activities whole project
The time or resources needed to progress from critical path
one event to another in a PERT network The longest sequence of activities in a
PERT network
256 PART THREE | PLANNING

EXHIBIT PM-9
4
PERT Network for D I 3
6 5 1
Constructing an Office J K
10 6 14 3 5 5
Building Start A B C E G H 3

3 5
F

six to dig the subterranean garage (Event B) would likely
delay the total project. A manager who needed to get back on
schedule or to cut the 50-week completion time would want
to concentrate on those activities along the critical path that
could be completed faster. How might the manager do this?
He or she could look to see if any of the other activities not
on the critical path had slack time in which resources could
be transferred to activities that were on the critical path.
Breakeven Analysis
Managers at Glory Foods want to know how many units of
their new sensibly seasoned canned vegetables must be sold in
order to break even—that is, the point at which total revenue
is just sufficient to cover total costs. Breakeven analysis is
a widely used resource allocation technique to help managers
determine breakeven point.26
Breakeven analysis is a simple calculation, yet it’s valu-
able to managers because it points out the relationship be-
tween revenues, costs, and profits. To compute breakeven
point (BE), a manager needs to know the unit price of the
product being sold (P), the variable cost per unit (VC), and
total fixed costs (TFC). An organization breaks even when
its total revenue is just enough to equal its total costs. But
total cost has two parts: fixed and variable. Fixed costs are
expenses that do not change regardless of volume. Examples
include insurance premiums, rent, and property taxes.
Variable costs change in proportion to output and include raw
materials, labor costs, and energy costs.
Breakeven point can be computed graphically or by
using the following formula:
TFC
BE =
P - VC
This formula tells us that (1) total revenue will equal total
cost when we sell enough units at a price that covers all
variable unit costs, and (2) the difference between price
and variable costs, when multiplied by the number of
units sold, equals the fixed costs. Let’s work through an
example.
Assume that Randy’s Photocopying Service charges
$0.10 per photocopy. If fixed costs are $27,000 a year and
variable costs are $0.04 per copy, Randy can compute his
breakeven point as follows: $27,000 ÷ ($0.10 – $0.04) =
450,000 copies, or when annual revenues are $45,000
(450,000 copies * $0.10). This same relationship is shown
graphically in Exhibit PM-10.
As a planning tool, breakeven analysis could help Randy
set his sales goal. For example, he could determine his profit
goal and then calculate what sales level is needed to reach
that goal. Breakeven analysis could also tell Randy how much
volume has to increase to break even if he’s currently operat-
ing at a loss or how much volume he can afford to lose and
still break even.

EXHIBIT PM-10
Breakeven Analysis Total Profit
Revenue Area
70,000

60,000
Revenue/Cost ($)

50,000 Loss
Area
40,000 Variable Costs
Breakeven Total
30,000 Point Costs

20,000
Fixed Costs
10,000

100 200 300 400 500 600

Output (in thousands)
 | PLANNING TOOLS AND TECHNIQUES MODULE
Linear Programming
Maria Sanchez manages a manufacturing plant that produces
two kinds of cinnamon-scented home fragrance products:
wax candles and a woodchip potpourri sold in bags. Business
is good, and she can sell all of the products she can produce.
Her dilemma: Given that the bags of potpourri and the wax
candles are manufactured in the same facility, how many of
each product should she produce to maximize profits? Maria
can use linear programming to solve her resource alloca-
tion problem.
Although linear programming can be used here, it can’t
be applied to all resource allocation problems because it
requires that resources be limited, that the goal be outcome
optimization, that resources can be combined in alternative
ways to produce a number of output mixes, and that a linear
relationship exist between variables (a change in one variable
must be accompanied by an exactly proportional change in
the other).27 For Maria’s business, that last condition would be
met if it took exactly twice the amount of raw materials and
hours of labor to produce two of a given home fragrance
product as it took to produce one.
What kinds of problems can be solved with linear
programming? Some applications include selecting trans-
portation routes that minimize shipping costs, allocating
a limited advertising budget among various product
brands, making the optimal assignment of people among
projects, and determining how much of each product to
make with a limited number of resources. Let’s return to
Maria’s problem and see how linear programming could
help her solve it. Fortunately, her problem is relatively
simple, so we can solve it rather quickly. For complex lin-
ear programming problems, managers can use computer
software programs designed specifically to help develop
optimizing solutions.
First, we need to establish some facts about Maria’s busi-
ness. She has computed the profit margins on her home
fragrance products at $10 for a bag of potpourri and $18 for
a scented candle. These numbers establish the basis for Maria
to be able to express her objective function as maximum
profit = $10P + $18S, where P is the number of bags of
Number of Hours Required (per unit)
Department Potpourri Bags Scented Candles
Manufacturing 2 4
Assembly 2 2
Profit per unit $10 $18
breakeven analysis linear programming
A technique for identifying the point at which A mathematical technique that solves resource
total revenue is just sufficient to cover total costs allocation problems
257
potpourri produced and S is the number of scented candles
produced. The objective function is simply a mathematical
equation that can predict the outcome of all proposed
alternatives. In addition, Maria knows how much time each
fragrance product must spend in production and the monthly
production capacity (1,200 hours in manufacturing and
900 hours in assembly) for manufacturing and assembly. (See
Exhibit PM-11.) The production capacity numbers act as
constraints on her overall capacity. Now Maria can establish
her constraint equations:
2P + 4S … 1,200
2P + 2S … 900
Of course, Maria can also state that P Ú 0 and S Ú 0 be-
cause neither fragrance product can be produced in a volume
less than zero.
Maria has graphed her solution in Exhibit PM-12. The
shaded area represents the options that don’t exceed the
capacity of either department. What does this mean? Well,
let’s look first at the manufacturing constraint line BE. We
know that total manufacturing capacity is 1,200 hours, so if
Maria decides to produce all potpourri bags, the maximum
she can produce is 600 (1,200 hours ÷ 2 hours required to
produce a bag of potpourri). If she decides to produce
all scented candles, the maximum she can produce is 300
(1,200 hours ÷ 4 hours required to produce a scented can-
dle). The other constraint Maria faces is that of assembly,
shown by line DF. If Maria decides to produce all potpourri
bags, the maximum she can assemble is 450 (900 hours
production capacity ÷ 2 hours required to assemble). Like-
wise, if Maria decides to produce all scented candles, the
maximum she can assemble is also 450 because the scented
candles also take 2 hours to assemble. The constraints im-
posed by these capacity limits establish Maria’s feasibility
region. Her optimal resource allocation will be defined at
one of the corners within this feasibility region. Point C
provides the maximum profits within the constraints stated.
How do we know? At point A, profits would be 0 (no pro-
duction of either potpourri bags or scented candles).
At point B, profits would be $5,400 (300 scented candles
EXHIBIT PM-11
Monthly Production
Capacity (in hours) Production Data for
Cinnamon-Scented Products
1,200
900
258 PART THREE | PLANNING

