Planning

Definition
As a function of management, planning has been defined by various authors. Few of them are
presented below:
Koontz and O’Donnell – “Planning is deciding in advance what to do, when to do, how to do
and who is to do it. It is bridging the gap from where we are to where we want to go.”
Alford and Beatt – “Planning is the thinking process, the organised foresight, the vision based
on fact and experience that is required for intelligent action.”
Louis A. Allen – “Management planning involves the development of forecasts, objectives,
policies, programmes, procedures, schedules and budgets.”
Tlieo Haimann – “Planning is deciding in advance what is to be done. When a manager plans,
he projects a course of action, for the future, attempting to achieve a consistent, coordinated
structure of operations aimed at the desired results.”
Urwick – “Planning is a mental predisposition to do things in orderly way, to think before
acting and to act in the light of facts rather than guesses.”
Weihrich and Koontz – “Planning is an intellectually demanding process; it requires that we
consciously determine courses of action and base our decisions on purpose, knowledge and
considered estimates.”

Nature
The nature of planning is briefly discussed below:
1. Primary of Planning:
The functions of management include planning, organising, staffing, directing and controlling.
Eminent writers may add other new ones to these functions or those which have not been
included in these functions. Anyway, writers unanimously accept that planning is the primary
function of all the other functions. The reason is that the manager wants to achieve the pre-
determined objectives in a better way.
2. Planning Contributes to Objectives:
There is a close connection between objectives and planning. Planning is based on the
objectives. If there is no link between planning and objectives, the former will only be a mental
exercise and of no use. Planning contributes to the attainment of objectives.
3. Planning an Intellectual Activity:
Planning includes the selection of the best alternative available and thinking before selection
of the best alternative. It involves the ability to foresee mishaps in future which might affect
the smooth functioning of an organisation. So, planning is an intellectual activity.
4. Planning Results in Higher Efficiency:
Planning efficiency is measured in terms of input and output ratios. Planning leads to maximum
output with minimum expenditure. This input and output relationship is not only determined
by money, labour hours and production units but also by the degree of satisfaction available to
the individual as well as the group. The high degree of human satisfaction motivates the
workers to produce more within the specified time.
5. Planning is a Continuous Process:
Planning does not come to an end with the establishment of a business concern. Planning in
other functions is also required. After the establishment of a business concern, certain decisions
are taken. Planning is necessary to implement the decisions. A number of decisions are taken
during the life time of the business concern. So, planning is necessary throughout the running
of the business concern as a continuous process.
6. Planning is Flexible:
While planning, any one of the available alternatives is selected. Planning selects the best
alternative based on certain assumptions. If the assumptions are proved wrong, the selected
alternative tends to be an incorrect one. There is a possibility of a dead log in the functions of
the management. Planning has one more alternative to suit future situations.
7. Unity and Consistency:
Every department manager resorts to planning at different times. The planning is related to the
achievement of objectives. In other words, managerial actions of different managers are unified
in order to achieve the objectives. Policies and procedures of the organisation provide a basis
for the consistency of executive behaviour and action in matters of planning.
8. Planning is Common to All:
Planning work is done by every person who is working in a business unit. He may be a
managing director or a foreman.
Being of a higher place, the planning for a managing director is to frame the policies and
procedures to be adopted. Being at a lower place, planning for a foreman is to allocate the work
to his subordinates. So, planning is common to all.
9. Basis for All Managerial Functions:
Planning is found at all levels of management. Top management looks after strategic planning.
Middle management looks after administrative planning and the lower level management looks
after operational planning.
10. Getting Co-Ordination:
Planning co-ordinates various business activities. Without planning, nothing can be co-
ordinated.
11. Considering Limiting Factors:
Every plan is formulated after considering the limiting factors. The limiting factors may be
money, skilled labour, quality materials, plant and machinery.
Importance
Planning helps the organization in the following ways:
1. Making Objectives Clear:
It makes objectives clean, clear, and specific; it also serves as guide for deciding what action
should be taken in present and future conditions.
2. Planning Provides Direction:
Planning helps the organisation to keep on the right path. It provides definite direction to
manager to decide what to do and when to do it.
3. It Reduces Risk and Uncertainty:
It helps organisation to predict future events and prepare to take necessary actions against
unexpected events. It is helpful in assessing and meeting future challenges. As per view of
Peter F. Drucker, “Planning enables a manager to affect rather than accept the future”.
4. Planning is Economical:
As per views of Koontz and O’ Donnell,” Planning substitutes jointly directed effort against
uncoordinated, piecemeal activity, an even flow of work for an uneven flow, and deliberate
decisions for snap judgments”. The effective plans coordinate organisational work and
economical.
5. Planning Provides the Basis for Control:
Planning provides the standard against which the actual performance can be measured and
evaluated. There is nothing to control without planning and without proper control. Plans serve
as yardsticks for measuring performance.
6. Planning Facilitates Decision Making:
Planned targets serve as the criteria for the evaluation of different alternatives so that the best
one may be chosen with the help of planning hasty decisions and random actions can be
avoided.
7. Planning Improve Efficiency of Operations:
It is rational activity that leads to efficient and economical operations, planned action is always
better than unplanned. Planning makes the task of managing more efficient and effective
manner. It helps to minimize the cost of operations and improves the competitive strength of
an organisation.
8. Planning Improves Morale:
If the role of employee is cleared and well defines goals, then the employee feels highly
motivated and contribute his full potential towards accomplishment of objectives. Planning
improves the behavioural climate in the organisation and reduces the friction between
departments.
9. Effective Co-Ordination:
According to Koontz and O’ Donnell “Plans are selected courses along with the management
desires to coordinate group action.” The effective coordination integrates the physical and
human resources between departments.
10. Planning Encourages Innovation and Creativity:
Planning compels the managers to be creative and innovative all the time. It forces managers
to find out new and improved ways of doing things in order to remain competitive and avoid
the threats in the environment.

Types of Planning
Following are the types of planning in management:
1. Top Level Planning
The plans and policies which are determined at the top-level management are known as the top-
level planning, like- general policies, objectives, goals, budget determination, etc.
2. Requestive Planning
Some plans are prepared on the request of the subordinates or colleagues, These are called
requestive planning, like- suggestion plan.
3. Imposed Planning
The plan which is not adopted willingly, but is imposed by external Agencies, like-
government, trade unions, and the Chamber of Commerce, etc. are known as Imposed
Planning.
4. Standing Planning
The plans which are frequently used are known as standing planning.
These plans are of a permanent nature.
These plans include plans relating to policies, organization, Framework, nature of production,
and standard process, and methods of the organization.
5. Single Cycle Planning
Single Cycle Planning means such planning which is formulated for fulfilling specific
objectives and for solving specific problems and automatically end with achievements of the
objectives or solution of the problem.
Such plans are also known as Ad-hoc Planning.
6. Routine Planning
Plans relating to day to day activities of the organization at various levels are known as routine
planning.
These plans are prepared as subsidiary plans of the comprehensive plan.
7. Creative Planning
The plans prepared for executing new policies, technical changes, new systems, and Research
are called creative plans.
8. Corrective Planning
The plans prepared for improvements in the objectives, policies, modalities, sales, standard,
production system, and long-term plans of the organization, as a result, of the changes
occurring in the real world, are known as corrective plans.
9. Comprehensive or Master Planning
By Comprehensive or master planning, we mean such planning which concentrates on all the
constitutions of institutions, Like- goals, interests, problems, and other aspects, etc.
In the master plan, the detailed analysis is carried out with respect to the goals and problems
of all the departments.
10. Functional or Departmental Planning
Functional planning is related to specific problems of the organization or specific departments,
like- productions, marketing, finance, personnel, buildings, and construction, etc.
This plan should be prepared in accordance with the objectives of the comprehensive plan.
11. Short-Term Planning
Generally, such planning which is for a period of less than one year is known as a short-term
planning.
The objectives of such planning are to nourish one’s own organization by achieving the targets
for production and supply of its present commodities or services in the existing market.
A short term plan is also called operational planning or tactical planning.
12. Middle Term Planning
Planning which is for the period of 1 year to 5 years is called middle term planning, within
which sub-plans prepared for the success of long term planning are included.
13. Long-Term Planning
Long-term planning means the plan prepared for a period of more than five years.
The objectives of the enterprise are determined and policies for achieving these objectives are
also decided.
Besides, decisions are also taken in respect of the activities, which are to be implemented for
achieving the long-term objectives.
14. Administrative Strategic Planning
Administrative strategic planning implies such planning which is formulated by the high-level
management of the situation for determining long-term targets and policies.
For that, the future of the institution is determined with reference to the changing
circumstances, like, trade cycles, market conditions, innovations and relationships with other
Institutions, etc.
This planning is the indicator of the objectives and managerial outlook of the institution. In
such planning, strategies are worked out by evaluating future business circumstances.
So, this planning is also known as strategic planning.
15. Operational Planning
It is related to the actual execution of activities of the institution.
This is formulated by the executive management on the basis of the main plan.
16. Project Planning
The planning related to any specific work or problem of the institution.
The complicated and high-cost activities, important from the viewpoint of time, Like- activities
related to publicity campaign, innovation research, building up of the new plant, sitting up of
information system and market research, etc. are known as project planning.
17. General Planning
The plan prepared by the top level (general management) is known as the top-level planning.
The top-level manager or executives formulate general goals, policies, programs, and budget,
etc. for the institution, under this planning.
18. Middle-Level Planning
The planning done by middle-level management (executive officers) for achieving the goals
and executing the policies is called middle-level planning.
19. Lower-Level Planning
Sometimes lower-level officers (supervisors) also prepare plans for achieving the targets.
This is called lower-level planning.
These plans are mainly operative in nature, which are prepared for the short term.
20. Schedule Planning
Schedule planning implies such planning which is for the short term.
In this planning, time values are determined for each activity included in the program.
This planning gives emphasis on work time relationship.
The practical approach is introduced to the total programme.
21. Product Planning
It is related to decisions of product, new products, future sales, etc.
22. Profit Planning
Profit planning means directing the institution about the time, reasons, methods, and modalities
of earning profits, over and above the costs.

