Corporate Planning and Managerial Economics Module 3 PDF

MANAGERIAL ECONOMICDS CORPORATE PLANNING AND MANAGERIAL ECONOMICS MODULE 3 Overview Managerial Economics is highly useful to any organization- private or public, profit- oriented or not – that is committed to making the most efficient use of its reso...

MANAGERIAL ECONOMICDS CORPORATE PLANNING AND MANAGERIAL ECONOMICS MODULE 3 Overview Managerial Economics is highly useful to any organization- private or public, profit- oriented or not – that is committed to making the most efficient use of its resources in attaining specific goals. In this module, the role of managerial economics is applied on the process of corporate planning. Villegas, economist, author and consultant pointed out that it is in planning where the application of economics to management is critical. Managerial economics can be fruitful only if it becomes an integral part of corporate strategic planning and serves as a foundation for the short and long-term business decisions associated with the process. It is therefore, in this view that the premise is exemplified. Lesson 1 Corporate Planning: Introduction, Definitions Characteristics, Scope Lesson 2 Corporate Planning: Needs, Process and Limitations LEARNING OUTCOMES At the end of the module the students would be able to: explain the significant role of managerial decision making in the corporate organization; recognize the similarity of the concepts on corporate development and managerial economics; examine the perceptions of corporate planning and its similarity to strategic management; justify the necessity of business planning as a primary role of managerial executive; analyze the opportunities of macro forecasting; appraise the functional aspect of the company’s endeavor; classify and recommend measures to sustain the productivity of resources in micro aspects; illustrate the need for corporate advancement in the third world countries; evaluate the corporate process of forecasting and prepare measures to modified the process; describe the limitations of corporate expansion. 25  MANAGERIAL ECONOMICDS 1.1 Introduction Peter Drucker the father of modern management defines corporate planning as a “continuous process of making entrepreneurial decisions and measuring the results against expectations through organized systematic feedback.” Corporate Planning is defined as the process of deciding long term goals and objectives within the ambit of organization’s strength and weaknesses. The existing and prospective environmental setting insuring their achievement thru integrating the short term and long-term plans or adopting measures of structural changes in the composition of the organization, after taking recourse to financial resources. Elements to constitute Corporate Planning or Strategic Planning 1. Laying down long range corporate goals and objectives. 2. Macro and Micro Environments. 3. Strengths and weaknesses of the organization. 4. Integration between short term and long-term plans. 5. Structural changes in the organization. 6. Implementation of the plan. 7. Optimal use of scarce financial resources. 8. Evaluation of performance. 9. Feedback to make corporate planning more effective and purposeful. Long term goals and objectives pertain to the areas of production, marketing, quality and even cost of production. In the area of production, the company may specifically spell out its goals regarding the volume of production, addition of new products or product lines. This decision may change the structure of the organization. Similarly, the marketing objectives may relate to market spread from domestic to international market. To achieve the above goals and objectives, the organization shall have to assess its strengths and weaknesses in relation to competitors and the market forces and other components of macro and micro environments. After assessing the strengths and weaknesses in the prevailing macro and micro environments, the corporation shall have two options first it may resort to an expansion programs to cope with the growing commitments to achieve the objectives laid down. Second for the purposes of requiring and pushing forward the existing plan of action integrating short term plans and long-term plans. The option may be the diversification or technological upgrading. In both cases structural changes may be needed in the composition of the organization. The objectives of strategic planning are to achieve the desired long- term objective/ goals by making the optimal use of the scarce resources in men and material. Evaluation of the implementation plan from the feedback may be taken for suitable measures to achieve the desired objective and efficiency, using feedback scheme.1 1.2 Corporate Planning- Definitions 26  MANAGERIAL ECONOMICDS No matter if you are a new business looking to sign their first client, or an industry leader looking to target a new audience, corporate planning is crucial to meet your goals. Image of human hands during discussion of business plan at meeting 1 Source: https://www.btrustlaw.com/blog/6-elements-of-successful-corporate-planning/ What Is Corporate Planning? Corporate planning is a process that is used by businesses to map out a course of action to grow, increase profits, gain exposure, or strengthen brand identity. 