The organization sets the objectives and works towards their achievement. Once these objectives are defined and strategies determined, certain policies have to be made to put them into action. Business policies act as a guide to action. They provide the frame work within which an organization has to meet its business objectives. The policy points out the direction in which the company ought to go.
Decision making is the primary task of a manager. While making decisions, it is common that managers consult the existing organizational policies relevant to the decisions. Policies provide a basic framework within which managers operate.
Policies exist at all level in the organization. Some may be major policies affecting the entire organization while others may be minor in nature affecting the departments or sections in the organization. It has to be remembered that a policy is also a decision. But it is a due time standing decision, in the light of which, so many routine decisions are made.
Following are examples of business policies.
- "We promote employees on the basis of experience"
- "We sell televisions only for cash"
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| Making Sense of Business Policies |
Define Business Policy?
Business Policy defines the scope or spheres within which decisions can be taken by the subordinates in an organization. It permits the lower-level management to deal with the problems and issues without consulting top level management every time for decisions. Business policies are the guidelines developed by an organization to govern its actions. They define the limits within which decisions must be made. Business policy also deals with acquisition of resources with which organizational goals can be achieved. Business policy is the study of the roles and responsibilities of top-level management, the significant issues affecting organizational success and the decisions affecting organization in long-run.
According to Koontz and O'Donnell, "Policies are plans in that they are general statements of principles which guide the thinking, decision making and action in an organization."
Types of Policies
Policies come into being in any organization in different ways. Koontz and O’Donnell have classified policies on the basis of their source under the following categories
1. Original Policy: The top management formulates policies for the important functional areas of business such as production, finance, marketing etc. The objective is to help the concerned functional managers in decision making in their respective areas. Thus, originated policies are the result of top management initiative. These policies are formulated in the light of the enterprises objectives. They may be broad or specific depending on the degree of centralization of authority. If they are broad, they allow the manager some operational freedom. On the other hand, if they are specific, they are implemented as they are.
2. Appealed Policies: Managers often confront with particular situations as to whether they have the authority to take a decision on a particular issue or problem. The policies regarding some issues may be unclear or may be totally absent. In such case, he appeals the matter to his superiors for thinking. Appeals are taken upwards till they reach the appropriate level in the hierarchy. After thorough examination of the issues involved, policy decision would be taken at the appropriate level.
3. Implied Policies: In some cases, there may not be specific policies. Managers draw meaning from the actions and behavior of their superiors. Though there is no explicit policy, managers may assume it in a particular way and go about in their day-to-day operations.
4. Externally Imposed Policies: These are the policies which are not deliberately conceived by the managements. They are rather, imposed as the organizations by the agencies in the external environment like Government Trade Unions, Industry Association, Consumer Councils etc. These agencies to protect the interest of the respective groups may lay down certain policies to be followed by the business. As the interaction of the business with external environment is increasing, one can find many policies thus coming into being in any modern business. For instance, the recruitment policy of the organization is influenced by the Govt’s policy towards reservation to weaker sections. Anti-pollution measures, concern for the quality of the product, customer care and service etc. come under this category.
Features of Business Policy
An effective business policy must have following features
1. Specific - Policy should be specific and definite. If it is uncertain, then the implementation will become difficult.
2. Clear - Policy must be unambiguous. It should avoid use of jargons and connotations. There should be no misunderstandings in following the policy.
3. Reliable/Uniform - Policy must be uniform enough so that it can be efficiently followed by the subordinates.
4. Appropriate - Policy should be appropriate to the present organizational goal.
5. Simple - A policy should be simple and easily understood by all in the organization.
6. Inclusive/Comprehensive - In order to have a wide scope, a policy must be comprehensive.
7. Flexible - Policy should be flexible in operation/application. This does not imply that a policy should be altered always, but it should be wide in scope so as to ensure that the line managers use them in repetitive/routine scenarios.
8. Stable - Policy should be stable else it will lead to indecisiveness and uncertainty in minds of those who look into it for guidance.
Importance of business Policy
1. Learning – business policy to integrate the knowledge and experience gained in various functional areas of management. It enabled the learner to understand and make sense of the complex interaction between different functional areas.
2. Business Environment - business policy helps to make the study and practice of management more meaningful as one can view business decision making in its proper perspective. Short terms gains for department may be sacrificed in the interest of the long term benefits that may accrue to organization as a whole.
3. Understanding the Organization – business policy helps to create an understanding of how policies are formulated. Its helps to creating an appreciation of the complexities of the environment that are faced by senior management.
4. Personal Development – beneficial for an executive to understand the impact of policy shifts on the status of one’s department and the position one occupies. Understanding of business policy enables executive opportunity or avoids a risk with regard to career planning and development.
