After reading this article you will learn about:- 1. Meaning of Planning Premises 2. Process of Planning Premises 3. Types.
Meaning of Planning Premises:
The process of planning is based upon estimates of future. Though past guides the plans in present, plans are made to achieve the goals in future. Therefore, forecast of future events leads to efficient plans. Since future events are not known accurately, assumption is made about these events. These events may be known conditions (changes in the tax laws as announced in the budget) or anticipated events which may or may not happen (entry of competitor in the same market with the same product).
Though these assumptions are primarily based on scientific analysis and models, managers also use their intuition and judgement to make assumptions about future events. Identifying the factors (assumptions) that affect plans is called premising and the methods used for making premises are called forecasting.
The forecast or the assumptions about future which provide a base for planning in present are known as planning premises. They are “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.
The estimates about future markets, consumer preferences, political and economic environment are the planning premises on which business plans are developed but if plans are made and their efficiency is judged in terms of future market demands, revenues and costs, they are mere expectations of plans. Such plans provide planning premise for other plans.
Process of Planning Premises:
Wrong premises can lead to failure of plans.
Since environmental factors affect business plans (also non-business plans) to a great extent, premises must be developed rationally and scientifically through the following process:
1. Selection of the premises:
Though there are innumerable factors in the environment, all of them do not affect operations of the business enterprise. Top managers should select the premises which have direct impact on developing organisational plans. There are many factors that affect business decisions, some of which are general in nature while others are selective.
The general factors affect all the firms alike but specific factors affect different firms differently. While developing premises, organisations should focus more on specific factors (or its micro environment) as they have immediate impact on making the plans.
In order to analyse the factors that affect developing the premises, two factors have to be taken into account:
I. The probability of impact of factors:
If represents whether the factors under study affect or do not affect the planning premises. This probability can be high, medium or low.
II. The degree of impact of factors:
Given the factors which have the probability of developing planning premises, it represents the degree to which these factors affect the planning premises. This can also be high, medium or low.
Based on these two broad factors, nine different combinations can be formed which broadly result into four categories:
1. Critical factors
2. High priority factors
3. Factors to be watched
4. Low priority factors
1. Critical factors:
These are the factors with:
(i) High probability of impact, and
(ii) High degree of impact.
These factors must be thoroughly analysed as they significantly affect making of the planning premises.
2. High priority factors:
Though these factors are not as important as critical factors, they rank high in priority in developing the planning premises.
These are the factors with:
(i) Medium probability of impact, and
High degree of impact
(ii) High/Medium probability of impact, and
Medium degree of impact
These factors also must be thoroughly analysed by managers as they significantly affect the making of planning premises.
3. Factors to be watched:
These are the factors with:
(i) Low probability of impact, and
(ii) High degree of impact.
Thus, while these factors may not affect the planning premises, but if they affect, their degree of impact is high. A close watch must be kept on these factors so that their impact may not be ignored.
4. Low priority factors:
These factors rank low in priority in affecting the planning premises as either their probability of impact is low or the degree of impact is low.
These are the factors with:
(i) Low probability of impact, and
Medium degree of impact
(ii) High/Medium/Low probability of impact, and
Low degree of impact.
These factors do not significantly affect making of the planning premises and, therefore, do not require extensive scanning by managers.
The factors covered under various categories are not generic and determination of these factors depends upon the judgement of managers, nature and size of the organisation and nature of environment in which the organisations are operating.
2. Development of alternative premises:
Since factors affecting organisational plans cannot be perfectly predicted, managers should develop alternative premises i.e., plans under different sets of assumptions about the future events. This helps in developing contingent plans. Contingent plans are the alternative plans for alternative premises. Since the premises keep changing, some slowly and some fast, to keep pace with such changes, alternative plans must be developed.
As developing too many plans is costly in terms of time and money, the following factors should be considered in developing contingent plans:
(a) They should be made for those factors which are important for corporate decisions like economic factors, competitors’ policies, consumers’ tastes etc.
They should be made in the order of priority of factors like:
(i) Critical factors,
(ii) High priority factors,
(iii) To be watched factors,
(iv) Low priority factors, and
(b) They should be made on the basis of cost-benefit analysis, that is, the alternative whose cost seems to be more than its benefits should be dropped out.