2 Villegas, B. M., a Philippines economist in the late 19ths defined corporate planning as “formal, systematic managerial process, organized by responsibility, time an information, insure that operational planning, project planning, strategic planning is carried out regularly to enable top management to direct and control the future of the enterprise.”3 Corporate planning is a sophisticated planning tool. It has been introduced into the corporate world recently, first in USA and later in all advanced industrial countries. A humble beginning has been made in India also. It is the determination of the long-term goals of a company as a whole and then developing plans to achieve these goals giving due weightage to environmental changes. It is planning for the overall organizational performance. Hussey a book writer, defined as “the formal process of developing objectives for the corporation and its component parts, evolving alternative strategies to achieve and doing this against a background of systematic appraisal of internal strengths and weaknesses and external environmental changes, the process of translating strategy into 27  MANAGERIAL ECONOMICDS detailed operational plans and seeing that these plans are carried out.” This is a comprehensive definition of corporate planning which includes deterministic, motivational and directional elements of corporate planning. Drucker’s view, on Corporate planning is not confined only to strategic decisions but most specifically on the implementation of what had been planned and a periodic review of it. Corporate planning is quite comprehensive as it includes – (i) strategic planning, (ii) operational planning and (iii) project planning.1 Corporate planning is creating a strategy for meeting business goals and improving your business. A corporate plan is a roadmap that lays out your business’s plan of action. When you focus on corporate planning, you set achievable goals and bring your business one step closer to success. 4 Corporate planning is a type of strategic planning, responsible for mapping out a course of strategies and their implementations to empower top-management. It optimizes exposure, reach, leads, sales, profits, credibility, loyalty, sustainability, and opportunities of a business. With the help of corporate strategic planning, a business can efficiently channeled corporate management by leveraging its resources with better penetration in the market than the other market players. Businesses of any size should incorporate such strategic planning, as it offers- Clarity & Direction Efficient use of resources A way of measuring progress Optimized decision-making Better coordination in business activities Effective allocation of responsibilities Motivation and guidance to members Analysis Strengths and weaknesses along with opportunities and threats via SWOT analysis, etc. All in all, corporate planning empowers any kind of business to accomplish its business goals in a more effective and organized manner.5 Why Plan? No matter the size of your business, it is crucial to have a plan. A plan is not only beneficial to keep your business organized, but it can also help increase. Clarity & Direction 28  MANAGERIAL ECONOMICDS Ensure efficiency use of resources Provide a way of measuring progress Support effective decision-making Coordinate activities Allocate responsibilities Motivate and guide staff 1.3 Corporate Planning top 6 characteristics 1. Corporate planning is a formal and systematic process. 2. It is a rational process. It requires imagination, foresight, reflective thinking, judgement and other mental facilities. 3. Corporate planning is a continuous process. It is a dynamic exercise that goes on throughout the company’s life. 4. Corporate planning has a long-term perspective. 5. Corporate planning provides an integrated framework within which each of the functional and departmental plans are tied together. 6. Corporate planning is basically concerned with the future impact of present decisions.1 Six Key Elements of a Successful Plan As a business, you must take many factors into consideration before you begin planning a business strategy. You must take a step outside of your position in the business and look at the following elements as if you were a competitor or a consumer. To create a successful corporate plan, you will need to 1. Gather Information 2. Set objectives of the plan 3. Devise strategies to meet goals 4. Implement your plan 5. Monitor plan performance 6. Evaluate the effectiveness/success of your plan Gathering Information The first and most important step in creating a successful corporate plan is to gather information. Take the good, the bad, the ugly and the pretty that regard to your specific goals. Not only should you gather this information about your own company, but also your biggest competitors. No matter if you are a small business or large, it is important to look at the strengths and weaknesses of the leading companies in your industry. This can help shape your plan to avoid the costly mistakes of others. 