EXHIBIT PM-12
Graphical Solution to Linear
700
Programming Problem

Quantity of Scented Candles

600

500
F
400

300 B

200
C
100 Feasibility
Region
A D E
100 200 300 400 500 600
Quantity of Potpourri Bags

* $18 profit and 0 potpourri bags produced = $5,400). = $4,500). At point C, however, profits would be $5,700
At point D, profits would be $4,500 (450 potpourri bags (150 scented candles produced * $18 profit and 300 pot-
produced * $10 profit and 0 scented candles produced pourri bags produced * $10 profit = $5,700).

Contemporary Planning Techniques

Lowest home mortgage rates since 1950s. H1N1 flu
pandemic. Chemical/biological attacks. Recession/inflation
worries. Category 4 or 5 hurricanes. Changing competition.
Today’s managers face the challenges of planning in an envi-
ronment that’s both dynamic and complex. Two planning
techniques that are appropriate for this type of environment
are project management and scenarios. Both techniques
emphasize flexibility, something that’s important to making
planning more effective and efficient in this type of organi-
zational environment.
Project Management
Different types of organizations, from manufacturers such
as Coleman and Boeing to software design firms such as
SAS and Microsoft, use projects. A project is a one-time-
only set of activities that has a definite beginning and end-
ing point in time.28 Projects vary in size and scope—from
Boston’s “big dig” downtown traffic tunnel to a sorority’s
holiday formal. Project management is the task of get-
ting a project’s activities done on time, within budget, and
according to specifications.29
More and more organizations are using project
management because the approach fits well with the need
for flexibility and rapid response to perceived market
opportunities. When organizations undertake projects that
are unique, have specific deadlines, contain complex inter-
related tasks requiring specialized skills, and are temporary
in nature, these projects often do not fit into the standard-
ized planning procedures that guide an organization’s other
routine work activities. Instead, managers use project man-
agement techniques to effectively and efficiently accom-
plish the project’s goals. What does the project management
process involve?
PROJECT MANAGEMENT PROCESS. In the typical project,
work is done by a project team whose members are assigned
from their respective work areas to the project and who
report to a project manager. The project manager coordi-
nates the project’s activities with other departments. When
the project team accomplishes its goals, it disbands and
members move on to other projects or back to their perma-
nent work area.
The essential features of the project planning process are
shown in Exhibit PM-13. The process begins by clearly defin-
ing the project’s goals. This step is necessary because the man-
ager and the team members need to know what’s expected. All
activities in the project and the resources needed to do them
must then be identified. What materials and labor are needed
to complete the project? This step may be time-consuming and
complex, particularly if the project is unique and the managers
have no history or experience with similar projects. Once the
activities have been identified, the sequence of completion
needs to be determined. What activities must be completed
before others can begin? Which can be done simultaneously?
This step often uses flowchart diagrams such as a Gantt chart,
a load chart, or a PERT network. Next, the project activities
need to be scheduled. Time estimates for each activity are
done, and these estimates are used to develop an overall proj-
ect schedule and completion date. Then the project schedule
 | PLANNING TOOLS AND TECHNIQUES MODULE
Identify
Estimate
Define activities Establish
time for
objectives. and sequences.
activities.
resources.
Source: Based on R. S. Russell and B. W. Taylor III, Production and Operations Management (Upper Saddle
River, NJ: Prentice Hall, 1995), p. 287.
is compared to the goals, and any necessary adjustments are
made. If the project completion time is too long, the manager
might assign more resources to critical activities so they can
be completed faster.
Today, the project management process can take place
online as a number of Web-based software packages are
available. These packages cover aspects from project
accounting and estimating to project scheduling and bug and
defect tracking.30
THE ROLE OF THE PROJECT MANAGER. The temporary
nature of projects makes managing them different from, say,
overseeing a production line or preparing a weekly tally of costs
on an ongoing basis. The one-shot nature of the work makes
project managers the organizational equivalent of a hired gun-
man. There’s a job to be done. It has to be defined—in detail.
And the project manager is responsible for how it’s done. At
J.B. Hunt Transport Services, the head of project management
trains project managers on both technical and interpersonal
skills so that they know how to “. . . run a project effectively.”31
Even with the availability of sophisticated computer-
ized and online scheduling programs and other project man-
