Planning and Decision Making
Business Studies — Grade 12 | Chapter 3 | NEB Nepal
Table Of Contents
Introduction
Planning and decision making are the two most fundamental intellectual activities of management. Before any resource is mobilized, any employee directed, or any operation controlled, a manager must first decide what needs to be done and then plan how to do it. Planning is the bridge between where an organization is and where it wants to be; decision making is the process of choosing among the alternatives that planning generates. Together they form the cognitive engine of management — the thinking that makes coordinated action possible.
1. Planning
1.1 Concept and Meaning of Planning
Planning is the management function of setting objectives, determining the best course of action to achieve them, and developing the detailed roadmap — budgets, schedules, and procedures — that will guide organizational activity toward those objectives.
According to Koontz and O’Donnell, “Planning is deciding in advance what to do, how to do it, when to do it, and who is to do it. Planning bridges the gap from where we are to where we want to go.”
According to George R. Terry, “Planning is the selecting and relating of facts and the making and using of assumptions regarding the future in the visualization and formulation of proposed activities believed necessary to achieve desired results.”
According to Louis Allen, “Planning is the determination of a course of action to achieve a desired result. It is the trap laid to capture the future.”
According to Billy E. Goetz, “Plans are anticipatory decisions. Planning is deciding what is to be done and how it is to be accomplished before action is required.”
According to Peter Drucker, “Plans are only good intentions unless they immediately degenerate into hard work.”
Planning is always future-oriented — it deals with what is yet to happen. It is the primary management function because every other function — organizing, staffing, directing, and controlling — depends on the plans established first.
1.2 Rationale (Need) for Planning
i. Provides Direction: Planning sets the organizational objectives and communicates them to all members. According to Koontz and O’Donnell, “Without planning, people and resources would be like a ship without a rudder — moving but without a destination.”
ii. Reduces Uncertainty: The future is uncertain, but planning forces managers to think ahead, anticipate problems, and prepare contingency responses — reducing the impact of uncertainty on organizational performance.
iii. Minimizes Waste and Redundancy: When work is coordinated through plans, duplication of effort is avoided, resources are allocated purposefully, and activities are sequenced efficiently.
iv. Facilitates Control: Planning establishes the standards against which actual performance will be measured. Without a plan, there is no basis for evaluating whether performance is satisfactory. According to Henri Fayol, “The plan is both the result anticipated and the course of action to be followed.”
v. Promotes Innovation: The planning process requires managers to examine existing methods critically and search for better alternatives — stimulating creative thinking and continuous improvement.
vi. Improves Decision Making: Planning requires managers to think through decisions systematically — gathering information, evaluating alternatives, and selecting the best course — rather than reacting impulsively.
vii. Competitive Advantage: Organizations that plan effectively anticipate market changes, new technologies, and competitive threats before they materialize — positioning themselves to exploit opportunities others have not yet recognized.
1.3 Process of Planning
Planning follows a logical sequence of steps:
Step 1 — Setting Objectives The planning process begins by clearly defining what the organization intends to achieve — the specific, measurable, time-bound goals that will guide all subsequent activity. According to Peter Drucker, objectives should be set in all key areas of organizational performance, not just profit — including market standing, innovation, productivity, human resources, and social responsibility.
Step 2 — Developing Planning Premises Planning premises are the assumptions about the future environment within which the plan will operate — expected economic conditions, likely competitor actions, government policy changes, and technological developments. According to Koontz and O’Donnell, “The more thoroughly individuals charged with planning understand and agree to utilize consistent planning premises, the more coordinated enterprise planning will be.”
Step 3 — Identifying Alternative Courses of Action Rarely is there only one way to achieve an objective. Managers must identify all feasible alternatives — different strategies, different resource combinations, different timelines — before committing to one.
Step 4 — Evaluating Alternatives Each alternative is assessed against the planning premises and organizational objectives — considering factors such as cost, risk, time required, resource availability, and alignment with organizational values.
Step 5 — Selecting the Best Alternative The alternative that best achieves the objectives within the available resources and constraints is selected. This selection is itself a decision — the most important decision in the planning process.
Step 6 — Formulating Derivative Plans The main plan (the strategic plan) must be supported by subordinate plans — departmental plans, project plans, budgets, and schedules — that detail how each part of the organization will contribute to the overall objective.
Step 7 — Securing Cooperation and Commitment Plans must be communicated clearly to all those who must execute them. Participation in the planning process builds commitment; top-down communication of completed plans builds understanding.
Step 8 — Monitoring and Reviewing Plans are not static. They must be regularly reviewed against actual progress and adjusted when circumstances change significantly.