29  MANAGERIAL ECONOMICDS Creating Successful Objectives & Strategies Goals and strategies are often confused, but they couldn’t be more different. An objective is a broad primary outcome that can be measured. A strategy is the approach you take to reach that goal. Some sample objectives that you can use to better shape your business’s plan are: Increase Sales by 20% Increase followers on social media by 200 Respond to customers within 3 hours of inquiries You can accompany these objectives with strategies will help your company “get there”. For example: Objective: Make Product X a category leader in sales revenue by year, 2020. Strategy: Persuade buyers that Product X is the best on the market by associating with large well-established Product X related manufacturers. Establishing quantifiable objectives and strategies will set your business up for success. The objective of your plan should answer, “Where are we going?” while the strategy should answer, “How are we going to get there?”. By setting out a plan for your business, you will be able to be confident in every action you make. There will be a road map laid out in front of you that you can feel confident following, because you have one the research and calculated the numbers. If you are struggling to detail the legal implications of your plan, an estate planning attorney will be able to better assist you. Failing to plan can quickly result in planning to fail.3 1.4 Corporate Planning –Scope A corporation can be effective only if it can handle successfully with the external environment (society) in which it functions. Similarly, the corporation can function smoothly and efficiently only if it can deploy its material, manpower and methods in a way that it functions with optimal efficiency. Hence to be effective and efficient the corporation has to cope with external as well as internal environment. Corporate planning has two aspects, macro and micro; the former is concerned with the interaction of the external environment and the latter interact with the internal environment. The scope of corporate planning in its macro (aggregate) and micro (functional) aspects are as follows: Scope of Corporate Planning: 1.Aggregative (Macro) Aspects: 30  MANAGERIAL ECONOMICDS Economic- National Economic Projections — Technological Progress. Political- Policy towards private investment. Social- Social mores and attitudes towards pricing and income distribution. Regulatory- Government controls on imports and investment, repatriations and size of firms. Competition- Relative growth rate of firms, future tax trends, government policy towards large-scale enterprise. The need for and extent of corporate planning within any economy is governed basically by the factors. 1.1 Scope of Macro-Aspect of Corporate Planning: Economic- National Planning o G.N.P. growth forecasts. o Inter sectoral plans. o Role of public and private sectors. o Monetary and fiscal policy. o Export prospects and balance of payments trends. o Credit policy. o Changes in price level. 1.2 Demand o Price policy. o Population growth rate. o Income-saving pattern. o Rate of urbanization. 1.3Technological Planning o State of indigenous technology o Foreign collaboration and import of technology o Facilities for research and development work. 1.4 Availability of Resources o Materials o Manpower o Methods. 1.5 Infrastructure Facilities o Transport o Power o Equivalent o Land o Finance. 31  MANAGERIAL ECONOMICDS 1.6 Political o Manifestoes of party in power and in opposition o Attitudes towards nationalization and the growth of public sector o Attitudes towards investors o Attitudes towards workers o Interests of different pressure groups and lobbying o Donations to political parties. 1.7 Social o Policies towards income distribution o Policies towards “Social pricing” o Attitudes towards consumption and savings o Attitude towards social responsibility of business o Attitude towards environmental pollution. 1.8 Regulatory o Government Regulations- o Industrial licensing o Foreign exchange o Capital and bonus issues o Competition policy o Repatriation of capital/dividends o Tariff Commission. 1.9 Competitive o Relative, growth rate of firms o Government policy towards large business houses o Tax policies o Competition for market and market structure o Competition for control of scarce resources like materials, managerial manpower and finance o Competition from public and cooperative sectors The data on variety of topics and aspects has to be collected in coping with the need for external environment. This process of scanning the external environment indicates “monitoring of the environment”. There is substantial inter-dependency among these various aspects, namely, economic, political, social regulatory and competitive. The inter-dependency considers the need for scale of planning which are the positive functions of all these factors. 