1

Planning and Forecasting

Importance of planning

Planning has primacy over the other functions of management

since the other functions have little meaning unless they are
focused on achieving desired objectives.

Hsun Tzu in the Art of War said:

"The general who wins a battle makes many calculations
before hand"
"It is by attention to this point I can see who is likely to win
or lose"

Definition of planning

Deciding in advance what to do, how to do it, and who is to do

it.

From this definition we can say that planning provides a

method of identifying and designing a sequence of programs
and activities to achieve these objects.

The planning/Decision-Making Process

In solving any problem, there is a logical method which

depends on
- Planning process
- The decision-making process (the scientific method)

The Logical Method:

1- Recognize the problem or opportunity
2- Define the problem, specify premises, and constrains
- Desired solution doesn't contradict with the overall objectives
and strategy.
3- Gather information
4- Develop or formulate alternatives

Define a decision (value) model or measure of merit,

quantitative
5- Evaluate alternatives
6- Implement the best alternative
7- Follow up and review effectiveness

Objectives
Objectives are the foundation for planning

Vision, Purpose, Mission

A Proverb: "Where there is no vision, the people perish".

A clear vision of the basic purpose or mission for which it

exists is essential to the long-term success of any enterprise.

The basic mission of the organization must be communicated

clearly and repeatedly to the many managers and
professionals whose action determines whether these
purposes are indeed achieved.

The three components of a good "Vision

Framework"
1- Core values and beliefs:
- A system of guiding principles and tents
- A philosophy of business and life
2- Purpose:
-

The fundamental reason for the organization's existence

3- Mission:
-

Compelling, audacious goals with a clear finish line and

specific time frame.

Strategies
-

Are grand plans to attain longer range objectives supported

by tactics

Strategic planning
-

Is the process of establishing corporate and objectives

along with the plans to accomplish them.

This process usually includes responses to such questions

as:
a- What is the organization's business?
b- What should it be?
c- What is the present position of the firm?
d- What is the company's desired position at some future
point in time?

Means to identify the business they are in (present) and

what they want to be (future)

Business Portfolio Matrix

-

Developed by the Boston Consulting Group

Market
Share

Market
Small

Large
Fast Growth
Stars
Slow Growth
Cash Cows

(Question Mark) ?
Dogs

Strategic Management

The pioneers of strategic management are Schendel and

Hofer (1979)

Definitions:
-

Strategic management is concerned with those issues

faced by managers who run entire organizations, or their
multifunctional units.

Strategic management can be defined as the formulation,

implementation, and evaluation of managerial actions that
enhance the value of a business enterprise.

Strategic management is about the direction of

organizations, most often, business firms. It includes those
subjects of primary concern to senior management, or to
anyone seeking reasons for success and failure among
organizations.

Strategic management entails the analysis of internal and

external environments of firms to maximize the utilization
of resources in relation to objectives.

Management of technology (as part of strategic

planning)

For any enterprise that requires staying current with

technology to assure future profitability.

They must consider making the strategic planning for

management of technology as an integral part of their
business.

Management of technology includes: management of:

- Research Development
- Product Development
- Process Development

Classes of technology

Base Technology:
- Any firm must master this technology to stay in business.
- Any firm must be an effective competitor in the chosen
product-market mix.

Key Technology:
- This technology provides competitive advantage.
- Preferred than the previous
- The firm may attain greater efficiencies in the production
-

process.
Give it the highest priority.

Pacing Technology:
- This technology could become tomorrow's key technology.
- The critical issue is to be in a competitive position and to
create future vitality)

Goals and Objectives:

The basic vision, purpose or mission must be interpreted in

terms of goals (objectives).

Objectives should be established before further planning.

Types of Objectives
-

Objectives are of two types:

1- Official: Management is pursuing in its public
statements.
2- Operative: Are the goals which the management is
actually pursuing.

Areas that Need Objectives:

Peter Drucker believes that objectives need to be established

in all areas on which the organization's survival depends:

1- Market share:
It is the ratio of $ sales of an enterprise in a particular market
to the total sales of all competitive products and services in
that market.
2- Innovation:
Most successful companies, especially in the areas of
technology where most engineers will work, are continually
searching for new products and services.

Other successful companies deliberately choose to be

followers and to provide low-cost, high-volume products
without high expense of being first.

3- Productivity (and Quality):

It measures an organization's ability to produce more goods
and services per unit of input.
4- Physical and financial resources:
An enterprise needs to establish goals for the resources (plant,
equipment, inventory, and capital) in order to perform
effectively.
5- Manager performance and development:

Good management is the key to enterprise success.

Effective firms plan carefully to assure the availability of good

managers in the years ahead for the organization to prosper.

Supporting goals are then developed in areas of concern, such
as recruitment, training, and evaluation.

6- Worker performance and development:

Nowadays, there are more educated workers which have

much to offer.
They need the company that knows how to motivate and
challenge them effectively.

7- Profitability:
The profitability is an essential for the continuation of any

enterprise.
The desired level of profit (must be set as objective) should be
set clear in order to measure the success of the firm in
accomplishing this objective.

8- Social responsibility:
Includes responsibility to customers, employees, suppliers,
and society as whole.

