CHAPTER 7
Basic Elements of Planning and Decision Making
Part III of this book is entitled PLANNING AND DECISION MAKING. Its fundamental purpose is to
discuss the first basic management function—planning and decision making.
Part III has four chapters. Chapter 7 introduces the basic elements of planning and decision making.
Chapter 8 focuses on strategy and strategic planning. Chapter 9 addresses the management of decision
making. Entrepreneurship is the focus of Chapter 10.
Teaching Tip: Some instructors prefer to cover the material in Chapter 10 separately at the end of the
course. If you prefer this method, the chapter is written so that it can be covered “out of sequence.”
CHAPTER SUMMARY
Chapter 7 is the first of four devoted to planning and decision making. Its purpose, therefore, is to
LEARNING OBJECTIVES
After covering this chapter, students should be able to:
1. Summarize the function of decision making and the planning process.
2. Discuss the purpose of organizational goals, identify different kinds of goals, discuss who sets goals,
and describe how to manage multiple goals.
American International Group (AIG) benefitted financially by acting as the insurer for insurance
companies. In effect, it mitigated the risks for insurance companies by taking on those risks itself. When
the bottom fell out of the housing market in 2007, AIG lost billions of dollars and showed how risks its
strategy was.
LECTURE OUTLINE
I. DECISION MAKING AND THE PLANNING PROCESS
Chapter 7: Basic Elements of Planning and Decision Making
Teaching Tip: Stress for students that the planning process portrayed in Figure 7.1 reflects an orderly
and logical sequence of steps. In reality, of course, the actual planning process used in any given
situation will likely reflect some variation in this process.
Decision making drives planning. Decisions underlie the establishment of organizational goals, for
Cross-Reference: Note for students that we are simply introducing decision making here. It is covered
much more thoroughly in Chapter 9.
II. ORGANIZATIONAL GOALS
A. Purposes of Goals
Goals help to achieve four purposes.
1. Goals provide guidance and a unified direction for people in the organization.
B. Kinds of Goals
1. There are four basic levels of goals.
An organization’s mission is a statement of its fundamental, unique purpose that sets it
apart from other firms of the same type. The mission also identifies the scope of the
business’s operations in product and market terms.
C. Responsibilities for Setting Goals
All managers should be involved, but each manager generally is responsible for setting goals
that correspond to his or her level in the organization.
Teaching Tip: Figure 7.2 illustrates the kinds of organizational goals that might be set for a regional
fast-food restaurant chain.
Chapter 7: Basic Elements of Planning and Decision Making
Group Exercise: After discussing the material in the section titled “Kinds of Goals”, have students
D. Managing Multiple Goals
Goals set by different areas or at different levels may conflict. Optimizing involves balancing
and reconciling possible conflicts between goals.
Discussion Starter: Ask students to identify situations in which they have had to optimize multiple
III. ORGANIZATIONAL PLANNING
A. Kinds of Organizational Plans
1. Strategic plans—general plans that outline the decisions of resource allocation, priorities,
2. Tactical plans—developed to implement specific parts of a strategic plan. Typically, a
tactical plan involves upper and middle managers and has a shorter time frame than the
B. Time Frames for Planning
1. Long-range plans cover many years and vary in length from organization to
organization. For our purposes, any plan that extends beyond five years is considered a
long-range plan.
C. Responsibilities for Planning
1. Planning staff—The planning staff is a group of planning professionals who help reduce
Management Update: Planning staffs were once very popular and used by virtually all large
organizations. In recent years, however, many firms have cut back or eliminated their planning staffs.
Management Update: As a corollary to the point noted above, planning task forces have become more
popular in recent years as firms have attempted to get their operating managers more involved in
planning.
Chapter 7: Basic Elements of Planning and Decision Making
Extra Example: Tenneco is a good example of a firm that has taken this approach. While Tenneco still
support for planning task forces composed of operating managers.
2. Planning task force—A planning task force is a group of line managers with a special
interest in the area of planning who are grouped together to address a particular issue.
Members of the planning staff also may be included in the task force.
Management Update: As the role of planning task forces has increased, so too has the role of
3. Board of directors—The board of directors establishes the corporate mission and
strategy.
4. Chief executive officer—The CEO plays a major role in the complete planning process
Extra Example: Again, this closely mirrors the approach used at Tenneco today. The firm’s executive
committee works with planning task forces, with the efforts of both supported and assisted by a small
planning staff.