32  MANAGERIAL ECONOMICDS The intensity of impact of each one of these factors varies from country-to-country, from industry-to-industry, from sector-to-sector, from unit-to-unit and, from time-to-time for the same unit. Hence, there is a real need to monitor the environment regularly and continuously. In particular, one may note the distinctive differences in the developed and developing economy. Stiff competition in a developed economy is observable. Whereas in developing countries there is less customers base competition. Instead there is a stiff competition for claims on resources, materials, managerial manpower and finance. Develop countries have giant-sized corporation with minimal government regulation and control while developing countries corporations are smaller but government control and regulations are relatively large and oppressive. 2. Functional (Micro) Aspects: Marketing- New products, new markets, etc. Production- Technical problems, research. Materials- Quality, availability. Finance- Capital structure, sources, viability. Manpower- Managerial, labor force projections, and development. Additionally, it is necessary that the size of the corporation the business engaged with has set the goals since it is crucial which may affect the planning either macro or micro. The second aspect of corporate planning is the “micro” which is the functional aspect in the business operation. In broad terms the functional aspects of corporate planning embraces marketing, production and material procurements, finance, personnel and manpower planning. 1 33  MANAGERIAL ECONOMICDS An Illustration on the micro-aspects of corporate planning 2 Source: https://www.yourarticlelibrary.com/business/corporate-planning/corporate-planning-features- process-and-analysis-management/69738 Lesson 2 Corporate Planning: Needs, Process and Limitations 2.1 Strategic Planning: Why Do We Need To Do It? / Corporate Planning - Need Regardless of whether your business is a small start-up or one of the biggest players in the market, you will likely have heard stories of how other organizations have achieved success through well thought-out strategic planning. Is strategic planning still relevant for businesses today, however, or is it just an outdated management fad? How exactly does it help an organization? Effective strategic management can bring many benefits to any business – here are just four examples. 34  MANAGERIAL ECONOMICDS It outlines a clear path for your company No business can hope to succeed by not having a plan and simply hoping to stumble across success. A strategic plan works like a roadmap, clearly defining the best route for your organization to take in the years ahead. Whether it covers one, three or five years into the future, a strategic plan can help guide your organization to meet the challenges that lie in wait. It brings a sense of focus Because a strategic plan establishes a direction for your business to take, it will help sharpen its focus in order to get there. Strategic planning can therefore help your organization develop the right goals and targets and help everyone focus their efforts into meeting them. It improves your business’s self-awareness Taking the time to establish a comprehensive strategic plan means your business has a better awareness of its strengths and weaknesses and where it stands in the market, both individually and in relation to competitors. It gives your employees something to work towards Strategic planning isn’t just beneficial for those highest up in the management hierarchy – it gives everyone in the organization a sense of purpose. With a definitive mission and clear goals and objectives to work towards, your staff will know their efforts count towards something and will be motivated to do their job.6 Corporate Planning – Need Corporate planning is an indispensable component of strategic management. Without corporate planning the long-term objectives and goals of the organization will not be achieved. In addition, the corporate manager keeps himself up-to-date regarding the status of technology, the state of strategic choices of the competitors and the policy changes of the government. At present, the rate of technological obsolescence is so fast that if the Corporate Manager becomes a little sluggish, his competitors will oust him from the market. Corporate Planning forces the Corporate Manager to install state-of-the-art technology so that the company’s march towards the realization of long-term objectives and goals is not hampered. Corporate Manager, under the force of corporate planning is expected to maintain a constant watch regarding the adoption of strategic choices by the competitors and their 35  MANAGERIAL ECONOMICDS impact on cost, profit and price. The manager accordingly shall have to bring about the needful adjustment in the functioning and operating efficiency of his organization. Policy changes by the Government are also an important variable of corporate planning. The Corporate Manager has to keep himself up-to-date regarding changes in such policies as industrial, monetary, fiscal or exim which have a direct bearing on the operation of the organization. Equally important is the impact of these changes on the overall functioning of the organization so that necessary changes in various functional areas could be affected to maintain the desired level of efficiency.1 2.2. Corporate Planning Process Corporate Strategic planning process steps 1. Determine your strategic position. 