Business Planning | Meaning, Significance, Steps, Limitations, Effectiveness

Meaning of Business Planning

Business Planning

Business Planning – Meaning, Significance, Steps, Limitations, Effectiveness

Business planning is strategic planning because it is concerned mainly with the designing of business. Business planning has become a very important part of the top management function due to the influence of external environmental factors and systems approach to the business management.

Long range business planning is a systematic approach to decision-making about issues which are fundamental and of crucial importance to its continuing long term effectiveness. Long range strategy is designed to provide information about an organization’s vision, mission, purpose, direction and objectives.

Implementation planning, in contrast to business planning, explains the details of the policies and procedures, which are required to accomplish the strategies of the firm. These plans produce immediate and tangible results in relatively shorter period.

However, the business planning is concerned with:

  1. The direction in which the company should move.
  2. The implementation of the plan for the subsequent period and
  3. The alternatives which are to be sacrificed, if the plan is accepted and implemented.

Business planning involves more than one strategy. In other words, the strategies relating to different functional areas are involved in business planning. An activity rather than a form of organization, is at the core of business planning.

Business planning provides a means to deal explicitly and systematically with matters of fundamental importance.

Definition of Business Planing

Business planning is,

the process of selecting an organization’s goals, determining the policies and strategic programmes necessary to achieve specific objectives en-route to the goals and establishing the methods necessary to assure that the policies and strategic programmes are achieved.

Thus, business planning is derived from strategic planning and strategy.

According to Stoner, business planning is different from implementation planning. According to him, business planning,

is not only planning activity of an organization; however, it is one in which the top management’s role is most critical. Planning at lower levels is called operational planning. It focuses on present operations and its prime concern is efficiency rather than effectiveness. In the sense that strategic planning provides guidance and boundaries for operational management …… Effective management must have a strategy and must operate on the day-to-day level to achieve goals.

Significance or Role of business Planning

Business planning plays significant role in the corporate governance. The significant role played by the business planning can be attributed to the benefits which can be derived. The main reasons for the increasing importance of business planning, are:

1. The increasing rate of technological change

Technological changes witnessed significant growth particularly during the last quarter of the 1990s. The revolution in the information technology, Enterprise Resource planning, Business process re-engineering, e-commerce, paper less office, on-line marketing and the like, brought phenomenal developments in the operations of business. Globalization policies announced by various governments resulted in severe competition, which in turn led to heavy spending on R&D by the corporate giants.

This, in turn, brought strides in technology. Technology upgradation, in turn, accelerated the growth rate of business and economy.

2.Long term business plan

The long term business plan orientation from the corporate world’s angle is clearly evident through the changed view of the business firms. Business firms were concentrating on the short-run profits in the past. But, they are busily engaged in building relationship business which can produce long-run results.

3. Increasing Complexity of External Environment

External environment is becoming increasingly complex. Governments are tending towards capitalist economies from communistic or socialistic economic systems. Added to this, the economy is liberalized and globalized. Thus there is significant change in the economic environmental factors.

Further, the technological factors have become complex due to the sudden shift in the technology from the traditional, to high-tech. Added to this, the revolution in the information technology has complicated the environment for the business.

The shifts in the economic, political and technological factors brought remarkable changes in the way of life and other social factors. Customer/consumer behavior changed predominantly.

Other significant changes include increasing awareness and concern towards the nature and ecology, decreasing government interference in the business, increasing concern of the workers towards quality of life at work place, challenging work, and changed management. The shift from rule-bound industrial relations to human relations, is another area which complicates the business environment.

The more complex the business environment is, the more significant is the business planning.

4. To meet challenges and commitment

There has been a significant shift in human resource. Employees of the new millennium concentrate on productivity, management challenges, quality, service and the like. Business plan foresees the management challenges, plans for and formulates the strategies and tactics to meet the challenges with the commitment of the employees.

5. Short-term Plan

Short term plans and operational plans are based on the long term and business plans. The company should formulate long range and business plans in order to achieve short range and operational objectives/goals.

6. To make judgements

Business plan provides the top management with a better basis for making judgements about the overall balance among the different parts of the company. Business plans provide a starting point in the analysis of the proposed programme.

7. Broader aspects

Business planning is a continuous process. This process is aided by modern sophisticated computers. The following image presents the broader aspects of business planning.

Broader aspects of business planning

Broader aspects of business planning

8. Change in Environmental factors

As mentioned earlier, the change in environmental factors particularly social and political increase the significance of business planning. The following image presents the changes in social and political factors and their influence on the significance of the business.

Changes in Social and Political factors

Changes in Social and Political factors

9. The model of business planning does not signify one-time-dimension but many dimensions.

Steps in Business Planning

The steps Involved in business planning include.