6. Line management—Line managers are individuals with formal authority and
D. Contingency Planning
Contingency planning is the determination of alternative courses of action to be taken if an
Extra Example: Starbucks recently developed a contingency plan. Recent frosts in Brazil drove up the
price of coffee beans to the point that Starbucks increased its own prices by 10 percent. It then
Discussion Starter: Ask students to recall examples of times when they have engaged in contingency
planning.
IV. TACTICAL PLANNING
Tactical plans are an organized sequence of steps designed to execute strategic plans.
Chapter 7: Basic Elements of Planning and Decision Making
Tactical plans must address a number of tactical goals derived from a broader strategic goal,
must deal with specific resource and time issues, and require the use of human resources.
B. Executing Tactical Plans
For proper execution of tactical plans, a manager must evaluate possible courses of action in
V. OPERATIONAL PLANNING
A. Single-Use Plans
A single-use plan is developed to carry out a course of action that is not likely to be repeated
in the future.
1. Program—a single-use plan for a large set of activities
2. Project—similar to a program, but generally of less scope and complexity
B. Standing Plans
A standing plan is used for activities that recur regularly over a period of time.
1. Policy—specify the organization’s general response to a designated problem or situation.
Discussion Starter: Give students several examples of policies at your college or university, for
Interesting Quote: McDonald’s is famed for its SOPs and rules and regulations. To see where this
mentality comes from, consider this quote from Ray Kroc, founder of McDonald’s: “The French Fry
has become almost sacrosanct for me. Its preparation is a ritual to be followed religiously.” (Fortune,
July 3, 1989, 80.)
Discussion Starter: Ask students for examples of rules and regulations they have encountered that they
Chapter 7: Basic Elements of Planning and Decision Making
VI. MANAGING GOAL-SETTING AND PLANNING PROCESSES
A. Barriers to Goal Setting and Planning
Cross-Reference: Note that Table 7.2 summarizes the barriers to effective goal setting and planning
and also lists the methods for overcoming those barriers.
1. Goals may be inappropriate if they are unattainable, if achieving them will mean a
2. Improper reward systems can act as a barrier to goal setting and planning.
Extra Example: Following from the boxed insert above, reward systems may also encourage this
behavior in athletic departments. That is, coaches may be rewarded only for winning even though they
Cross-Reference: Note that resistance to change is discussed more fully in Chapter 13.
6. Constraints or limits on what an organization can do or is allowed to do can act as a
barrier to goal setting and planning.
B. Overcoming the Barriers
1. Managers must recognize the purpose and limits of goal setting and planning.
2. People responsible for achieving the goals and implementing the plans should be
C. Using Goals to Implement Plans
Formal goal setting, sometimes called management by objectives or MBO, is a widely used
method for managing the goal-setting and planning processes concurrently to make sure that
both are done effectively.
1. The purpose of formal goal setting is to give subordinates a voice in the goal-setting and
Chapter 7: Basic Elements of Planning and Decision Making
Extra Example: Managers at Cypress Semiconductor use a comprehensive form of MBO to guide
virtually all performance. Each employee has dozens of goals, all of which are stored and continually
updated in a central computer network.
2. The process of formal goal setting must start at the top. Top managers must communicate
why they adopted the process, what it will accomplish, and that they are committed to it.
Employees must be educated about formal goal setting and it must be implemented in a
Group Exercise: Have students develop a formal goal-setting system that could be used in teaching a
class such as this one.
END OF CHAPTER QUESTIONS
Questions for Review
1. Describe the nature of organizational goals. Be certain to include both the purposes and the kinds of
goals.
The four purposes of goals are to: (1) provide guidance and direction, (2) facilitate planning,
2. Describe the scope, responsible personnel, and time frames for each kind of organizational plan.
How are plans of different kinds related?
Strategic plans are long-range and broad plans that will impact the entire organization. They are
3. Explain the various types of operational plans. Give a real or hypothetical business example for each
type. Do not use examples from the text.
A program is a single-use plan that directs a large set of activities, such as Wal-Mart’s acquisition
Chapter 7: Basic Elements of Planning and Decision Making
4. List the steps in the formal goal-setting process. What are some of the advantages for companies
that use this approach? What are some of the problems that may arise from use of this approach?