1.4 Benefits of Planning
i. Clarity of Purpose: Planning forces managers to articulate precisely what they are trying to achieve — creating shared understanding across the organization.
ii. Efficient Use of Resources: Resources are allocated purposefully rather than haphazardly — minimizing waste and maximizing productivity.
iii. Basis for Control: Plans provide the benchmarks against which performance is measured. Without plans, control is impossible.
iv. Better Coordination: Departmental plans derived from the overall organizational plan ensure that all parts of the organization are working toward the same goals, reducing conflict and duplication.
v. Morale and Motivation: Employees who understand the organizational direction and their role in achieving it are better motivated than those working in the dark. According to Douglas McGregor, Theory Y workers — the majority — are capable of commitment and self-direction when they understand and accept organizational goals.
vi. Preparedness for Change: Planning identifies future threats and opportunities early, giving the organization time to prepare responses rather than react in crisis.
vii. Reduces Dependence on Guesswork: According to George R. Terry, “Planning replaces aimless activity with purposeful effort.”
1.5 Pitfalls (Limitations) of Planning
i. Rigidity: Overly rigid plans can prevent organizations from adapting to unexpected changes. Plans must be treated as guides, not straitjackets.
ii. Time and Cost: Comprehensive planning requires significant management time and organizational resources. For small businesses in Nepal, the cost of elaborate planning may not be justified.
iii. False Sense of Security: Detailed plans can create an illusion of control — managers may feel that because they have a plan, success is assured. According to Dwight D. Eisenhower, “Plans are useless, but planning is indispensable” — the value is in the thinking process, not the document.
iv. Resistance to Change: Commitment to existing plans can create resistance to necessary adaptation. People and departments invested in executing a plan may resist changing it even when evidence suggests it is no longer optimal.
v. Based on Uncertain Premises: All planning rests on assumptions about the future. If those assumptions prove wrong — as they often do in Nepal’s volatile political and economic environment — plans built on them may become obsolete or counterproductive.
vi. Inhibits Initiative: Detailed, prescriptive plans can reduce employee initiative and creativity — people follow the plan rather than thinking for themselves.
vii. Planning-Execution Gap: According to Henry Mintzberg, organizations that spend too much time planning and too little time doing suffer from “paralysis by analysis” — a common problem in large bureaucratic organizations.
1.6 Types of Plans
Plans are classified on several bases:
Classification 1: By Level (Strategic, Tactical, Operational)
i. Strategic Plans: Developed by top management; cover the entire organization; long-term (3–5+ years); define the overall direction and broad objectives.
According to Alfred Chandler, “Strategy is the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.”
ii. Tactical Plans: Developed by middle management; cover specific departments or divisions; medium-term (1–3 years); translate strategic objectives into departmental action plans.
iii. Operational Plans: Developed by first-line management; cover specific teams or work units; short-term (days, weeks, months); specify exactly who does what, when, and with which resources.
Classification 2: By Time Horizon
i. Long-Term Plans: Covering three years or more. Used for major capital investments, market expansion, and organizational transformation. Nepal’s national development plans (periodic plans) are examples.
ii. Medium-Term Plans: Covering one to three years. Used for departmental development, product launches, and significant operational changes.
iii. Short-Term Plans: Covering one year or less — often aligned with the annual budget cycle. Operational schedules and weekly work plans are examples.
Classification 3: By Nature/Type
i. Objectives/Goals: The specific results an organization aims to achieve — the foundation of all planning. According to Peter Drucker, objectives must be set in every key area of organizational performance.
ii. Policies: General guidelines that direct thinking and decision-making across the organization. A policy does not specify actions but establishes boundaries within which decisions are made. Example: “All suppliers must be paid within 30 days.”
iii. Procedures: Chronological sequences of steps that must be followed to carry out a specific activity. Procedures specify exactly how something is to be done. Example: the step-by-step procedure for processing a bank loan application.
iv. Rules: Specific, precise statements that permit or prohibit particular actions — no discretion is allowed. Example: “No employee may accept gifts from suppliers.”
v. Programs: Comprehensive plans that combine objectives, policies, procedures, rules, assignments, and budgets to achieve a specific organizational purpose. Example: a training program for new employees.
vi. Budgets: Plans expressed in numerical (usually financial) terms — specifying expected revenues, expenditures, and resource allocations for a defined period. According to Koontz and O’Donnell, “A budget is a plan expressed in numerical terms — it is one of the most widely used planning tools.”
vii. Strategies: Plans for how the organization will compete and achieve sustainable advantage in its chosen markets. According to Michael Porter, “Strategy is about making choices, trade-offs — it is about deliberately choosing to be different.”
viii. Single-Use Plans vs. Standing Plans:
- Single-Use Plans: Developed for a specific, non-recurring situation — a project plan, an event plan, a crisis response plan.
- Standing Plans: Ongoing plans that provide guidance for recurring situations — policies, procedures, and rules are all standing plans.