2. Prioritize your objectives. 3. Develop a strategic plan. 4. Execute and manage your plan. 5. Review and revise the plan. Some businesses run by a team. Say a team of Lucid they said “Business should have a strategic plan—but the number of businesses that try to operate without a defined plan (or at least a clearly communicated one) might surprise you. Research from On Strategy shows that 86% of executive teams spend less than one hour per month discussing strategy, and 95% of a typical workforce doesn’t understand its organization’s strategy. This means that the workforce must clearly understand the strategic plan set forth by the company.7 Major steps involved in corporate planning are as follows: 1. Environmental Analysis and Diagnosis The first steps (which is, in fact, the background step), involved in corporate planning is environmental analysis and diagnosis 2. Determination of Objectives All planning starts with the determination of the objectives. After environmental analysis and diagnosis, the planners determine the objectives for the company. These objectives must represent a unified or coordinated scheme and make a realistic, and achievable objectives a “SMART” one 36  MANAGERIAL ECONOMICDS 3. Strategy Formulation Strategy formulation is the core aspect of corporate planning. It is the tool in attaining the objectives of company. Setting the company’s objectives is easier compare to the implementation of the company’s plan. 4. Development of Tactical Plans Strategies are translated into action plans called tactical plans or operational plans. Tactical plans are necessary for the implementation of strategies in the achieving the goals of the company. For example, if the strategy of a company is to develop the skills and talents of manpower a design of suitable training programs must be created. Corporate planning and strategy formulation have a long-term perspective; while tactical plans have a short-term perception. The latter is to be implemented immediately, in the usual course of organizational life. 5. Implementation of Tactical Plans: Plans has to be implemented and put into action. 6.) Follow-Up-Action After the tactical plans have been put into practice a review of progress and monitoring and feedback for the betterment of the corporate planning process. 8 The Steps in corporate planning process 3Source: https://www.yourarticlelibrary.com/business/corporate-planning/corporate-planning-features- process-and-analysis-management/69738 2.3 Limitation of Corporate Planning 37  MANAGERIAL ECONOMICDS Planning is needed both in the business and non-business organizations. Some people think that planning is based on the future anticipations and nothing can be said with certainty about future. Therefore, it is a useless process. In fact, these people point towards the difficulties in the way of planning. If planning has to be successful and purposeful, the managers should be aware of these difficulties and limitations of planning. Six Main Limitations of Planning in Any Organizations 1. Planning Creates Rigidity Although the quality of flexibility is inherent in planning, meaning thereby that in case of need changes can be brought in, but it must be admitted that only small changes are possible. Big changes are neither possible nor in the interest of the organization. Since it is not possible to introduce desired changes according to the changed situations, the organization loses many chances of earning profits. For this limited flexibility in planning, both the internal as well as external factors are responsible. These facts are called internal and external inflexibility. They are as follows: Internal Inflexibility At the time of planning the objectives of the organization, its policies, procedures, rules, programs, etc. are determined. It is very difficult to bring in changes time and again. It is known as internal inflexibility, External Inflexibility: External inflexibility means various external factors that cause limited flexibility in planning. These factors are beyond the control of the planners. The chief among them are: political climate, economic changes, technical changes, natural calamities, policies of the competitors, etc. For example, in political context, as a result of change, a new government brings up a new trade policy, policy of taxation, import policy, etc. All these changes make every sort of planning a meaningless waste. Similarly, a change in the policies of the competitors suddenly makes all types of planning ineffective. 2. Planning Does Not Work in a Dynamic Environment Planning is based on the anticipation of future happenings. Since future is uncertain and dynamic, therefore, the future anticipations are not always true. Therefore, to consider planning as the basis of success is like a leap in the dark. Generally, a longer period of planning makes it less effective. Therefore, it can be said that planning does not work in dynamic environment. For example, a company 38  MANAGERIAL ECONOMICDS anticipated that the government was thinking about allowing the export of some particular product. With this hope the same company started manufacturing that product. But the government did not allow the export of this product. In this way, the wrong anticipation proved all planning wrong or incorrect. It brought loss instead of profit. 