Steps in Planning
The following are the steps.
Define objectives
The first, and most crucial, step in the planning process is to determine what is to be
accomplished during the planning period. The vision and mission statements provide long-
term, broad guidance on where the organization is going and how it will get there. The planning
process should define specific goals and show how the goals support the vision and mission.
Goals should be stated in measurable terms where possible. For example, a goal should be “to
increase sales by 15 percent in the next quarter” not “increase sales as much as possible.”
Develop premises
Planning requires making some assumptions about the future. We know that conditions will
change as plans are implemented and managers need to make forecasts about what the changes
will be. These include changes in external conditions (laws and regulations, competitors’
actions, new technology being available) and internal conditions (what the budget will be, the
outcome of employee training, a new building being completed). These assumptions are called
the plan premises. It is important that these premises be clearly stated at the start of the planning
process. Managers need to monitor conditions as the plan is implemented. If the premises are
not proven accurate, the plan will likely have to be changed.
Evaluate alternatives
There may be more than one way to achieve a goal. For example, to increase sales by 12
percent, a company could hire more salespeople, lower prices, create a new marketing plan,
expand into a new area, or take over a competitor. Managers need to identify possible
alternatives and evaluate how difficult it would be to implement each one and how likely each
one would lead to success. It is valuable for managers to seek input from different sources
when identifying alternatives. Different perspectives can provide different solutions.
Identify resources
Next, managers must determine the resources needed to implement the plan. They must
examine the resources the organization currently has, what new resources will be needed, when
the resources will be needed, and where they will come from. The resources could include
people with particular skills and experience, equipment and machinery, technology, or money.
This step needs to be done in conjunction with the previous one, because each alternative
requires different resources. Part of the evaluation process is determining the cost and
availability of resources.
Plan and implement tasks
Management will next create a road map that takes the organization from where it is to its goal.
It will define tasks at different levels in the organizations, the sequence for completing the
tasks, and the interdependence of the tasks identified. Techniques such as Gantt charts and
critical path planning are often used to help establish and track schedules and priorities.
Determine tracking and evaluation methods
It is very important that managers can track the progress of the plan. The plan should determine
which tasks are most critical, which tasks are most likely to encounter problems, and which
could cause bottlenecks that could delay the overall plan. Managers can then determine
performance and schedule milestones to track progress. Regular monitoring and adjustment as
the plan is implemented should be built into the process to assure things stay on track.

Planning Premises
A planning premise is a set of assumptions that are derived from forecasting the future. It is a
logical and systematic estimate of the future factors that can affect planning. Planning premises
provide a background against which the estimated events take place. These are the events that
affect planning. Establishing planning premises is a critical element in the planning phase,
which ensures that all managers in the organization are in sync with each other. To explain
planning premises, let us consider a few examples from business and government planning:
• In the budget, there is an announcement of even changes in the tax laws. These are
known conditions on which planning is based.
• A competitor might enter the same market as yours with the same kind of product. This
is an anticipated event; the possibility of that happening is not particular.
Importance of Planning Premises
The premises of planning is the framework on which planning is based. Amid uncertainty
surrounding business and management, it is these planning premises that imply not just
assumptions about the future but also predictions. They are the bedrock on which managers
plan the future course of action. Without proper planning premises, the planning does not have
a solid foundation. If panning premises change, the plans need to change as well. Here are the
primary reasons for establishing planning premises:
• They help in well-organized planning.
• The risk of uncertainty is reduced considerably.
• There is a reduction in the risk of flexibility.
• Managers can do effective coordination.
• It also increases profitability.
Types of Planning Premises
Planning premises in management are vital in making important decisions that are based on
certain predictions about the future. Managers build the superstructure of planning based on
their ability to identify the crucial, strategic, or limiting factors that allow them to select the
proper planning premises. Planning premises in business management can be classified based
on many factors, as described below:
Internal and External Premises
• The premises which exist within the boundaries of the business are internal premises.
Some of the internal premises are men, money, material, and methods. Your planning
would be based on how competent is your workforce and how much money you have
at your disposal.
• External premises are derived from the environment that surrounds the business. They
are centered around the market like money market, product market, government
policies, growth in population, etc.
Tangible and Intangible Premises
• Any premise which can be quantitatively measured is a tangible premise. These
premises can be quantified in terms of time, money, and units of production.
• On the other hand, intangible premises cannot be quantified. Some of the intangible
premises are public relations, business reputation, the morale of employees, etc.
Controllable, Semi-controllable, and Uncontrollable Premises
• Those premises which can be controlled by the management to a large extent come
under controllable premises. Management has a lot of control over their future
commitments when it comes to material, machines, and money.
• The business can partially control some premises or assumptions about the future.
These fall under semi-controllable premises. Few examples of such planning premises
are trade union relations, product demand, etc.
• Those premises which cannot be controlled by the management of an organization
come under uncontrollable planning premises. Some examples are weather conditions,
natural disasters, etc.
Constant and Variable Premises
• These premises which do not change irrespective of actions taken are constant premises
like men, money, etc. These premises behave similarly under all circumstances.
• Based on the course of action taken, some premises change which is termed as Variable
premises. These premises cannot be controlled or predicted, for example, the sales
volume of a firm, union and management relations, etc.
Establishment of Planning Premises
Developing Planning Premises needs the planners to do realistic forecasting. Determining
planning premises involves
• Calculating the probability of events.
• Analyzing changes in consumer behavior, technology, government policies, etc.
• Implementing systematic investigation to develop the basis for planning.
Predicting future events is a complex process; hence premises must consider limited
assumptions that are most critical for the plant. A typical process of developing premises in
planning is:
• Selecting the premise - Not all the factors in the environment affect the operations of
the business. The management must list down those premises which directly influence
the development of organizational plans.
• Reviewing limitations - Several practical factors limit the abilities of an organization to
achieve its goals. Such limitations should be anticipated and provided for. A few
examples of such limitations are power, labor, money, and material.
• Developing alternative premises - Since it is not possible to predict all the factors that
can affect organizational planning, managers must develop a set of alternative premises.
These premises are established based on separate assumptions of future events. The
alternative plans are developed since premises keep changing, some change slowly and
some fast.
• Verifying premises - In an organization, there are different departments and planning
happens at different levels as per the judgment of people in that department. All these
premises are sent to the top management for their approval. The premises developed by
line managers and staff are more consistent with each other than those of the top
executives.
• Communicating premises - The premises developed through this process are then
supported by budget and various programs. Then the premises are communicated to all
those who are part of the planning process at different levels of business. Documents
like ETOP (environmental threat and opportunity profile) contain planning premises.

Types of plans;
The following are the types.

1. Objectives:
Objectives are plans for the future that will serve to provide direction for subsequent activity.
We have a hierarchy of objectives. Primary or basic objectives are determined by the top
management. Each department has its own objectives within the framework of basic goals.