1. Establishing verifiable goals or set of goals to be achieved

The business plan is based on the enterprise objectives. These objectives are mostly formulated by the top management, The values and beliefs held by the top management are reflected in these goals.

2. Establishing planning premises

Planning premises include certain assumptions about the future on the basis of which the plan will be ultimately formulated. Planning premises include:

  1. Internal and external premises
  2. Tangible and intangible premises
  3. Controllable and non controllable premises.

1. Internal premises

Internal premises include sales forecasts, policies and programmes of the organization, capital investment, managerial competency, human resource skills, other organizational resources.

2. External Premises

External premises include general business and economic environment, technological
changes, Government policies and regulations, population growth, political stability, and social factors.

Management would identify the objectives/goals to be achieved or ‘where should we go?’, ‘where are we?’ – The gap between these two is termed as ‘gap analysis‘.

Many companies have used gap analysis by setting the objectives and identifying the gap between them and the prospective growth of the present. The firms should achieve high performance in order to fill the gap.

3. Tangible Premises

The premises which can be quantifiable are called tangible premises. The tangible premises include population growth, product demand, past sales, capital invested and the like.

4. Intangible Premises

The intangible premises are those which cannot be measured quantitatively. These premises include political factors, social factors, technological factors, natural factors etc.

5.Uncontrollable Premises

Some factors are controllable and some are uncontrollable. Uncontrollable premises include strikes, lockouts, wars natural calamities, emergency situations etc.

6. Controllable Premises

Controllable premises include company’s labour policy, investment policy, advertising policy, level of technology competency of managerial personnel, quality of human resources, availability of financial resources etc.,

3. Deciding the planning period

After formulating planning premises and long-term goals, the manager have to decide the length of business plan period. The plan of the period should be based on the nature of the business, the vision and mission of the company.

Other factors which influence the planning period are: lead time in the development of a new idea business / product, time required to get back the original investment and length of commitments already made.

4. Finding Alternative Courses of Action

After formulating the business plans, the top-level management should find out the alternative courses of actions available in order to accomplish the company’s mission. For example, availability of alternative technologies, alternative sources of capital, highly skilled employees abroad etc.

5. Evaluating the alternative plans and selecting a course of action

The management has to evaluate the available courses of action through SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) and rank the alternatives. After ranking the alternatives, the management has to select the best business plan.

6. Developing Derivative plans

The management after selecting the best business plan, it should formulate the other policies and plans which are the sub plans to the main plan. Management should involve and consult the lower level managers while formulating the derivative plans.

7. Implementation of the Business Plans

After the development and selection of the plans and derivative plans, management has to take initiative to implement the business plan. The following presents the implementation of business plan.

Implementation of Business Plan

Implementation of Business Plan

8. Measuring and controlling

After the business plan is put into action, the management has to measure the progress of the plan and compare it with the standards, observe the deviations, if any and correct the deviations. The following images presents the process of business planning.

Process of Business Planning

Process of Business Planning

Business Planning Process

Process of Business Planning

Limitations of Business Planning

Though the top management formulates the business plans, sometimes they fail in producing results due to the uncertainties in the implementation stage. The limitations of the business planning include:

1. Implementation of the strategic plan should be pre-planned and based on detailed action. Many times managements fail to monitor the implementation process.

2. Some managers are reluctant to formulate objectives for their departments or jobs.

3. Managers are sometimes afraid of failure, to achieve business plans.

4. Managers fail to integrate the plans of their departments or jobs with the organizational/company plans.

5. Some managers do not have required skills to understand and analyze the external
environment.

6. Forecasting often becomes misleading due to wrong premises.

7. Managers due to their deficient and inherent nature, fail to plan efficiently.

8. The uncertainties in the environment, makes the business plan inefficient.

9. Inter-group conflicts: Inter group conflicts and inter-departmental conflicts are the other important limitations of business plan. These limitations are also due to

  • Lack of understanding about the objectives of the firm.
  • Lack of a constructive approach to objectives
  • Different values and personalities of individual managers.
  • Competition for scarce resources.
  • Built-in conflict between a young manager and an experienced Manager.

Methods of making Business Planning effective

The Management at different levels should take measures to make the business plan effective due to the possibility of limitations. These measures include:

1. Establishment of co-ordination between long-term plans and short-term plans.

2. Bringing co-ordination among all the departments in the organization in formulating and implementing plans.

3. Formulating a comprehensive plan linking all the departmental plans with the corporate level plans.

4. Giving proper attention to the departmental level plans.

5. Ensuring the commitment and involvement of all managers at all levels in the organization.

6. Ensuring the free-flow of communication particularly the bottom up communication.

7. Train and develop the managers in analyzing and understanding external environment, formulate the plans effectively.

8. Foresee the environmental changes, feed the information forward to all the levels in the organization.

9. Ensuring effective team work and empower the managers to formulate effective plans.

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