(c) Though maximum details should be covered in each contingency plan, all the plans cannot cover extensive information. Contents or details should depend on the order of priority of plans. Important plans made for critical factors should cover maximum information while plans for low priority factors should not contain extensive details as the degree of their impact on organisational plans is low.
Collecting details or information about the factors that affect the premises is based on forecasting techniques. The choice of technique (simple or complex) depends upon the need of the organisation, resources, the period in which information is collected, the sample size, to what degree is the sample representative of the general population etc.
Every technique has costs and benefits and a thorough cost-benefit analysis should be undertaken before adopting a specific technique of forecasting. In some cases, this information is available through secondary sources like published journals, magazines and information agencies. The relevance of such information should be considered before using it for development of premises.
3. Verification of premises:
Planning staff at different levels of different departments makes plans according to their judgement. These premises are then sent to top executives for their approval. The premises which involve both staff and line managers are more consistent than those that are developed by executives alone.
4. Communication of premises:
After the premises are developed, they are supported by budgets and programmes and communicated to all those concerned with development of plans at different levels in different departments. Planning premises are contained in documents like environmental threat and opportunity profile (ETOP) and communicated to managers concerned. The premises, thus, help to develop sound plans followed by strategies, policies, procedures etc. which further help in effective implementation of plans.
Types of Planning Premises:
Different types of planning premises are:
1. Internal and External premises,
2. Controllable, Semi-controllable and Non-controllable premises, and
3. Tangible and Intangible premises.
1. Internal and external Premises:
Internal premises originate from factors within the enterprise. They relate to premises about the company’s internal policies and programmes, capital budgeting proposals, sales forecasts, personnel forecasts (skills and abilities of personnel) etc. These premises may be strengths or weaknesses of the organisation.
Strength represents a positive attitude which provides strategic advantage to the company over competitors and weakness is a limitation or constraint that provides strategic disadvantage. Managers analyse their strengths and weaknesses through corporate analysis and when corporate analysis (internal) is combined with environmental analysis (external), it is called SWOT analysis (Strength, Weaknesses, Opportunities, Strengths).
External premises originate from factors outside the organisation. These are the indirect- action environmental factors (social, political, technological etc.) which affect the organisation. They are also non-controllable premises beyond the control of the organisation. The external environmental factors represent opportunity or threat to the organisation.
Opportunity is a favourable environmental condition which helps the organisation to improve its operational efficiency and threat creates risk for the company. It is the environmental challenge that weakens the organisation’s competitive strength. This is done through SWOT analysis. It identifies environmental variables which help to formulate plans and policies.
2. Controllable, semi-controllable and non-controllable premises:
Controllable premises are within the control of a business enterprise, such as, men, money, materials, policies, procedures, programmes etc. They can be controlled by a business enterprise to ensure better sales of products. Such premises are usually internal to the business.
Semi-controllable premises are those which can be partially controlled by a business enterprise like, labour position in the market, prices of the product, market share of the company etc. For instance, increase or decrease in the price of the product is neither totally controllable nor non-controllable by the managers.
The extent to which prices can be increased or decreased depends upon market sentiments, prices charged by competitors, cost structure of the company etc. Thus, change in prices can be controlled but subject to constraints of the variables that affect the price of the product. Similar is the case with change in wages paid to the labour or labour turnover (labour turnover is greatly affected by the wages offered by other companies.
Non-controllable premises lie beyond the control of the business enterprise. Wars, natural calamities and external environmental factors (economic policies, taxations laws, political climate etc.) are the non-controllable premises. These premises are usually external to the business.
3. Tangible and intangible premises:
Tangible premises can be estimated in quantitative terms like, production units, cost per unit etc. For example, production forecast and sales forecast can be expressed in monetary terms. How many units of product A can be sold in a year and, therefore, produced, how much raw material is needed for production can be estimated in units and monetary terms.
Intangible premises cannot be quantified, for example, goodwill of the firm, employer-employee relationships, leadership qualities of the managers, motivational factors that affect employees’ performance etc. Though the planning premises have been classified as above, this classification is not mutually exclusive.
Different types of premises tend to overlap each other. For instance, internal premises may also be controllable (organisational policies) and tangible premises (cost of product), external premises can also be non-controllable premises (economic policies).
External premises can also be tangible (rate of inflation) or intangible (value system of the society). Therefore, various types of planning premises have to be viewed in the context in which they need to be used in making the plans.