2. Policies:
A policy is a standing plan or answer to recurring questions. It is a continuing decision which
applies to repetitive situations. It is a guide to action or decision of a manager. A policy helps
keep work in line with objective.
Policies are directives providing continuous framework for executive actions on recurrent
managerial problems. Policies take the form of general statements to lead managerial activity
through proper channel towards the objective. For instance, a firm has a policy of promotion
from within.
If a vacancy arises, naturally the first preference is given to existing employees if they meet
the job requirements. A policy assists decision making. But deviations may be needed, of
course, as exceptions and under some extraordinary circumstances. In other words, there is a
limited scope for discretion in dishonouring a policy.
3. Rules:
Rules are the simplest type of plan chosen from alternatives. A rule requires that a specific
action be taken or not taken with respect to a situation. It is more rigid and more specific than
a policy. It guides action but provides no discretion in its strict application.
Of course, rules are essential for discipline and smooth operations of the business. No smoking
rule in a factory is applicable to all including the top executives. A rule is designed to define in
advance, what alternative must be selected, or what decision must be made. In effect it dictates
the way an activity is to be (or is not to be) done. A rule is related to procedure.
4. Procedure:
It is a standing plan acting as a means of implementing a policy. For example the sales
department lays down a policy to execute all orders within 48 hours. The procedure of
execution of orders will prescribe a sequence of steps that must be followed after the receipt of
an order till the dispatch of goods to the customer.
These chronological series of steps or tasks constitute a procedure. A procedure lays down the
manner or method by which work is to be performed in a standard and uniform way.
Once a procedure is established, it ensures uniformly high level of performance. It results in
work simplification and eliminates overlap or duplication of efforts. Policy guides thinking and
action, whereas procedure guides action only to fulfil the objectives.
5. Programme:
It is a single use plan. It is a sequence of activities designed to implement policies and
accomplish objectives. It gives step-by step approach to guide action necessary to reach
predetermined targets. It is an instrument of co-ordination, i. e., a timetable of action. A good
programme ensures smooth and efficient operation. A procedure tells how it is to be done,
whereas a programme tells what is to be done.
It enables a manager to prepare carefully and systematically for difficulties, before they arise.
We have detailed programmes of personal selling advertising, and sales promotion in our
marketing campaign to accomplish the set goals in sales and to reach the particular market.
6. Schedules:
Scheduling is the process of establishing time sequence of the work to be done. It is an integral
part of programming. A schedule specifies the time when each of a series of actions should
take place. Once the tasks to be done and the persons who must do them are clear according to
our standing plans, scheduling may be the only element needing immediate management
attention.
7. Budget:
A budget is a projection (and a plan) defining anticipated costs of attaining an objective. It is
an appraisal of expected expense against anticipated income or a future period. It may be stated
in time, materials, money or other units required to perform work and secure specified result.
Since most values are denoted in money, we have usually money budgets. E budget is a type
of plan. It is also used as a control device. However, the budget begins as a forecast and
therefore, requires planning.
The master budget of the company is a formal expression of plans, objectives and goals
prescribed by the top management in advance for the enterprise as a whole. We also have
budget for each subdivision of the enterprise. It indicates the amount of money to be spent
for…. by each department.
8. Forecasting:
We have three types of forecasting:
(a) Extrapolation,
(b) Economic forecasting, and
(c) Marketing research.
Forecasting is based on statistical data and marketing research. Economic forecasting is the
basis of planning. Forecasting is a systematic attempt to probe the future on the basis of known
information. Planning decisions are based upon intelligent and rational forecasting the future
trend of specified events, e.g., price trend.

Planning process
The following are the steps.
1) Perception Of Opportunities
This is not an actual step in the planning however before going for the planning process one
has to study & find opportunities in the environment. If an opportunity does not exist in the
surrounding whole planning process may fail. So, to make planning more successful one has
to study legal, political framework or existing position, change in customer mindset change in
technology competition, the present position of the industry level. Here organization has to
analyze its own strengths & weakness if the good opportunity is existing in the surrounding
organization can proceed to the next step.
For Eg. For Industries like hotels, the market is good nowadays because the income has been
increased over the last 5-6 years, the lifestyle of youth has been changed, even females are
working more in number these days, etc.
2) Establishment of Objectives
Once the opportunity is perceived in the organization and unit objectives are been set from
which specific results are expected at the end of planning. The organizational objectives should
be specific to all key result areas.
For eg Sales profitability, R& D, quality & so on. Once these objectives are set the objectives
of lower units that are department objective setting is a crucial task that guides the organization
throughout the planning process.
3) Planning premises
It is nothing but study of external & internal environment i.e SWOT analysis is nothing but the
study of external & internal environment i.e SWOT analysis
External environment includes the study of following
1. Indian Economy.
2. National income availability of natural resources.
3. Availability of natural resources.
4. Political, social, legal technology.
5. Competitor’s plan –their status in the market.
While internal environment includes
1. Availability of the workforce.
2. Availability Of funds cost-effectiveness.
3. Cost-effectiveness.
4. Brand strength.
5. High market share.
This one will analyze strength/weakness/opportunity & treat in the organization & out of an
organization.
4) Identification of alternative
This is an important step where companies find various alternatives to achieve a particular
objective.
For eg If a company wants to launch a new mobile hand, this can be done in various ways
1. Creating mobile for youth
2. Creating for low- or high-class-income group
3. Whether smartphone including 3g & 4 g features
4. There should be mobile manufactured in India or out of India
5. Evaluation of Alternatives
Various alternatives are evaluated for different criteria like cost, future competition, generation
of profit, the requirement of manpower, etc. Out of this best suitable alternative is been selected
6) Choice of alternative
After the evaluation of the various parameter, the best alternative is selected this alternative is
selected by keeping in the view of environmental factor. Planning process & objectives
7) Formulation Of Supporting Plan
Once the best alternative or plan is selected a various supporting plan are prepared to support
the main plan like as
1. Buying of raw material
2. Recruitment of new staff
3. Training of staff
4. Advertisement plan
5. Buying of equipment’s
8) Establishing a sequence of activities
Once the supporting plan was prepared the sequence of actions are decided
for eg Who will do a specific task when it will be completed what exactly he has to do etc

Business forecasting
Companies use forecasting to help them develop business strategies. Past data is collected and
analyzed so that patterns can be found. Today, big data and artificial intelligence has
transformed business forecasting methods. There are several different methods by which a
business forecast is made. All the methods fall into one of two overarching
approaches: qualitative and quantitative.
While there might be large variations on a practical level when it comes to business forecasting,
on a conceptual level, most forecasts follow the same process:
1. A problem or data point is chosen. This can be something like "will people buy a high-
end coffee maker?" or "what will our sales be in March next year?"
2. Theoretical variables and an ideal data set are chosen. This is where the forecaster
identifies the relevant variables that need to be considered and decides how to collect
the data.
3. Assumption time. To cut down the time and data needed to make a forecast, the
forecaster makes some explicit assumptions to simplify the process.
4. A model is chosen. The forecaster picks the model that fits the dataset, selected
variables, and assumptions.
5. Analysis. Using the model, the data is analyzed, and a forecast is made from the
analysis.
6. Verification. The forecast is compared to what actually happens to identify problems,
tweak some variables, or, in the rare case of an accurate forecast, pat themselves on the
back.
Once the analysis has been verified, it must be condensed into an appropriate format to easily
convey the results to stakeholders or decision-makers. Data visualization and presentation
skills are helpful here.

MBO;
Management by objectives (also known as management by planning) is the establishment of
a management information system (MIS) to compare actual performance and achievements to
the defined objectives. Practitioners claim that the major benefits of MBO are that it improves
employee motivation and commitment and allows for better communication between
management and employees.
However, a cited weakness of MBO is that it unduly emphasizes the setting of goals to attain
objectives, rather than working on a systematic plan to do so. Critics of MBO, such as W.
Edwards Demming, argue that setting particular goals like production targets leads workers to
meet those targets by any means necessary, including short-cuts that result in poor quality.
In his book that coined the term, Peter Drucker set forth several principles for management by
objectives.1 Objectives are laid out with the help of employees and are meant to be challenging
but achievable. Employees receive daily feedback, and the focus is on rewards rather than
punishment. Personal growth and development are emphasized, rather than negativity for
failing to reach objectives.

MBO is not a cure-all but a tool to be utilized. It gives organizations a process, with many
practitioners claiming that the success of MBO is dependent on the support from top
management, clearly outlined objectives, and trained managers who can implement it.
Management by Objectives in Practice
Management by objectives outlines five steps that organizations should use to put the
management technique into practice.
1. The first step is to either determine or revise organizational objectives for the entire
company. This broad overview should be derived from the firm's mission and vision.
2. The second step is to translate the organizational objectives to employees. In 1981,
George T. Doran used the acronym SMART (specific, measurable, acceptable,
realistic, time-bound) to express the concept.2
3. Step three is stimulating the participation of employees in setting individual objectives.
After the organization's objectives are shared with employees, from the top to the
bottom, employees should be encouraged to help set their own objectives to achieve
these larger organizational objectives. This gives employees greater motivation since
they have greater empowerment.
4. Step four involves monitoring the progress of employees. In step two, a key component
of the objectives was that they are measurable for employees and managers to determine
how well they are met.
 5. The fifth step is to evaluate and reward employee progress. This step includes honest
feedback on what was achieved and not achieved for each employee.

Concept of decision-making
One of the most important functions of a manager is to take decisions in the organization.
Success or failure of an organization mainly depends upon the quality of decision that the
managers take at all levels. Each managerial decision, whether it is concerned with planning,
organizing, staffing or directing is concerned with the process of decision-making.
It is because of its perverseness of Decision-Making that professor Herbert Simons has said the
process of managing as a process of decision-making. As per his opinion a post of position
cannot be said to be managerial until and unless the right of Decision-Making is attached to it.
A decision is a course of action which is consciously chosen from among a set of alternatives
to achieve a desired result. It means decision comes in picture when various alternatives are
present. Hence, in organization an execute forms a conclusion by developing various course of
actions in a given situation. It is a made to achieve goals in the organization. To decide means
to cut off on to come to a conclusion.
It is also a mental process. Whether the problem is large or small in the organization, it is
usually the manager who has to comfort it and decide what action to take. So, the quality of
managers’ decisions is the Yardstick of their effectiveness and value to the organization. This
indicates that managers must necessarily develop decision making skills.
According to D. E. McFarland, “A decision is an act of choice – wherein an executive forms a
conclusion about what must not be done in a given situation. A decision represents a course of
behavior chosen from a number of possible alternatives”.
According to Haynes and Massie, “a decision is a course of action which is consciously chosen
for achieving a desired result”.
According to R. A. Killian, “A decision in its simplest form is a selection of alternatives”.
Thus, from above definitions it can be concluded that decision-making is a typical form of
planning. It involves choosing the best alternative among various alternatives in order to realize
certain objectives. This process consists of four interrelated phases, explorative (searching for
decision occasions), speculative (identifying the factors affecting the decision problem),
evaluative (analysis and weighing alternative courses of action and selective (choice of the best
course of action).