2. Decision Making
2.1 Meaning and Importance of Decision Making
Decision making is the process of identifying and selecting a course of action from among available alternatives to resolve a problem, exploit an opportunity, or achieve an objective.
According to George R. Terry, “Decision making is the selection based on some criteria from two or more possible alternatives.”
According to Koontz and O’Donnell, “Decision making is the selection of a course of action from among alternatives; it is at the core of planning.”
According to Herbert Simon, the Nobel Prize-winning economist and organizational theorist, “Decision making is synonymous with managing. The manager’s work is, at its heart, the work of making decisions.” Simon also introduced the concept of bounded rationality — managers make decisions with limited information, limited cognitive capacity, and limited time, and therefore cannot achieve perfect rationality. They “satisfice” — choose the first option that meets a minimum acceptable standard — rather than optimize.
According to Chester Barnard, “The process of decision is one of the most characteristic and important acts of management. The quality of managerial decisions determines the quality of organizational performance.”
Importance of Decision Making:
i. Core Management Function: Every management function — planning, organizing, staffing, directing, controlling — involves making decisions. Decision making is the common thread running through all managerial activity.
ii. Determines Organizational Direction: Strategic decisions about markets, products, investments, and organizational structure determine where the organization goes and what it becomes. Poor decisions at the top can destroy organizations; excellent decisions can transform them.
iii. Allocates Scarce Resources: Every decision about how to use organizational resources — capital, staff time, equipment — has an opportunity cost. Good decision making ensures resources are allocated to their highest-value uses.
iv. Solves Problems and Exploits Opportunities: Decision making is the mechanism through which organizations respond to challenges and capitalize on emerging opportunities.
v. Affects All Stakeholders: Management decisions affect employees (jobs, working conditions), customers (product quality, prices), investors (returns), suppliers (orders), and communities (employment, environmental impact). The quality of decisions therefore has far-reaching consequences.
2.2 Types of Managerial Decisions
i. Programmed Decisions (Routine/Structured) Decisions that deal with routine, repetitive problems for which standard procedures already exist. Because these situations are familiar, decision making is systematic and quick.
According to Herbert Simon, “Programmed decisions are those made in accordance with a habit, rule, or established procedure. They do not require fresh analysis each time.”
Examples in Nepal: Processing a standard bank loan application, renewing an import license, following a procurement procedure for office supplies.
ii. Non-Programmed Decisions (Non-Routine/Unstructured) Decisions that deal with unique, complex, or novel problems for which no established procedure exists. These require judgment, creativity, and careful analysis.
According to Simon, “Non-programmed decisions are those made in response to situations that are unique, poorly defined, and largely unstructured, and have important consequences for the organisation.”
Examples in Nepal: Deciding whether to enter a new provincial market, responding to a major competitor’s price war, restructuring the organization after a regulatory change.
iii. Strategic Decisions Decisions made by top management that affect the long-term direction, competitive positioning, and resource allocation of the entire organization. They are typically non-programmed, involve significant uncertainty, and have irreversible consequences.
iv. Tactical Decisions Decisions made by middle management that implement strategic decisions at the departmental level — deciding how to allocate departmental budgets, which suppliers to use, how to staff a project.
v. Operational Decisions Decisions made by first-line management and supervisors about day-to-day operations — scheduling work, allocating daily tasks, handling immediate operational problems.
vi. Individual Decisions Decisions made by a single manager without formal consultation with others. Appropriate for routine, time-sensitive matters within a manager’s clear authority.
vii. Group/Collective Decisions Decisions made through a formal process involving multiple managers or a committee. Appropriate for complex, high-stakes decisions where multiple perspectives and expertise are valuable.
2.3 Decision Making Conditions
Management decisions are made under three conditions, depending on how much is known about the likely outcomes of each alternative:
i. Certainty The decision maker has complete information about the outcomes of each available alternative. Every alternative is fully known, and the consequences of choosing each are predictable with confidence.
According to Ricky W. Griffin, “Under conditions of certainty, the manager knows with confidence what the outcomes will be for any decision alternative selected.”
Example: A manager deciding how to allocate a confirmed budget among known expenditure categories — the amounts and their effects are fully known.
Certainty is rare in real management situations. Most decisions involve some degree of risk or uncertainty.
ii. Risk The decision maker has reliable information about the probability of each possible outcome for each alternative, but cannot be certain which outcome will actually occur. Decisions under risk involve working with probability estimates.
According to Koontz and O’Donnell, “Risk exists when the decision maker can assign probabilities to the various outcomes, based on statistical data or informed estimation.”
Example: A Nepali trekking company deciding whether to run a high-altitude expedition in a specific month, knowing the statistical probability of good weather conditions from historical records.
