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Planning Tools and Techniques

Techniques for assessing the environment Environmental scanning,

Forecasting, and

Benchmarking

Techniques for allocating resources

Budgeting,

Scheduling,

Breakeven analysis, and

Linear programming

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Techniques for assessing the environment

Environmental scanningScreening of large amounts of information to anticipate andinterpret changes in the environment

Organizations that don’t keep on top of environmentalchanges are likely to experience the opposite! Example isTupperware!

One of the fastest-growing areas of environmental scanning iscompetitor intelligence. It’s a process by whichorganizations gather information about their competitors andget answers to questions such as: Who are they? What arethey doing? How will what they’re doing affect us?

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Competitors intelligence – Information sources

No spying.

Advertisements, promotional materials, press releases,reports filed with government agencies, annual reports, wantads, newspaper reports, and industry studies.

Attending trade shows and debriefing the salesforce

Buy competitors’ products and have own engineers study

them (through a process called reverse engineering) to learnabout new technical innovations.

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Techniques for assessing the environment (contd.)

Forecasting• Quantitative forecasting

• Qualitative forecasting

Environmental scanning establishes the basis forforecasts, which are predictions of outcomes.

Today, many organizations collaborate onforecasts by using Internet-based software knownas CPFR, which stands for collaborative planning,forecasting, and replenishment. CPFR offers astandardized way for retailers and manufacturersto use the Internet to exchange data.

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• The goal of forecasting is to provide managers withinformation that will facilitate decision making.

• Forecasting techniques are most accurate whenthe environment is not rapidly changing.

• The more dynamic the environment, the more likelymanagers are to forecast ineffectively.

• Forecasting is relatively ineffective in predictingnonseasonal events such as recessions, unusualoccurrences, discontinued operations, and theactions or reactions of competitors.

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Forecasting

Ways to improve its effectiveness.First, use simple forecasting methods. They tend todo as well as, and often better than, complexmethods that may mistakenly confuse random data

for meaningful information.

Second, compare every forecast with “no change.” Ano-change forecast is accurate approximately half

the time.

Third, don’t rely on a single forecasting method.Make forecasts with several models and averagethem, especially when making long-range forecasts.

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Fourth, don’t assume that you can accurately identifyturning points in a trend. What is typically perceivedas a significant turning point often turns out to besimply a random event.

Fifth, shorten the length of forecasts to improve theiraccuracy because accuracy decreases as the periodyou’re trying to predict increases.

Sixth, remember that forecasting is a managerialskill and as such can be practiced and improved.

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Technique Description Application

Quantitative Forecasting

Time series

analysis Fits a trend line to a mathematical

equation and projects into the

future by means of this equation

Predicting next quarter’s sales on

the basis of four years of previous

sales data

Regression

models Predicts one variable on the basis

of known or assumed other

variables

Seeking factors that will predict a

certain level of sales (for example,

price, advertising expenditures)

Econometricmodels

Uses a set of regression equationsto simulate segments of the

economy

Predicting change in car sales as aresult of changes in tax laws

Economic

indicators Uses one or more economic

indicators to predict a future state

of the economy

Using change in GNP to predict

discretionary income

Substitution

effect Uses a mathematical formula to

predict how, when, and under what

circumstances a new product or

technology will replace an existing

one

Predicting the effect of DVD

players on the sale of VHS

players

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Technique Description Application

Qualitative Forecasting

Jury of opinion Combines and averages the

opinions of experts Polling the company’s human

resource managers to predict

next year’s college recruitment

needs

Salesforce

composition Combines estimates from

field sales personnel of

customers’ expected

purchases

Predicting next year’s sales of

industrial lasers

Customer

evaluation Combines estimates from

established customers’

purchases

Surveying major care dealers by

a care manufacturer to

determine types and quantities

of products desired

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Benchmarking

Benchmarking is the search for the best practicesamong competitors or non-competitors that lead to

their superior performance.

The basic idea behind benchmarking is that

managers can improve performance by analyzingand then copying the methods of the leaders invarious fields.

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Techniques for assessing the environment (contd.)

Benchmarking

Prepare andimplement action

plan

Form abenchmarking

planning team

Gather internal and

external data

Analyze data toidentify

performance gaps

BESTPRACTICES

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Benchmarking

A typical benchmarking follows four steps:

1. A benchmarking planning team is formed. The team’s initialtask is to:

•identify what is to be benchmarked•identify comparative organizations, and

•determine data collection methods.

2. The team collects internal data on its own work methodsand external data from other organizations.

3. The data are analyzed to identify performance gaps and thecause of difference.

4. An action plan that will result in meeting or exceeding thestandards of others is prepared and implemented.

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Benchmarking

How does a benchmarking team get data on other organizations?

You need to decide against whom you’re going to benchmark.

Use your network of contacts among customers, suppliers, and

employees for organizations they think are best at the process you’retrying to improve.

Watch for organizations that may have won local, regional, or nationalawards as potential benchmarking partners.

Use Internet. Competitors’ Web sites can be rich sources of information.