Types of decision-making
The decisions taken by managers at various points of time may be classified thus:
1. Personal and Organizational Decisions:
Decisions to watch television, to study, or retire early are examples of personal decisions. Such
decisions, pertain to managers as individuals. They affect the organisation, in an indirect way.
For example, a personal decision to purchase a Maruti rather than an Ambassador, indirectly
helps one firm due to the sale and hurts another because of the lost sale. Personal decisions
cannot be delegated and have a limited impact.
Organisational decisions are made by managers, in their official or formal capacity. These
decisions are aimed at furthering the interests of the organisation and can be delegated. While
trying to deliver value to the organisation, managers are expected to keep the interests of all
stakeholders also in mind—such as employees, customers, suppliers, the general public etc.
they need to take decisions carefully so that all stakeholders benefit by what they do (Like price
the products appropriately, do not resort to unethical practices, do not sell low quality goods
etc.)
2. Individual and Group Decisions:
Individual decisions are taken by a single individual. They are mostly routine decisions.
Advantages and Disadvantages of Group Decision-Making:
Group decisions, on the other hand are decisions taken by a group of individuals constituted
for this purpose (for example, Admission Committee of a College, Board of Directors in a
company). Group decisions, compared to individual decisions, have far reaching consequences
and impact a number of persons and departments. They require serious discussion, deliberation
and debate. The following are the advantages and disadvantages of group decision making.
Advantages:
i. A group has more information than an individual. Members, drawn from diverse fields, can
provide more information and knowledge about the problem.
ii. A group can generate a greater number of alternatives. It can bring to bear a wider
experience, a greater variety of opinions and more thorough probing of facts than a single
individual.
iii. Participation in group decisions increases acceptance and commitment on the part of people
who now see the solution as their own and acquire a psychological stake in its success.
iv. People understand the decision better because they saw and heard it develop; then paving
the way for smooth implementation of the decision.
v. Interaction between individuals with varied viewpoints leads to greater creativity.
Disadvantages:
i. Groups are notorious time-wasters. They may waste a lot of time and energy, clowning
around and getting organized.
ii. Groups create pressures towards conformity; other infirmities, like group think, force
members to compromise on the least common denominator.
iii. Presence of some group members, who are powerful and influential may intimidate and
prevent other members from participating freely. Domination is counter-productive; it puts a
damper on the groups’ best problem solvers.
iv. It may be very costly to secure participation from several individuals in the decision-making
process.
v. The group consists of severed individuals and hence, it is easy to pass the buck and avoid
responsibility.
3. Programmed and Non-Programmed Decisions:
A programmed decision is one that is routine and repetitive. Rules and policies are established
well in advance to solve recurring problems quickly. For example a hospital establishes a
procedure for admitting new patients and this helps everyone to put things in place quickly and
easily even when many patients seek entry into the hospital. Programmed decisions leave no
room for discretion. They have to be followed in a certain way. They are generally made by
lower level personnel following established rules and procedures.
Non-programmed decisions deal with unique/unusual problems. Such problems crop up
suddenly and there is no established procedure or formula to resolve them. Deciding whether
to take over a sick unit, how to restructure an organisation to improve efficiency, where to
locate a new company warehouse, are examples of non-programmed decisions.
The common feature in these decisions is that they are novel and non-recurring and there are
no readymade courses of action to resort to. Because, non-programmed decisions often involve
broad, long-range consequences for the organisation, they are made by higher-level personnel
only.
Managers need to be creative when solving the infrequent problem; and such situations have
to be treated de novo each time they occur. Non-programmed decisions are quite common in
such organisations as research and development firms where ‘situations are poorly structured
and decisions being made are non-routine and complex.
The characteristics of programmed and non-programmed decisions are discussed as under:
Programmed vs. Non-Programmed Decisions:
i. Concerned with relatively routine problems. They are structured and repetitive in nature.
ii. Solutions are offered in accordance with some habit, rule or procedure
iii. Such decisions are relatively simple and have a small impact.
iv. The information relating to these problems is readily available and can be processed in a
pre-determined fashion.
v. They consume very little time and effort since they are guided by predetermined rules,
policies and procedures.
vi. Made by lower level executives.
vii. Concerned with unique and novel problems. They are unstructured, non-repetitive and ill
defined.
viii. There are no pre-established policies or procedures to rely on. Each situation is different
and needs a creative solution.
ix. Such decisions are relatively complex and have a long-term impact
x. The information relating to these problems is not readily available.
xi. They demand lot of executive time, discretion and judgment.
xii. Top management responsibility
4. Strategic, Administrative and Routine Decisions:
Strategic decision-making is a top management responsibility. These are key, important and
most vital decisions affecting many parts of an organisation. They require sizeable allocation
of resources. They are future-oriented with long-term ramifications. They can either take a
company to commanding heights or make it a ‘bottomless pit’!
Administrative decisions deal with operational issues—dealing with how to get various aspects
of strategic decisions implemented smoothly at various levels in an organisation. They are
mostly handled by middle level managers.
Routine decisions, on the other hand, are repetitive in nature. They require little deliberation
and are generally concerned with short-term commitments. They ‘tend to have only minor
effects on the welfare of the organisation’. Generally, lower-level managers look after such
mechanical or operating decisions.
The Concept of Bounded Rationality:
The classical model thus prescribes a consistent and value maximizing procedure to arrive at
decisions. It turns the decision maker into an economic being trying to pick up the best
alternative for achieving the optimum solution to a problem. According to the classical model,
the decision-maker is assumed to make decisions that would maximize his or her advantage by
searching and evaluating all possible alternatives.
The decision-making process, described in based on certain assumptions:
i. Decision-Making is a Goal-Oriented Process:
According to the rational economic model, the decision-maker has a clear, well-defined goal
that he is trying to maximize. Before formulating the goal, the decision-maker can identify the
symptoms of a problem and clearly specify one best way to solve the same.
ii. All Choices are Known:
It is assumed that in a given decision situation, all choices available to the decision-maker are
known or given and the consequences or outcomes of all actions are also known. The decision
maker can list- (i) the relevant criteria; (ii) feasible alternatives; and (iii) the consequences for
each alternative.
iii. Order of Preference:
It is assumed that the decision maker can rank all consequences, according to preference and
select the alternative which has the preferred consequences. In other words, the decision maker
knows how to relate consequences to goals. He knows which consequence is the best
(optimality-criterion).
iv. Maximum Advantage:
The decision maker has the freedom to choose the alternative that best optimises the decision.
In other words, he would select that alternative which would maximise his satisfaction. The
decision maker has complete knowledge and is a logical, systematic maximiser in economic-
technical terms.
Causes of Bounded Rationality:
The above model is prescriptive and normative; it explains how decision makers ought to
behave. Rationality is an ideal and can be rarely achieved in an organisation.
Many factors intervene in being perfectly rational, namely:
1. Impossible to State the Problems Accurately:
It is often impossible to reduce organisational problems to accurate levels. An accurate, precise
and comprehensive definition of the problem as assumed under the model may not be possible.
Moreover, relevant goals may not be fully understood or may be in conflict with each other.
Striking a balance between goals such as growth, profitability, social responsibility, ethics,
survival, etc., may be difficult and as such, the assumption that the decision maker has a single,
well-defined goal in an organisational setting appears to be unfortunate.
2. Not Fully Aware of Problems:
Frequently, the manager does not know that he has a problem. If the organisation is successful
and is flourishing, managers may not be in a position to assign their valuable time to searching
future problems. As rightly commented by Weber’s, if current performance is satisfactory, few
of us use present time to search for future problems.
3. Imperfect Knowledge:
It is too simplistic to assume that the decision-maker has perfect knowledge regarding all
alternatives, the probabilities of their occurrence, and their consequences. Indeed managers
rarely, if any, have access to perfect information.
4. Limited Time and Resources:
Most managers work under tremendous pressure to meet the challenges posed by internal as
well as external factors. They have to operate under ‘do or die’ situations and investing more
time than necessary would mean lost opportunities and consequently, lost business. This
pressure to act pushes the decision managers to choose quickly. Moreover, obtaining full
information would be too costly.
If resources are limited, the decisions should be taken in such a manner so as to achieve
efficiency and effectiveness. Less effective solutions may be accepted, if substantial savings
are made in the use of resources. Working under severe time and cost constraints, managers
may settle down for less optimal decisions rather than wasting time and effort in finding an
‘ideal’ solution.
5. Cognitive Limits:
Most of the decision makers may not be gifted with supernatural powers to turn out a high-
quality decision, every time they sit through a problem. They may not be able to process large
amounts of environmental information, loaded with technicalities and competitive data,
thoroughly.
Also, difficulties arise in relating them successfully to confusing organisational objectives.
When managers are invaded with intricate details regarding various fields, they try to simplify
the decision-making process by reducing the number of alternatives to a manageable number.
When the thinking capacity is overloaded, rational decisions give way to bounded decisions.
Instead of considering eight to ten alternatives, managers may deal with only three or four, to
avoid overloading and confusion. They simplify the ‘complex fabric of the environment’, into
workable conceptions of their decision problems.
6. Politics:
The normative model, unfortunately, ignores the influence of powerful individuals and groups
on the decision-making process. Many studies have revealed decision-making to be political in
nature, accommodating the dissimilar and sometimes, conflicting interests of different groups
(labour unions, consumer councils, government agencies, local community). In order to satisfy
these groups, the decision maker may have to assign weightage to less optimal solutions, at the
expense of organisational efficiency.
Thus, the rational economic model is based on a defective logic and reasoning. It is an
idealistic, perhaps even naive, model of decision-making which works only when all the
underlying assumptions prevail. The complexities of the real-world force us to reject the
traditional concepts.
We are compelled to consider a more realistic theory which receives inputs from both the
quantifiable and non-quantifiable variables: a theory which ‘focuses on human involvement in
the various steps of the (decision-making) process and allows for the impact of numerous
environmental factors’.
Administrative Decision Making:
Bounded Rationality Approach:
The objective of the administrative model, also known as the behavioural theory, proposed by
Herbert A. Simon and refined by Richard Cyert and James March, is to explain the decision-
making behaviour of individuals and organisations.
According to Simon, people carry only a limited, simplified view of problems confronting them
because of certain reasons:
(i) They do not have full information about the problems,
(ii) They do not possess knowledge of all the possible alternative solutions to the problem and
their consequences,
(iii) They do not have ability to process competitive environmental and technical information,
(iv) They do not have sufficient time and resources to conduct an exhaustive search for
alternative solutions to the problems.
Thus, human and organisational limitations make it impossible for people to make perfectly
rational decisions. There are always ‘boundaries to rationality’ in organisations.
In decision-making process steps normally refers to processes, procedures and phases which
are usually followed for better decision.