Purpose and Scope of Business Policy
Purpose of business policy
1. To integrate the knowledge gained in various functional areas of management
2. Adopt a generalist approach to solving problems
3. Understand the complex interlink ages operating within the organization. Through the use of system approach to decision making and relating these chances taking places in the external environment.
Scope of Business Policy
1. Business policy consists of a variety of subject that affect various interest groups in the Organization and Outside it.
2. Business policy is concerned with the various functional areas like production, human resources, marketing and finance.
3. We call understand Business policy areas in two broad categories: Major and minor policies. The overall objectives, procedures and control are covered in major policies. These policies are concerned with each and every aspect of the Organization, its structure, its financial status, its production stature, its human resources and all those issues which require attention like mergers, research, expansion, etc. Basically, the top management is involved in the framing of such major policies. Further, the operations and activities are also carried Out by executives so that the organizational objectives are met.
Objectives of Business Policy
1. In Terms of Knowledge – The Various concepts like Strategy, Policy, Plans and Programmes are encountered in the functional area course too. It is imperative to understand these concepts specifically in the business policy. Through all these tool Learner can understand the environment in which firms operates. The development of such approach helps in problem solving and decision making for Business.
2. Skills – Attainment of knowledge should lead to skills in order to apply hat has been learnt. This can be taken place by an analysis and interpretation of case studies as well as business events to develop skill of identifying the factors relevant in decision making. SWOT of analysis and suggestion of appropriate strategies and policies of core content of general management decision making.
3. Attitude - Inculcation of appropriate attitude amongst Learner. Function under partial ignorance conditions. In long range planning especially, the manager has to make do with incomplete information.
Factors determining Business policy
The Business policy of an organization is influenced by various interrelated and interacting, factors. These factors can be classified as internal and external factors. The determinants which are internal to the firm/organization and which influence the decisions directly are known as the internal factors. External factors include all those factors which act from outside the firm and influence the organization externally. We discuss these determinants one by one below:
Internal Factors
The determinants include the Business mission, Business objectives, Business resources and the management values which are all internal to the organization and play a very important role in the formulation of Business policy.
1. Business Mission: The policy maker has to understand the Business mission, so that the policy is in tune with it. Business mission provides the company with the meaning for which it exists and operates. Because policy provides guidelines for managerial action, it has to be made in a manner that it accomplishes the Business mission.
2. Business Objectives: Another internal determinant of Business policy are the Business objectives. All organizations frame organizational objectives and work towards their achievement. Policy makers must take into account the economic, financial and other objectives of the company.
3. The Resources: The organization has to carry out its activities keeping in mind the resources it has. The Business policy has to identify the various resources available and then only call it be made sound. The size of plants, capital structure, liquidity position, personnel skills and expertise, competitive position, nature of product etc. all help in the formulation of Business policy.
4. Management Values: Business policy reflects the values imbibed in the organization. The personal values of the managers forming Business policy influences its formulation. Management values differ from organization to organization. It is an important determinant of Business policy.
External Factors
These include the forces external to the firm. The external determinants of Business policy are industry structure, economic environment and political environment.
1. Industry Structure: The formulation of Business policy is influenced by the industry ill which the firm exists. The structure of industry comprises of size of firms, the entry barriers, number of competitors etc. The Business policy is formulated keeping in mind competitors, strategies, policies, etc.
2. Economic Environment: Economic environment comprises of the demand, supply, price trends, the national income, availability of inputs, the various institutions etc. It includes all these factors which influence the policies of the firm. Therefore, it becomes one of the most important determinants of Business policy.
3. Political Environment: The firm has to carry Out its activities in accordance with the government regulations and policies. If these are not complied with the firm would not be able to meet its objectives in ail efficient manner. The various policies like monetary policy, fiscal policy, credit policy influence the Business policy of the firm.
4. Social Environment: The firm affects various sections of the society. The various sections ill turn influences the activities of the firm. The social beliefs of the managers influence policies. The religious, cultural and ethnic dimensions have to be dealt with while formulation policies of an organization.
5. Technology: Every now and then, new technologies are entering the market. An organization has to change with the changes in the environment. It has to remain up to date with respect to technology it uses. Thus, technology also plays an important role in formulation of Business policy.
Difference between Policy and Strategy
The term “policy” should not be considered as synonymous to the term “strategy”. The difference between policy and strategy can be summarized as follows
1. Policy is a blueprint of the organizational activities which are repetitive/routine in nature. While strategy is concerned with those organizational decisions which have not been dealt/faced before in same form.
2. Policy formulation is responsibility of top-level management. While strategy formulation is basically done by middle level management.
3. Policy deals with routine/daily activities essential for effective and efficient running of an organization. While strategy deals with strategic decisions.
4. Policy is concerned with both thought and actions. While strategy is concerned mostly with action.
5. A policy is what is, or what is not done. While a strategy is the methodology used to achieve a target as prescribed by a policy.
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