Formal goal setting can increase employee motivation towards the accomplishment of specific
Questions for Analysis
5. Managers are frequently criticized for focusing too much attention on the achievement of short-term
goals. In your opinion, how much attention should be given to long-term versus short-term goals? In
the event of a conflict, which should be given priority? Explain your answers.
6. What types of plans and decisions most likely require board of director involvement, and why?
What types of decisions and plans are not appropriate for board involvement, and why?
Board should oversee any important strategic decisions, and they should also carefully supervise
7. Standing plans help make an organization more effective. However, they may inhibit
experimentation and organizational learning. Under what conditions, if any, should organizations
ignore their own standing plans? In the area of planning, how can an organization balance the need
for effectiveness against the need for creativity?
Standing plans should be abandoned if circumstances change radically, forcing the alteration. Firms
Questions for Application
8. Interview the head of the department in which your major exists. What kinds of goals exist for the
department and for the members of the department? Share your findings with the rest of the class.
The students of many departments will find that there are generally goals in three areas: teaching,
Chapter 7: Basic Elements of Planning and Decision Making
9. Tell about a time when an organization was not able to fully achieve all of its goals simultaneously.
Why did this occur? Is complete realization of all goals impossible for an organization? Why or
why not?
Students’ answers will vary, but here is one example: “At my workplace, we seek to hire
experienced personnel who will be able to offer great customer service, but our budget is limited, so
10. From your library or the Internet, find information about a company’s mission statement and goals.
List its mission and some of its strategic, tactical, and operational goals. Explain the relationship
you see among the goals at different levels.
Answers will vary. For example, if students investigated the mission statement of the IRS, they
END OF CHAPTER EXERCISES
Building Effective Decision-Making Skills
I. Purpose
This exercise allows students to apply their decision-making skills to a specific business situation.
II. Format
This exercise calls for reading the case scenario and dividing the class into groups of three or four.
III. Follow-Up
A. Your instructor will divide the class into groups of three or four people each. Each group will
meet as a management team responsible for deciding the fate of the Smallville plant.
Chapter 7: Basic Elements of Planning and Decision Making
D. If the team decides to keep the plant open, it must draw up a plan explaining how the company
can still remain competitive.
Building Effective Time Management Skills
I. Purpose
This exercise should aid students in learning about the complexity of priority setting within an
organization.
II. Format
III. Follow-Up
A. Develop a schedule listing the sequence in which you need to meet with the eight parties that
you’ve listed above. Do the best that you can to minimize backtracking (seeing one party and
then having to see him or her again after seeing someone else).
MANAGEMENT AT WORK
HOW TO SUCCEED IN BUSINESS
Steve Jobs’s ongoing health problems has caused him to step down temporarily as the CEO of Apple
twice in the last two years. In both cases, the company announced that Tim Cook, the company’s chief
operating officer, would take over Jobs’s responsibilities. The vignette focuses on succession planning in
general and suggests several best practices in this area.
Management Update: In August 2011, Steve Jobs announced that he was resigning as Apple’s chief
executive officer due to deteriorating health. The company’s board named Tim Cook Apple’s CEO.
1. Case Question 1: In what ways can succession planning be regarded as a type of contingency
planning? Under what circumstances might it be necessary for a company to treat its succession–
planning process as a crisis management process?
The chapter defines contingency planning as the determination of alternative courses of action to be
Chapter 7: Basic Elements of Planning and Decision Making
2. Case Question 2: How might a company use the process of goal setting to help it implement its
succession plan? Be sure to consider the barriers to successful implementation that it might
encounter.
The company can frame its long-term goals and find a person whose skills are best suited to lead the
3. Case Question 3: When asked if Apple would provide more details about Jobs’s second leave of
absence, a company spokeswoman responded ‘we’ve said all we’re going to say.” Is Apple
obligated to offer any more details, particularly about the health of its CEO? One lawyer who
advises corporate boards on such questions says that such details are material to investment
decisions only “if you’re asking shareholders to make decision based on [that] information …. You
can’t expect the company,” he adds, “to give a blow–by–blow account of Steve Jobs’s health.” What
do you think? If you were an Apple investor, what information would you regard as “material” to
your decisions? What would you want to know in deciding whether to keep or sell your shares of
Apple?
Not all companies are like Apple in that Steve Jobs is so closely identified with the company’s