Process of decision-making
According to Stanley Vance decision-making consists of the following six steps:
1. Perception.
2. Conception.
3. Investigation.
4. Deliberation.
5. Selection.
6. Promulgation
1. Perception:
Perception is a state of awareness. In a man consciousness arises out of perception.
Consciousness gives tilt to the decision-making process. The executive first perceives and then
moves on to choose one of the alternatives and thus takes a decision. Perception is, therefore,
an important and first step without which decisions relating to any of the problems of the
organisation cannot be taken. Other steps follow “perception” is the first step in decision-
making.
2. Conception:
Conception means designs for action or programme for action. Conception relates to that power
of mind which develops ideas out of what has been perceived.
3. Investigation:
The investigation provides an equipment with the help of which the manager tries to go ahead
with a debate either in his mind independently or with his co-workers. Perception is a sort of
location of the problem whereas conception is the preparation of design or programme for
solving the problem. But only perception and conception cannot offer the solution.
For solution investigation is to be carried out. Information relevant to a particular concept is to
be sought, acquired and then analysed. Relative merits and demerits of a different analysed
concepts should be measured. Alternative course of action is to be thought, analysed and
compared to. This needs investigation with which the manager should be armed.
4. Deliberation:
Weighing the consequences of possible course of action is called deliberation. The manager
may either weigh the relative merits and demerits and the following consequences in his own
mind or share his mental exercise with others to equip himself better. The deliberations remove
bias and equip the manager with different ideas and alternatives and help him in arriving at a
decision which may safely be ascribed as good decision.
5. Selection:
Selection is an act of the choice which in management terminology is known as decision. After
deliberations one of the alternatives, the best possible in the circumstances, is selected.
6. Promulgation:
Perception, conception, investigation, deliberation and lastly selection will carry weight only
when selected – the chosen alternative, that is, the decision – is properly and timely
communicated to all those who are concerned and for whom the decision is meant. Only proper
promulgation will help its execution.
According to the views of Mrityunjoy Banerjee – A discrimination among the available
alternatives is designated as the decision. For him also decision is an act of choice – selection
from different available alternatives.
He is of the opinion that a decision like planning passes through the following five phases:
(a) Defining and analysing the problem i.e., the act of perception.
(b) Finding relevant fact, i.e., the act of conception and investigation.
(c) Developing alternative solutions i.e., the act of deliberation.
(d) Selecting the best solution, i.e., the act of selection – the choice – the actual decision-
making.
(e) Converting the decision into effective action, i.e., the promulgation, with the help of which
the decision so taken is effectively, properly and timely communicated to all concerned.”

Decision-making techniques
1. Marginal Analysis:
This technique is used in decision-making to figure out how much extra output will result if
one more variable (e.g. raw material, machine, and worker) is added. In his book, ‘Economics’,
Paul Samuelson defines marginal analysis as the extra output that will result by adding one
extra unit of any input variable, other factors being held constant.
Marginal analysis is particularly useful for evaluating alternatives in the decision-making
process.
2. Financial Analysis:
This decision-making tool is used to estimate the profitability of an investment, to calculate the
payback period (the period taken for the cash benefits to account for the original cost of an
investment), and to analyze cash inflows and cash outflows.
Investment alternatives can be evaluated by discounting the cash inflows and cash outflows
(discounting is the process of determining the present value of a future amount, assuming that
the decision-maker has an opportunity to earn a certain return on his money).
3. Break-Even Analysis:
This tool enables a decision-maker to evaluate the available alternatives based on price, fixed
cost and variable cost per unit. Break-even analysis is a measure by which the level of sales
necessary to cover all fixed costs can be determined.
Using this technique, the decision-maker can determine the break-even point for the company
as a whole, or for any of its products. At the break-even point, total revenue equals total cost
and the profit is nil.
4. Ratio Analysis:
It is an accounting tool for interpreting accounting information. Ratios define the relationship
between two variables. The basic financial ratios compare costs and revenue for a particular
period. The purpose of conducting a ratio analysis is to interpret financial statements to
determine the strengths and weaknesses of a firm, as well as its historical performance and
current financial condition.
5. Operations Research Techniques:
One of the most significant sets of tools available for decision-makers is operations research.
Operation research (OR) involves the practical application of quantitative methods in the
process of decision-making. When using these techniques, the decision-maker makes use of
scientific, logical or mathematical means to achieve realistic solutions to problems. Several OR
techniques have been developed over the years.
6. Linear Programming:
Linear programming is a quantitative technique used in decision-making. It involves making
an optimum allocation of scarce or limited resources of an organization to achieve a particular
objective. The word ‘linear’ implies that the relationship among different variables is
proportionate.
The term ‘programming’ implies developing a specific mathematical model to optimize outputs
when the resources are scarce. In order to apply this technique, the situation must involve two
or more activities competing for limited resources and all relationships in the situation must be
linear.
Some of the areas of managerial decision-making where linear programming technique
can be applied are:
i. Product mix decisions
ii. Determining the optimal scale of operations
iii. Inventory management problems
iv. Allocation of scarce resources under conditions of uncertain demand
v. Scheduling production facilities and maintenance.
7. Waiting-line Method:
This is an operations research method that uses a mathematical technique for balancing services
provided and waiting lines. Waiting lines (or queuing) occur whenever the demand for the
service exceeds the service facilities.
Since a perfect balance between demand and supply cannot be achieved, either customers will
have to wait for the service (excess demand) or there may be no customers for the organization
to serve (excess supply).
When the queue is long and the customers have to wait for a long duration, they may get
frustrated. This may cost the firm its customers. On the other hand, it may not be feasible for
the firm to maintain facilities to provide quick service all the time since the cost of idle service
facilities have to be borne by the company.
The firm, therefore, has to strike a balance between the two. The queuing technique helps to
optimize customer service on the basis of quantitative criteria. However, it only provides vital
information for decision-making and does not by itself solve the problem. Developing queuing
models often requires advanced mathematical and statistical knowledge.
8. Game Theory:
This is a systematic and sophisticated technique that enables competitors to select rational
strategies for attainment of goals. Game theory provides many useful insights into situations
involving competition. This decision-making technique involves selecting the best strategy,
taking into consideration one’s own actions and those of one’s competitors.
The primary aim of game theory is to develop rational criteria for selecting a strategy. It is
based on the assumption that every player (a competitor) in the game (decision situation) is
perfectly rational and seeks to win the game.
In other words, the theory assumes that the opponent will carefully consider what the decision-
maker may do before he selects his own strategy. Minimizing the maximum loss (minimax)
and maximizing the minimum gain (maximin) are the two concepts used in game theory.
9. Simulation:
This technique involves building a model that represents a real or an existing system.
Simulation is useful for solving complex problems that cannot be readily solved by other
techniques. In recent years, computers have been used extensively for simulation. The different
variables and their interrelationships are put into the model.
When the model is programmed through the computer, a set of outputs is obtained. Simulation
techniques are useful in evaluating various alternatives and selecting the best one. Simulation
can be used to develop price strategies, distribution strategies, determining resource allocation,
logistics, etc.
10. Decision Tree:
This is an interesting technique used for analysis of a decision. A decision tree is a sophisticated
mathematical tool that enables a decision-maker to consider various alternative courses of
action and select the best alternative. A decision tree is a graphical representation of alternative
courses of action and the possible outcomes and risks associated with each action.
In this technique, the decision-maker traces the optimum path through the tree diagram. In the
tree diagram the base, known as the ‘decision point,’ is represented by a square. Two or more
chance events follow from the decision point. A chance event is represented by a circle and
constitutes a branch of the decision tree. Every chance event produces two or more possible
outcomes leading to subsequent decision points.
The decision tree can be illustrated with an example. If a firm expects an increase in the
demand for its products, it can consider two alternative courses of action to meet the
increased demand:
(a) Installing new machines,
(b) Introducing a double shift.
There are two possibilities for each alternative, i.e. output may increase (positive state) or fall
(negative state). The probabilities associated with each state are taken as 0.6 and 0.4
respectively. This information can be presented in a tabular form, known as a pay-off matrix
(see Table 13.2).