Do not overlook the possibility of developing partnerships with otherorganizations, even competitors, to share benchmarking data. Obviously,this will work only if you have something that others want.

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Resources are the assets of the organization and include

the following factors:

financial (debt, equity, retained earnings, and other financial holdings);

physical (equipment, buildings, raw materials, or other tangible assets);

human (experiences, skills, knowledge, and competencies of people);

intangible (brand names, patents, reputation, trademarks, copyrights,registered designs, and databases); and

structural/cultural (history, culture, work systems, workingrelationships, level of trust, policies, and structure)

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How are these resources allocated effectively

and efficiently so that organizational goals are

met?

Four techniques are used for this purpose:

budgeting

scheduling

breakeven analysis

linear programming

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Budgeting - A budget is a numerical plan for allocatingresources to specific activities.

How can the budgeting process be improved. Some suggestions forimproving budgeting:

Be flexible.

Goals should drive budgets – budgets should notdetermine goals.

Coordinate budgeting throughout the organization.

Use budgeting/planning software when appropriate.

Remember that budgets are tools. Remember that profits result from smart management,

not because you budgeted for them.

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Variable Budget Fixed BudgetTakes into account Assumes fixedthe costs that vary OR level of sales orwith volume production

Revenue BudgetProjects future scales

Cash BudgetForecasts cash on

hand and how muchwill be needed

Expense BudgetLists primary activitiesand allocatesdollar/rupeeamount to each

Profit BudgetCombines revenueand expense budgetsof various units todetermine each unit’s

profit contribution


Budgeting – Types of Budget

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Scheduling - It is a process of allocating resourcesby detailing what activities have to be done, the orderin which they are to be completed, who is to do each,and when they are to be completed.

Managers schedule.

Some of the useful scheduling devices are Gantt charts

Load charts

PERT network analysis.

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Gantt Charts –

The Gantt chart was developed during the early1900s by Henry Gantt, and associate of thescientific management expert Frederick Taylor.

It’s essentially a bar graph with time on the

horizontal axis and the activities to be scheduled onthe vertical axis.

The bars show output, both planned and actual,over a period of time.

The Gantt chart visually shows when tasks aresupposed to be done and compares that with theactual progress on each.

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Load Charts –

A load chart is a modified Gantt chart.

Instead of listing activities on the vertical axis,

load charts list either entire departments orspecific resources.

This arrangement allows managers to plan

and control capacity utilization. Load charts schedule capacity by work areas.

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Program Evaluation and Review Technique (PERT) -

Planning a large project such as departmentalreorganization requires coordinating hundreds and

even thousands of activities, some of which must bedone simultaneously and some of which can’t begin

until preceding activities have been completed.

How can managers schedule such a complex project?

The Program Evaluation and Review Technique

(PERT) is highly appropriate for such projects.

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A PERT network is a flowchart diagram that depicts the

sequence of activities needed to complete a project and thetime or costs associated with each activity.

With a PERT network, a manager must think through whathas to be done, determine which events depend on oneanother, and identify potential trouble spots.

PERT also makes it easy to compare the effects alternativeactions might have on scheduling costs.

PERT allows managers to monitor a project’s progress,identify possible bottlenecks, and shift resources asnecessary to keep the project on schedule.

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To understand how to construct a PERT network, you need to

know four terms.

Events are end points that represent the completion of majoractivities.

Activities represent the time or resources required to progressfrom one event to another.

Slack time is the amount of time an individual activity can bedelayed without delaying the whole project.

The critical path is the longest or most time-consumingsequence of events and activities in a PERT network. Anydelay in completing events on this path would delaycompletion of the entire project.

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Breakeven analysis - A technique for identifying the

point at which total revenue is just sufficient to covertotal costs.

It points out the relationship between revenues, costs,

and profits.

To compare breakeven point (BE), a manager needsto know the unit price of the product being sold (P),the variable cost per unit (VC), and total fixed costs(TFC). An organization breaks even when its totalrevenue is just enough to equal its total costs.

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Total cost has two parts:

Fixed costs are expenses that do not changeregardless of volume. Examples – insurance

premiums, rent, and property taxes.

Variable costs change in proportion to output

and include raw materials, labor costs, andenergy costs.

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Breakeven point can be computed graphically or by using the following

formula:

Total Fixed Cost

Breakeven Point =

Unit Price – Variable Cost per unit

As a planning tool, breakeven analysis could help set

sales goal, how much volume has to increase to break

even if operating at a loss.

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Linear Programming - A mathematical technique that solvesresource allocation problems.

It can’t be applied to all resource allocation problems because

it requires:

that there be limited resources,

that the goal be outcome optimization, that there be alternative ways of combining resources to

produce a number of output mixes, and

that there be a linear relationship between variables ( a

change in one variable must be accompanied by an exactlyproportional change in the other).

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What kinds of problems can be solved with linear programming?

Some applications include

selecting transportation routes that minimizeshipping costs,

allocating a limited advertising budget among

various product brands,

making the optimal assignment of people amongprojects.

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