Insurance, capital budgeting, and financial portfolio management all involve decision making under risk — managers use probability and expected value calculations to guide their choices.
iii. Uncertainty The decision maker lacks reliable information about outcomes and cannot assign meaningful probabilities to alternatives. The future is genuinely unknowable.
According to Frank Knight, “Uncertainty exists when the decision maker cannot even estimate the probability of outcomes — the situation is unprecedented, novel, or too complex for reliable probability estimation.”
Example: A Nepali business deciding whether to enter a completely new industry in an emerging technology sector with no historical precedent, during a period of significant political transition.
Under uncertainty, managers rely on judgment, experience, and various decision frameworks (maximin, maximax, minimax regret) rather than calculation.
Comparison of Decision Making Conditions:
| Condition | Information Available | Outcomes | Example |
|---|---|---|---|
| Certainty | Complete | Fully predictable | Budget allocation |
| Risk | Probabilistic | Estimable | Investment with known risk rates |
| Uncertainty | Minimal | Unknown/unpredictable | New venture in novel market |
2.4 Decision Making Process
According to Herbert Simon, effective decision making follows a rational sequence of steps — though real decisions are often constrained by bounded rationality:
Step 1 — Identifying the Problem or Opportunity A decision is required when there is a gap between the current situation and a desired one. Before deciding anything, the manager must accurately diagnose the problem — misdiagnosis leads to solving the wrong problem. According to Peter Drucker, “The most serious mistakes are not made by answering the wrong question — they are made by answering the right question wrongly.”
Step 2 — Gathering Relevant Information Collect the data, facts, and expert opinions needed to understand the problem fully and identify possible solutions. The quality of subsequent decisions depends heavily on the quality of information gathered.
Step 3 — Identifying Alternatives Generate all feasible alternatives. Limiting the search too early — considering only the most obvious options — is a common decision-making failure. Creative thinking at this stage expands the solution space.
Step 4 — Evaluating Alternatives Assess each alternative against relevant criteria — cost, risk, time, resource requirements, alignment with objectives, legal and ethical implications. Analytical tools such as cost-benefit analysis, decision trees, and SWOT analysis support this step.
Step 5 — Selecting the Best Alternative Choose the alternative that best satisfies the decision criteria within the available constraints. According to Simon, managers typically satisfice — selecting the first option that meets minimum acceptable standards — rather than exhaustively searching for the theoretically optimal solution.
Step 6 — Implementing the Decision Convert the chosen alternative into action — assigning responsibilities, allocating resources, communicating instructions, and setting timelines. The best decision poorly implemented is no better than a bad decision.
Step 7 — Monitoring and Evaluating Results Track the outcomes of the implemented decision and compare them with the expected results. If the decision proves incorrect, corrective action must be taken. This feedback loop connects decision making back to problem identification and restarts the cycle.
3. Planning and Decision Making in Nepal
i. Public Sector Planning: Nepal’s national development planning has been guided by periodic plans since the First Five-Year Plan (1956–1961). The National Planning Commission formulates periodic plans that set macroeconomic targets and sectoral priorities — a direct application of strategic planning at the national level.
ii. Corporate Planning in Nepali Businesses: Nepal’s major commercial banks, insurance companies, and large manufacturers prepare annual plans and budgets as part of their operational management. The Companies Act, 2063 BS requires public companies to present plans and budgets to their Annual General Meetings for shareholder approval.
iii. Decision Making Challenges: Nepali managers frequently make decisions under conditions of high uncertainty — political transitions, regulatory changes, infrastructure gaps, and the large informal economy all generate significant unpredictability. Building planning skills and structured decision-making practices is a priority for improving organizational performance across Nepal’s public and private sectors.
iv. Small Business Planning: Nepal’s large small-and-medium enterprise (SME) sector often lacks formal planning capacity. Research consistently shows that businesses with even basic written plans — objectives, annual budgets, marketing plans — significantly outperform those operating entirely reactively.
Conclusion
Planning and decision making are inseparable — planning is structured by decisions, and decisions are made within the framework of plans. According to Koontz and O’Donnell, “Decision making is the core of planning — it is the crossroads where alternatives converge and choices are made.” Together these two functions determine whether an organization moves purposefully toward its goals or drifts reactively from one crisis to the next.
As Peter Drucker observed, “The greatest danger in times of turbulence is not the turbulence — it is to act with yesterday’s logic.” For Nepal’s managers and organizations, developing rigorous planning habits and disciplined decision-making processes is not an academic luxury but a practical necessity — the foundation of organizational resilience and competitive capability in an uncertain and rapidly changing world.
Prepared for NEB Grade 12 Business Studies — Chapter 3: Planning and Decision Making Aligned with the National Curriculum Framework 2076, Curriculum Development Centre, Sanothimi, Bhaktapur