Additional machines
= (Rs. 3,00,000 × 0.6) + (Rs. 2,00,000 × 0.4)
= Rs. 2,60,000
Double shift
= (Rs. 2,80,000 × 0.6) + (Rs. 2,40,000 × 0.4)
= Rs. 2,64,000
Since the pay-off from introducing a double shift is higher, it may be selected. Though, the
decision tree does not provide a solution to the decision-maker, it helps in decision-making by
showing the alternatives available and their probabilities.
The decision tree allows the decision-maker to see the application of most of the steps in the
decision-making process in one single diagram. The effectiveness of this decision-making
technique depends on the assumptions and the probability estimates made by the decision-
maker.

Organising
Concept & Definition
Organising is that managerial process which seeks to define the role of each individual
(manager and operator) towards the attainment of enterprise objectives; with due regard to
establishing authority-responsibility relationships among all; and providing for co-ordination
in the enterprise-as an in-built device for obtaining harmonious groups action.

Formal and Informal Organisation

Formal Organisation:
The formal organisation represents the classification of activities within the enterprise,
indicates who reports to whom and explains the vertical journal of communication which
connects the chief executive to the ordinary workers. In other words, an organisational structure
clearly defines the duties, responsibilities, authority and relationships as prescribed by the top
management.
In an organisation, each and every person is assigned the duties and given the required amount
of authority and responsibility to carry out this job. It creates the co-ordination of activities of
every person to achieve the common objectives. It indirectly induces the worker to work most
efficiently. The inter-relationship of staff members can be shown in the organisation chart and
manuals under formal organisation.
Characteristics of Formal Organisation:
The important characteristics of a formal organisation are given below:
1. It is properly planned.
2. It is based on delegated authority.
3. It is deliberately impersonal.
4. The responsibility and accountability at all levels of organisation should be clearly defined.
5. Organisational charts are usually drawn.
6. Unity of command is normally maintained.
7. It provides for division of labour.
Advantages of Formal Organisation:
1. The definite boundaries of each worker is clearly fixed. It automatically reduces conflict
among the workers. The entire building is kept under control.
2. Overlapping of responsibility is easily avoided. The gaps between the responsibilities of the
employees are filled up.
3. Buck passing is very difficult under the formal organisation. Normally exact standards of
performance are established under formal organisation. It results in the motivating of
employees.
4. A sense of security arises from classification of the task.
5. There is no chance for favouritism in evaluation and placement of the employee.
6. It makes the organisation less dependent on one man.
Keith Davis observes that formal organisation is and should be our paramount organisation
type as a general rule. It is the pinnacle of man’s achievement in a disorganised society. It is
man’s orderly, conscious and intelligent creation for human benefit.
Disadvantages of Formal Organisation:
1. In certain cases, the formal organisation may reduce the spirit of initiative.
2. Sometimes authority is used for the sake of convenience of the employee without considering
the need for using the authority.
3. It does not consider the sentiments and values of the employees in the social organisation.
4. The formal organisation may reduce the speed of informal communication.
5. It creates the problems of coordination.
Informal Organisation:
Informal organisation is an organisational structure which establishes the relationship on the
basis of the likes and dislikes of officers without considering the rules, regulations and
procedures. These types of relationships are not recognised by officers but only felt. The
friendship, mutual understanding and confidence are some of the reasons for existing informal
organisation. For example, a salesman receives orders or instructions directly from the sales
manager instead of his supervisors.
The informal organisation relationship exists under the formal organisation also. The informal
organisation relationship or informal relations give a greater job satisfaction and result in
maximum production.
According to C.J. Bernard, “Informal organisation brings cohesiveness to formal organisation.
It brings to the members of a formal organisation a feeling of belonging, status of self-respect
and gregarious satisfaction. Informal organisations are important means of maintaining the
personality of the individual against certain effects of formal organisation which tend to
disintegrate personality.”
Characteristics of Informal Organisation:
1. Informal organisation arises without any external cause i.e., voluntarily.
2. It is a social structure formed to meet personal needs.
3. Informal organisation has no place in the organisation chart.
4. It acts as an agency of social control.
5. Informal organisation can be found on all levels of organisation within the managerial
hierarchy.
6. The rules and traditions of informal organisation are not written but are commonly followed.
7. Informal organisation develops from habits, conduct, customs and behaviour of social
groups.
8. Informal organisation is one of the parts of total organisation.
9. There is no structure and definiteness to the informal organisation.
Advantages of Informal Organisation:
The advantages of informal organisations are briefly explained below:
1. It fills up the gaps and deficiency of the formal organisation.
2. Informal organisation gives satisfaction to the workers and maintains the stability of the
work.
3. It is a useful channel of communication.
4. The presence of informal organisation encourages the executives to plan the work correctly
and act accordingly.
5. The informal organisation also fills up the gaps among the abilities of the managers.
Disadvantages of Informal Organisation:
The disadvantages of Informal Organisation are summarised below:
1. It has the nature of upsetting the morality of the workers.
2. It acts according to mob psychology.
3. Informal organisation indirectly reduces the efforts of management to promote greater
productivity.
4. It spreads rumour among the workers regarding the functioning of the organisation
unnecessarily.

Organisational Structure
An organizational structure is a system that outlines how certain activities are directed in order
to achieve the goals of an organization. These activities can include rules, roles, and
responsibilities.
The organizational structure also determines how information flows between levels within the
company. For example, in a centralized structure, decisions flow from the top down, while in
a decentralized structure, decision-making power is distributed among various levels of the
organization.
Having an organizational structure in place allows companies to remain efficient and focused

Functional Organisation
Overview of the Functional Structure
An organization can be arranged according to a variety of structures, which determine how the
organization will operate and perform. In a functional structure, a common configuration, an
organization is divided into smaller groups by areas of specialty (such as IT, finance,
operations, and marketing). Some refer to these functional areas as ” silos “—entities that are
vertical and disconnected from each other. Correspondingly, the company’s top management
team typically consists of several functional heads (such as the chief financial officer and the
chief operating officer). Communication generally occurs within each functional department
and is transmitted across departments through the department heads.
Functional structure at FedEx: This organizational chart shows a broad functional structure at
FedEx. Each different functions (e.g., HR, finance, marketing) is managed from the top down
via functional heads (the CFO, the CIO, various VPs, etc.).
Advantages of a Functional Structure
Functional departments arguably permit greater operational efficiency because employees with
shared skills and knowledge are grouped together by functions performed. Each group of
specialists can therefore operate independently with management acting as the point of cross-
communication between functional areas. This arrangement allows for increased
specialization.
Disadvantages of a Functional Structure
A disadvantage of this structure is that the different functional groups may not communicate
with one another, potentially decreasing flexibility and innovation. Functional structures may
also be susceptible to tunnel vision, with each function perceiving the organization only from
within the frame of its own operation. Recent trends that aim to combat these disadvantages
include the use of teams that cross traditional departmental lines and the promotion of cross-
functional communication.
Functional structures appear in a variety of organizations across many industries. They may be
most effective within large corporations that produce relatively homogeneous goods. Smaller
companies that require more adaptability and creativity may feel confined by the
communicative and creative silos functional structures tend to produce.

Product/ Market Organisation

Organisational structure by product
Product organisational structure is a framework in which a business is organised in separate
divisions, each focusing on a different product or service and functioning as an individual unit
within the company.
In a product-based structure (also known as a divisional structure), you assign employees into
self-contained divisions according to:
• the particular line of products or services they produce
• the customers they deal with
• the geographical area they serve
The structure may have several layers of managers and employees. Each layer (ie division) can
have its own marketing team, its own sales team, and so on. A manager typically reports to the
head of the company by product type, eg sporting goods, housewares and general merchandise.
Certain key functions (eg finance or human resources) may be provided centrally.
For example, a computer software business may divide its structure according to its two distinct
customer groups - home users and business users. In such an arrangement, all employees
working on the development, sales or promotion of business software would be in one division,
while everyone working on software for home users would be in another.
Product structure advantages and disadvantages
Product organisation may not suit everyone, but is likely to provide distinct advantages to those
businesses that:
• have particular product lines that are substantially different
• require specialised expertise for production or distribution
• target a few major customers that make up most of your business
Product structure can also help your business:
• focus on specific market segments
• meet customer needs more effectively
• extend knowledge or expertise within specialised divisions
• respond to market changes more flexibly and quickly
• encourage positive competition between each department
• coordinate and measure the performance of each division directly
Product organisational structure does have certain disadvantages, including being difficult to
scale and potentially:
• duplicating functions and resources, eg a different sales team for each division
• dispersing technical expertise across smaller units
• nurturing negative rivalries among divisions
 • over-emphasising divisional, rather than organisational goals
• losing central control over each separate division
Product or divisional structure is mainly suitable for larger companies with two or more key
product lines, strategic customers or markets.