3.Planning Reduces Creativity Under planning all the activities connected with the attainment of objectives of the organization are pre-determined. Consequently, everybody works as they have been directed to do and as it has been made clear in the plans. Therefore, it checks their incisiveness. It means that they do not think about appropriate ways of discovering new alternatives. According to Terry, “Planning strangulates the initiative of the employees and compels them to work in an inflexible manner.” 4. Planning Involves Huge Costs Planning is a small work but its process is really big. Planning becomes meaningful only after traversing a long path. It takes a lot of time to cover this path. During this entire period the managers remain busy in collecting a lot of information and analyzing it. In this way, when so many people remain busy in the same activity, the organization is bound to face huge costs. 5. Planning is a Time-consuming Process Planning is a blessing in facing a definite situation but because of its long process it cannot face sudden emergencies. Sudden emergencies can be in the form of some unforeseen problem or some opportunity of profits and there has been no planning for all these situations beforehand and which now requires immediate decision. In such a situation, if the manager thinks of completing the planning process before taking some decision, it may be possible that the situations may worsen or the chance of earning profit may slip away. Thus, planning is time consuming and it delays action. 6. Planning Does Not Guarantee Success Sometimes the managers think that planning solves all their problems. Such thinking makes them neglect their real work and the adverse effect of such an attitude has to be faced by the organization. In this way, planning offers the managers a false sense of security and makes them careless. Hence, we can say that mere planning does not ensure success; rather efforts have to be made for it.9 Suggested Reading Links 39  MANAGERIAL ECONOMICDS Villegas B. M. Managerial Economics, Text and Case Studies. Pp. 20-21. Third edition. Sinagtal Publisher, Inc. Greenhils P.O. box 536, Manila 1999. Bdc* “Five essential tips for creating a strong corporate plan” https://www.bdc.ca/en/articles-tools/business-strategy-planning/define- strategy/corporate-plans-5-key-components Madulid F. A. Module 2 Strategy Formulation, pp. 7-26. Discussion Questions 1. What is the role of managerial economics in corporate organization? 2. Compare the similarities of the concepts on corporate planning and managerial economics. 3. Describe the resemblance between corporate expansion and managerial finances. 4. Summarize the need of Strategic planning/corporate planning. 5. Clearly show the major steps and process of corporate planning. 6. Create possible adjustment on the restrictions brought about on planning in an organization. Learning Exercises/ Activities 1. Group case problem analysis. 2. Presentation of the case problems analysis. END NOTES 1 Niti A. “Corporate Module”, Retrieved September 24, 2021. https://www.economicsdiscussion.net/management/corporate-planning/corporate-planning/3247 2VillegasB. M. Managerial Economics Text and Case Studies. Third Edition. Greenhills P. O Box 536, Manila. Sinagtala Publisher, Inc. 1999. 3Bochnewich Law Offices. May 1, 2015. “Six (6) elements of successful Corporate Planning”. Retrieved on Sept. 26, 2021 https://www.btrustlaw.com/blog/6-elements-of-successful-corporate-planning/ 4 Levinson, Chelsea. June 07, 2018.” Definition of corporate Planning”. Retrieved on Sept. 26, 2021. https://bizfluent.com/about-5117185-definition-corporate-planning.html 5 Hitest Bhasin, March 30 2021. “Corporate Planning Definition” Retrieved on September 26, 2021. https://www.marketing91.com/corporate-planning/ 40  MANAGERIAL ECONOMICDS 6Craig Catley. February 7, 2014. “Strategic Planning: Why Do We Need To Do It?” Retrieved on September 26, 2021. https://www.strategyblocks.com/blog/why-we-need-to-do-strategic-planning/ 7Lucid Team. “Corporate Strategic Planning Process”. Retrieved on September 27, 2021. https://www.lucidchart.com/blog/5-steps-of-the-strategic-planning-process 8 Talathi R. https://www.yourarticlelibrary.com/business/corporate-planning/corporate-planning-features- process-and-analysis-management/69738 9 Samiksha S. “Six Main Limitations of Planning in Any Organizations” https://www.yourarticlelibrary.com/organization/6-main-limitations-of-planning-in-any-organizations/905 IMAGES 1. Image of human hands during discussion of business plan at meeting https://www.btrustlaw.com/blog/6-elements-of-successful-corporate-planning/ 2. An Illustration on the micro-aspects of corporate planning https://www.yourarticlelibrary.com/business/corporate-planning/corporate-planning-features- process-and-analysis-management/69738 3. The Steps in corporate planning process https://www.yourarticlelibrary.com/business/corporate-planning/corporate-planning-features- process-and-analysis-management/69738 41