agement tools, the role of project manager remains difficult
because he or she is managing people who typically are still
assigned to their permanent work areas. The only real influ-
ence project managers have is their communication skills
and their power of persuasion. To make matters worse, team
members seldom work on just one project. They’re usually
assigned to two or three at any given time. So project man-
agers end up competing with each other to focus a worker’s
attention on his or her particular project.
Scenario Planning
During the 1990s, business was so good at Colgate-Palmolive
that then-chairman Reuben Mark worried about what
“might go wrong.” He installed an “early-warning system
project project management
A one-time-only set of activities that has The task of getting a project’s activities done
a definite beginning and ending point on time, within budget, and according to
in time specifications
259
EXHIBIT PM-13
Project Planning Process
Determine Determine
Compare
project additional
with
completion resource
objectives.
date. requirements.
to flag problems before they blew up into company-wrecking
crises.” For instance, a red-flag report alerted Mark “that
officials in Baddi, India, had questions about how a plant
treated wastewater.” Mark’s response was to quickly assign
an engineering team to check it out and prevent potential
problems.32
We already know how important it is that today’s man-
agers do what Reuben Mark was doing—monitor and
assess the external environment for trends and changes. As
they assess the environment, issues and concerns that could
affect their organization’s current or planned operations are
likely to be revealed. All of these issues won’t be equally
important, so it’s usually necessary to focus on a limited
set that are most important and to develop scenarios based
on each.
A scenario is a consistent view of what the future is
likely to be. Developing scenarios also can be described as
contingency planning; that is, if this event happens, then we
need to take these actions. If, for instance, environmental
scanning reveals increasing interest by the U.S. Congress for
raising the national minimum wage, managers at Subway
could create multiple scenarios to assess the possible conse-
quences of such an action. What would be the implications
for its labor costs if the minimum wage was raised to $10 an
hour? How about $12 an hour? What effect would these
changes have on the chain’s bottom line? How might com-
petitors respond? Different assumptions lead to different out-
comes. The intent of scenario planning is not to try to predict
the future but to reduce uncertainty by playing out potential
situations under different specified conditions.33 Subway
could, for example, develop a set of scenarios ranging from
optimistic to pessimistic in terms of the minimum wage
issue. It would then be prepared to implement new strategies
to get and keep a competitive advantage. An expert in sce-
nario planning said, “Just the process of doing scenarios
causes executives to rethink and clarify the essence of the
business environment in ways they almost certainly have
never done before.”34
scenario
A consistent view of what the future is
likely to be
260 PART THREE | PLANNING
Although scenario planning is useful in anticipating
events that can be anticipated, it’s difficult to forecast
random events—the major surprises and aberrations that
can’t be foreseen. For instance, an outbreak of deadly and
devastating tornadoes in southwest Missouri on January 7,
2008, was a scenario that could be anticipated. The disaster
recovery planning that took place after the storms was effec-
tive because this type of scenario had been experienced
before. A response had already been planned and people
knew what to do. But the planning challenge comes from
those totally random and unexpected events. For instance,
the 9/11 terrorist attacks in New York and Washington, D.C.,
were random, unexpected, and a total shock to many organ-
izations. Scenario planning was of little use because no one
could have envisioned this scenario. As difficult as it may be
for managers to anticipate and deal with these random
events, they’re not totally vulnerable to the consequences.
One suggestion that has been identified by risk experts as
particularly important is to have an early warning system in
place. (A similar idea is the tsunami warning systems in the
Pacific and in Alaska, which alert officials to potentially
dangerous tsunamis and give them time to take action.)
Early warning indicators for organizations can give man-
agers advance notice of potential problems and changes—
such as it did Reuben Mark at Colgate-Palmolive—so they,
too, can take action. Then, managers need to have appropri-
ate responses (plans) in place if these unexpected events
occur.
Planning tools and techniques can help managers pre-
pare confidently for the future. But they should remember
that all the tools we’ve described in this chapter are just that—
tools. They will never replace the manager’s skills and capa-
bilities in using the information gained to develop effective
and efficient plans.