Matrix Structure
A matrix organization is a work structure where team members report to multiple leaders. In a
matrix organization, team members (whether remote or in-house) report to a project manager
as well as their department head. This management structure can help your company create
new products and services without realigning teams.

Matrix organizations have two or more management reporting structures. While this may seem
confusing at first, team members typically have a primary manager for their department.
Reporting to a department manager functions similarly to a traditional work structure. For
example, team members working in IT report to the IT department head. The IT department
head reports to the vice president of their division. Eventually, all reporting relationships lead
to the CEO.
The difference in a matrix structure is that team members also report to project managers.
Projects often require work from members of various departments like IT, marketing, and
finance, which is why having a separate manager for individual projects makes sense.
Types of matrix management
There are three types of matrix management, with each type giving more or less authority to
the project manager. You can visualize these management types on a scale with the project
manager on one end and the department manager on the other.

Weak matrix
In a weak matrix, the project manager has the least amount of decision-making power
compared to the other matrix management types. When the project manager has limited
authority over the project, the matrix becomes weak because the project budget and timeline is
in the hands of the department head. Creating a communication plan can keep communication
from getting lost in a weak matrix.
Balanced matrix
In a balanced matrix, the department head and the project manager have equal authority and
team members report to both of them. This keeps communication open between everyone in
leadership roles and allows the project to move forward smoothly.
Strong matrix
In a strong matrix, the project manager has most of the decision-making power over the project,
while the department head has more limited authority. This creates a strong organizational
structure because the project manager has full ownership over the project. The department head
can oversee the project but doesn’t make key decisions.
Advantages of the matrix organization structure

The matrix organizational structure is more complex than the hierarchical structure, but it has
many advantages. Some advantages of the matrix design include clear project objectives, an
efficient use of resources, free-flowing information, and training for project managers.
Clear project objectives
The matrix organization design can ensure greater clarity on project objectives. When your
team reports their progress to both the project manager and the department head, solidifying
project goals is critical. When the project manager feels supported by other members of senior
management, project organization becomes a priority.
Efficient use of resources
The matrix structure allows for an efficient use of resources because teams include specialists
from various departments. This reduces overhead costs and the amount of time needed to
complete a project. In a hierarchical structure where every team reports to only one manager,
there are fewer managers per team. These teams may require more time to create one project
deliverable because they don’t have members with different specialities.
Free-flowing information
Working in a matrix structure creates a free-flow of information between teams because the
team reports to multiple leaders. While team members must remember to relay information in
a hierarchical system, the matrix makes information flow a requirement. Reporting information
to multiple leaders may seem tedious, but with the right project management system in place,
it requires little or no extra work from team members.
Training for project managers
The unique structure of the matrix organization gives project managers a large amount of
responsibility. Project managers must lead their team through the project lifecycle. This
structure challenges project managers and trains those who want to be cross-functional
managers in other departments.
Team retention
The matrix organization has a great track record from team member retention because when
specialists are placed together, the product team stays strong. These team members work under
functional department heads and are then assigned to project managers. Specialists often enjoy
working together, and it can improve project performance.
Disadvantages of the matrix organization structure
Like the hierarchical reporting structure, the matrix organization also has disadvantages. Most
of the disadvantages stem from this structure being complex. While complex designs can have
benefits when they work, they also have the potential to cause conflict and make things messy.
Complex reporting style
The complexity of the matrix organization can be a disadvantage because teams may have
trouble knowing who to report to and when. While the intention of the matrix is to benefit
teams, it may complicate projects and muddy the overall process.
Slow response time
The complexity of the matrix can lead to slow response times, which can delay projects. Slow
response times come from the need to report information to multiple people. Having more
people involved is a good thing, but the downside is that relaying information to more people
takes time.
Conflicting guidance
Conflicting guidance occurs if the project manager and department head aren’t on the same
page. While the matrix structure is meant to encourage teamwork, it may do the opposite
depending on the personalities involved.
Potential friction
The main difference between the matrix and hierarchical structure is that team members report
to two managers in a matrix structure. This makes the matrix organization more complex and
puts more responsibility on team members. Having two managers can give team members more
feedback and guidance, but it can also result in friction.
Juggling priorities
It can be difficult for team members to juggle priorities in a matrix structure if managers don’t
work together. If the department head believes their tasks are most important and the project
manager thinks the same, the team may have trouble determining which manager’s guidance
to prioritize.

Span of Management
Depending upon the complexity of organisational activities and relationships amongst
superiors and subordinates, it becomes important the superiors manage an optimum number of
subordinates that result in optimum organisational output. All the subordinates cannot be
managed by one superior. There has to be a limit on the number of subordinates who can be
effectively managed by one superior.
The number of subordinates that a superior can effectively supervise is known as span of
management or span of control. In the 19th and middle of 20th century, management writers
determined 5 or 6 as the optimum number that a manager could effectively manage at the upper
level.
Beyond this number, managers faced problems like:
1. Overburdened with work.
2. Difficulty in coordinating the activities of large number of people.
3. Difficulty in controlling.
Thus, optimum number of subordinates that a manager could supervise was determinable but
today, it is not so. Exact number of employees that managers can effectively supervise cannot
be defined. Span of management is situational in nature.
Depending on the number of employees that can be supervised or controlled by managers, there
can be two kinds of structures in the organisation:
I. Tall structures, and
II. Flat structures.
I. Tall structures:
These structures are found in classical bureaucratic organisations. In this structure, a manager
can supervise less number of subordinates. He can, therefore, exercise tight control over their
activities. This creates large number of levels in the organisation. This is also known as narrow
span of control. A tall structure or a narrow span of control appears like this.
Merits of a Tall Structure:
1. Managers can closely supervise activities of the subordinates.
2. There can be better communication amongst superiors and subordinates.
3. It promotes personal relationships amongst superiors and subordinates.
4. Control on subordinates can be tightened in a narrow span.
Limitations of a Tall Structure:
1. It creates many levels in the organisation structure which complicates co-ordination amongst
levels.
2. More managers are needed to supervise the subordinates. This increases the overhead
expenditure (salary etc.). It is, thus, a costly form of structure.
3. Increasing gap between top managers and workers slows the communication process.
4. Decision-making becomes difficult because of too many levels.
5. Superiors perform routine jobs of supervising the subordinates and have less time for
strategic matters.
6. Employees work under strict control of superiors. Decision-making is primarily centralised.
This restricts employees’ creative and innovative abilities.
7. Strict control leads to low morale and job satisfaction. This can affect productivity in the
long-run.
To overcome the limitations of a tall structure, many organisations reduce the number of levels
in the hierarchy by downsizing the organisation. Downsizing is “the process of significantly
reducing the layers of middle management, expanding spans of control and shrinking the size
of the work force.”
Many companies downsize their work force through the process of restructuring. Restructuring
is “the process of making a major change in organisation structure that often involves reducing
management levels and also possibly changing some major components of the organisations
through divestiture and/or acquisition.”
“The most common and most serious symptom of mal-organisation is multiplication of the
number of management levels. A basic rule of organisation is to build the least possible number
of management levels and forge the shortest possible chains of command.” — Peter F. Drucker
II. Flat Structures:
These structures have a wide span of control. When superior supervises a larger number of
subordinates, flat structure is created with lesser number of hierarchical levels. A departure was
made from tall structures to flat structures by James C. Worthy who was a consultant in the L.
Sears, Roebuck and company.
A structure where span of control for each managerial position is 4 appears as follows:

To illustrate, if organisations A and B, both have 256 workers and the span of control for each
managerial position is 2 for company A and 4 for company B, there will be 9 levels in company
A (requiring 128 supervisors at the lowest level, 64 at the next higher level and so on) and 5
levels in company B. A narrow span of control creates more levels in the organisational
hierarchy than the wide span of control.
The levels in case of organisation B(5) where span of control is 4 appears as follows:

(The span of 4 prevails for each functional area at each level). For the sake of simplicity, the
figure represents the span for only one functional area and one level.
Merits of a Flat Structure:
1. There is low cost as less number of managers can supervise organisational activities.
2. The decision-making process is effective as superiors delegate authority to subordinates.
They are relieved of routine matters and concentrate on strategic matters. The decision-making
is decentralised.
3. Subordinates perform the work efficiently since they are considered worthy of doing so by
the superiors.
4. There is effective communication as the number of levels is less.
5. It promotes innovative abilities of the top management.
Limitations of a Flat Structure:
1. Superiors cannot closely supervise the activities of employees.
2. Managers may find it difficult to co-ordinate the activities of subordinates.
3. Subordinates have to be trained so that dilution of control does not affect organisational
productivity.
Both tall and flat structures have positive and negative features and it is difficult to find the
exact number of subordinates that a manager can effectively manage. Some management
theorists like David D. Van Fleet and Arthur G. Bedeian assert that span of control and
organisational efficiency are not related and many empirical studies have proved that span of
control is situational and depends on a variety of factors.
Some studies proved that flat structures produce better results as decentralised decision making
has less control from the top, promotes initiative and satisfaction at work. Large number of
members in a group can better solve the complex problems as group decision making is based
on greater skill variety.
Other studies proved that people working in tall structures produce better results as less number
of members in a group can come to consensus of opinion and evaluate their decisions more
thoroughly. Group cohesiveness is high and, thus, commitment to decisions is also high.
Members feel satisfied with their decisions and conflicts are reduced.
Factors Affecting Span of Management:
The following factors help in determining the suitable span of management:
1. Competence of managers:
If managers are competent in their jobs, they can have a wide span of management.
Competence of managers is judged by their ability to make decisions related to motivational
plans, leadership styles, communication channels and chains, techniques of control etc.
Managers who rank high on these parameters can effectively supervise larger number of
subordinates.
2. Nature of work:
If employees perform similar and repetitive work, managers can supervise large number of
subordinates and, thus, have a wide span of control. Non-repetitive and challenging work
requires narrow span of control. Changes in the nature of work also affects the span of
management.
Frequent changes as a result of dynamic environment support a narrow span as superiors
frequently have to direct the activities of subordinates. Stability in the nature of work supports
a wide span of management as superiors’ directions are not frequently required to carry out the
work processes.
3. Assistance to managers:
If managers have access to technical or secretarial assistance, a larger group of subordinates
can be managed. Span of control can, therefore, be wide. Staff assistance can be useful for
collecting and processing information related to various decisions and issuing orders to the
subordinates. Managers save time in communicating with subordinates, direct the activities of
larger number of subordinates and focus on other strategic organisational matters.
4. Competence of subordinates:
If subordinates are competent to manage their jobs without much assistance from the superiors,
span of control can be wide. Competent subordinates do not require frequent directions from
the superiors with respect to various organisational activities. Superiors can thus, manage a
larger group of subordinates.
5. Plans and policies:
If plans clearly define the organisational/individual goals and policies, superiors can supervise
a larger group of subordinates and have a wide span of control. Clearly defined plans include
well-formulated policies procedures, methods etc. Particularly, if standing plans are well
defined, subordinates know the broad guidelines within which they have to make decisions in
similar and repetitive situations.
They do not approach the superiors every time they face a similar problem-solving situation.
Superiors can, thus, manage a larger group of subordinates. However, if most of the decisions
are made by resorting to single use plans (programmes, budgets, projects etc.), managers have
to be frequently approached and the span can, thus, be narrow.
6. Organisational level:
The top executives look after important and specialised activities and, therefore, the span is
narrow at the top level but at lower levels the span can be wide, since supervisors are mainly
concerned with routine jobs. According to J.C. Worthy, a manager can supervise as many as
20 subordinates at the lower levels.
7. Authority-responsibility structure:
If authority-responsibility structure is well-defined and understood, superiors can supervise
larger number of subordinates. People work within the confines of their responsibility and take
directions from superiors only when required. Lack of clarity in authority-responsibility
structure will create confusion in the organisation. Jobs and who will perform which job, who
is accountable to whom will not be clear. In such a situation, managers cannot supervise a large
group of subordinates. The span of management will, thus, be narrow.
8. System of control:
Effective techniques of control can enable the manager to supervise larger number of
subordinates. Effective system of control promotes decentralisation. Superiors do not actively
involve in the decision-making processes as decisions are taken at the levels where they are
required. There is extensive delegation, clarity of jobs, authority-responsibility relationships
and freedom to take decisions. The span of control can, thus, be wide.
9. Financial factors:
Both narrow and wide structures have financial constraints. A narrow span requires more
managers and is, thus, a costly form of structure. Wide span, on the other hand, may result into
organisational inefficiencies. Proper balance has to be maintained between the costs and
benefits of the span that a manager can effectively supervise.
These factors are situational in nature and the span of management is also, thus, situational.
Sometimes it can be narrow and sometimes wide. For the same organisation, it can be different
for different functional areas and different levels. The span is usually narrow in the finance
department and wide in the marketing department for the same level. It may be different in
different organisations for the same functional areas and levels.

Delegation of authority.
A manager alone cannot perform all the tasks assigned to him. In order to meet the targets, the
manager should delegate authority. Delegation of Authority means division of authority and
powers downwards to the subordinate. Delegation is about entrusting someone else to do parts
of your job. Delegation of authority can be defined as subdivision and sub-allocation of powers
to the subordinates in order to achieve effective results.
Elements of Delegation
1. Authority - in context of a business organization, authority can be defined as the power
and right of a person to use and allocate the resources efficiently, to take decisions and
to give orders so as to achieve the organizational objectives. Authority must be well-
defined. All people who have the authority should know what is the scope of their
authority is and they shouldn’t mis utilize it. Authority is the right to give commands,
orders and get the things done. The top-level management has greatest authority.
Authority always flows from top to bottom. It explains how a superior gets work done from his
subordinate by clearly explaining what is expected of him and how he should go about it.
Authority should be accompanied with an equal amount of responsibility. Delegating the
authority to someone else doesn’t imply escaping from accountability. Accountability still rest
with the person having the utmost authority.
2. Responsibility - is the duty of the person to complete the task assigned to him. A person
who is given the responsibility should ensure that he accomplishes the tasks assigned
to him. If the tasks for which he was held responsible are not completed, then he should
not give explanations or excuses. Responsibility without adequate authority leads to
discontent and dissatisfaction among the person. Responsibility flows from bottom to
top. The middle level and lower-level management holds more responsibility. The
person held responsible for a job is answerable for it. If he performs the tasks assigned
as expected, he is bound for praises. While if he doesn’t accomplish tasks assigned as
expected, then also he is answerable for that.
3. Accountability - means giving explanations for any variance in the actual performance
from the expectations set. Accountability cannot be delegated. For example, if ’A’ is
given a task with sufficient authority, and ’A’ delegates this task to B and asks him to
ensure that task is done well, responsibility rest with ’B’, but accountability still rest
 with ’A’. The top-level management is most accountable. Being accountable means
being innovative as the person will think beyond his scope of job. Accountability, in
short, means being answerable for the end result. Accountability can’t be escaped. It
arises from responsibility.
For achieving delegation, a manager has to work in a system and has to perform following
steps : -
1. Assignment of tasks and duties
2. Granting of authority
3. Creating responsibility and accountability
Delegation of authority is the base of superior-subordinate relationship, it involves following
steps:-
1. Assignment of Duties - The delegator first tries to define the task and duties to the
subordinate. He also has to define the result expected from the subordinates. Clarity of
duty as well as result expected has to be the first step in delegation.
2. Granting of authority - Subdivision of authority takes place when a superior divides and
shares his authority with the subordinate. It is for this reason, every subordinate should
be given enough independence to carry the task given to him by his superiors. The
managers at all levels delegate authority and power which is attached to their job
positions. The subdivision of powers is very important to get effective results.
3. Creating Responsibility and Accountability - The delegation process does not end once
powers are granted to the subordinates. They at the same time have to be obligatory
towards the duties assigned to them. Responsibility is said to be the factor or obligation
of an individual to carry out his duties in best of his ability as per the directions of
superior. Responsibility is very important. Therefore, it is that which gives
effectiveness to authority. At the same time, responsibility is absolute and cannot be
shifted. Accountability, on the others hand, is the obligation of the individual to carry
out his duties as per the standards of performance. Therefore, it is said that authority is
delegated, responsibility is created and accountability is imposed. Accountability arises
out of responsibility and responsibility arises out of authority. Therefore, it becomes
important that with every authority position an equal and opposite responsibility should
be attached.
Therefore every manager,i.e.,the delegator has to follow a system to finish up the delegation
process. Equally important is the delegatee’s role which means his responsibility and
accountability is attached with the authority over to here.
Relationship between Authority and Responsibility
Authority is the legal right of person or superior to command his subordinates while
accountability is the obligation of individual to carry out his duties as per standards of
performance Authority flows from the superiors to subordinates,in which orders and
instructions are given to subordinates to complete the task. It is only through authority, a
manager exercises control. In a way through exercising the control the superior is demanding
accountability from subordinates. If the marketing manager directs the sales supervisor for 50
units of sale to be undertaken in a month. If the above standards are not accomplished, it is the
marketing manager who will be accountable to the chief executive officer. Therefore, we can
say that authority flows from top to bottom and responsibility flows from bottom to top.
Accountability is a result of responsibility and responsibility is result of authority. Therefore,
for every authority an equal accountability is attached.
Differences between Authority and Responsibility

Authority Responsibility

It is the legal right of a It is the obligation of subordinate to

person or a superior to perform the work assigned to him.
command his subordinates.

Authority is attached to the Responsibility arises out of superior-

position of a superior in subordinate relationship in which
concern. subordinate agrees to carry out duty
given to him.

Authority can be delegated Responsibility cannot be shifted and is

by a superior to a absolute
subordinate

It flows from top to bottom. It flows from bottom to top.