Management by Objectives
This management technique has been
developed by Drucker in 1954.
This technique can be and should be employed
between subordinate at every level.
Steps of this MBO:
- Both the manager and subordinate should have
complete understanding of the goals and
objectives of the organization as a whole.
- Establishing the objectives of the subordinate
based on the overall objectives of the
organization.
Advantages of MBO:
- Greater commitment and satisfaction on the
part of the subordinate.
- Enforced planning and prioritizing of future
activities on the part of both.
- More rational method of performance evolution
based on
- contribution to organization objectives.
Disadvantages:
- Time and paper.
- Misuse when superior assign (rather than
negotiate) objectives.
- Gamesmanship of subordinates who try to
negotiate easy goals.
- There is a tendency for the subordinates to
focus and concentrate on the relatively few
MBO.

Some Planning Concepts

Responsibilities of Planning
- It is a continuing responsibility of every manager.

The higher the managers rise, the more time they

must spend in planning and the further into the future
they must try to foresee.

Planning Premises (Assumptions)

- An essential for effective planning is establishment of
assumptions, on which planning is to be based.
- It was defined by Weihrich and Koontz as the
anticipated environment in which plans are expected
to operate. They include assumptions or forecasts of
the future and known conditions that will affect the
operation of plans.
Planning Horizon
- It asks how far into the future one should plan. This
varies greatly, depending on the nature of the
business and the plan.
System of Plans
- Usually not just one plan is involved, but a system of
them, especially complex programs.
Policies and Procedures
- Policies are guides for decision making that permit
implementation and discretion by subordinates.
- Rules do not permit discretion.
- Policies have a hierarchy of levels, just as plans do.
- A procedure is a prescribed sequence of activities to
accomplish a desired purpose.
- Procedure tells you if you want to do this, do it this
way.
- Standard operating procedures are examples of
procedures used at the operating (working) level.

Forecasting
The engineer manager must give attention to
1 Future market sales.
2 Future technology.

1 The most important assumption in planning and

decision making is the level of future sales.
Production level determine, how many people to hire
and train or layoff.
New facilities and equipment.
Size of the sales force.
Advertising budget and others

Ways to accomplish this

a) Qualitative:
1) Jury of executive opinion
- Estimates by top executive on future values.
- Inexpensive, quick, and simple
2 Sales force composite
-

Members of the sales force estimate sales in their

own territory.
The field of sales force is the closest to customers.
3 Users expectation

If most of the product was a few customers, then ask

these customers to project their needs for the future
period.

b) Quantitative
Using mathematics and statistics
4 Choice of method
-

Successful companies will combine different methods,

quantitative and qualitative to establish future sales
forecast.

Quantitative Methods

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1- Moving Average Forecasts

(i) Simple Moving Average:
- It is usually used when sales do not follow
certain trend. Take the simple average of the
last four or so of the recent sales.
- Since the early year is weighted as heavily as
the most recent years, this is considered a
disadvantage.
1

Fn+1 n A

(ii) Weighted Moving Average

- It is better than the previous, since the recent
years weighted heavily than early years.
Fn+1 W A
Where= W =1.0

2- Exponential Smoothing:
- To start the forecast sequence, set the first
forecast equal to the actual value of the
preceding year.

n+1

= A + (1 - ) Fn

3- Simple Regression:
- It assume that the independent variable I
depends on a single dependent variable D:
D = a + bI
Constants:
n ( ID )(I D)

n ( I 2 )

b=

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a= (

( D)
)
(n)

(I)

b (n)

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Example:
If sales for years 1994, 1993, 1992, and 1991 were 1600 units,
1200 units, 1300 units, and 1100 units respectively. What
would be the sales for 1995 using all forecast methods.

1) Simple moving average

F1995 = 1300 units

2) Weighted moving average

If the weights of the four values are (0.4, 0.3, 0.2, 0.1)
F1995 = 1370 units

3) Exponential smoothing

Fn+1 = An + (1 - )Fn

4- Simple Regression Model

This model assumes that the independent variable
I depends on a single dependent variable D:

D = a + bI

Constants:
b = ( n (Ii Di) ( Ii Di ) ) / ( (n
2
i

2
i

(I ) ) - I )
a = Di/n b Ii/n = b

Where and are the mean values of D and I, and

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indicates a summation from ( i = 1 to n ).

Example:
Use the same example as in simple moving
average:
yea
rs
199
1
199
2

199
Mea
3
n
199
4

0
1
2
3
6
1.
5

110
0
130
0
120
0
160
0
520
0
130
0

I*
D
0
130
0
240
0
480
0
850
0

I2
0
1
4
9
14

b = ( n (Ii Di) ( Ii Di ) ) / ( (n
2
i

2
i

(I ) ) - I )
b = ( 4(8500) 6( 5200) ) / ( 4(14)
(6)2 ) = 140

a = Di/n b Ii/n = b
a = ( 5200/4 ) - ( 140 (6/4) = 1090

0r

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a = 1300 (140)1.5 = 1090

Then the forecast for 1995:

D = a + bI

D = 1090 + (1995 -1991)140 = 1650