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Nature and importance of business policy, development

and classification of business policy, mechanism or


• A policy is a principle or protocol to guide decisions and achieve rational outcomes.
• A policy is a statement of intent, and it is implemented as a procedure or protocol.
• Policies are generally adopted by the Board of Directors or senior governance body
within an organization whereas procedures or protocols would be developed and
adopted by senior executive officers.
• Policies can assist in both subjective and objective decision making. (Subjective-e.g.
work-life balance policy, objective e.g. password policy)
• The term may apply to government, private organizations, groups and individuals.
• Policy differs from rules or law. While law can compel or prohibit behaviors (e.g. a law
requiring the payment of taxes on income), policy merely guides actions towards
achieving desired outcome. • Policy may also refer to the process of making important
organizational decisions, including the identification of different alternatives such as
programs or setting priorities, and choosing them on the basis of the impact they will
have. • Policies can be understood as political, management, financial, and
administrative mechanisms arranged to reach explicit goals.

Definition of Business Policy

• Business policy basically deals with decisions regarding the future of an ongoing
enterprise. Such policy decisions are taken at the top level after carefully evaluating the
organizational strengths and weaknesses in terms of product price, quality, leadership
position, resources etc., in relation to its environment.
• Once established, the policy decisions shape the future of a company. In a way,
business policy implies the choice of purposes, the shaping of organizational identity
and character, the continuous definition of what is to be achieved and the deployment
of resources for achieving corporate goals.
Some useful definitions of Business Policy

• A business policy is an implied overall guide setting up boundaries that supply the general limit
and direction in which managerial action will take place.
• A business policy is one, which focuses attention on the strategic allocation of scarce resources.
Conceptually speaking strategy is the direction of such resource allocation while planning is the
limit of allocation
• A business policy represents the best thinking of the company management as to how the
objectives may be achieved in the prevailing economic and social conditions
• A business policy is the study of the nature and process of choice about the future of
independent enterprises by those responsible for decisions and their implementation
• The purpose of a business policy is to enable the management to relate properly the
organization’s work to its environment. Business policies are guides to action or channels to
• 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.
• 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

An effective business policy must have following


• Specific- Policy should be specific/definite. If it is uncertain, then the implementation

will become difficult.
• Clear- Policy must be unambiguous. There should be no misunderstandings in
following the policy.
• Reliable/Uniform- Policy must be uniform enough so that it can be efficiently followed
by the subordinates.
• Appropriate- Policy should be appropriate to the present organizational goal.
• Simple- Policy should be simple & easily understood by all in the organization.
• Comprehensive- In order to have a wide scope, a policy must be comprehensive.
• 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.
• Stable- Policy should be stable else it will lead to uncertainty in minds.
• Deals with decisions regarding the future of an ongoing enterprise.
• Top level management is involved in policy formulation.
• Gives a shape to the future of a company
• Allocates the resources.
• Goal oriented.
• Creates identity and character of the company.
• Integral.
• Comprehensive.
• Specific.
• Stable

Scope of Business Policy

• It covers many aspects of business.

• It includes the functions and the responsibilities of the senior management related to
organizational problems, which affect the success of the total enterprise.
• It deals with the determination of the future courses of the action that the organization has to
• It involves a choice of purposes and defining what needs to be done in order to identity the
• It includes the resources by the help of which the organization can achieve its goals.

Importance of a Business Policy

A. From the view point of course itself:
• It “integrates knowledge and experience” gained in various functional areas of management.
• It enables the learner to understand the complex interaction that takes place between different
functional areas.
• It deals with “the constraints and complexities of the real life business”.
• It offers a very broad perspective to its learners.
• It makes the study and practice of management more meaningful and guides how to make policy/
B. For the understanding of Business Environment
• It creates an understanding of how policies are formulated.
• This helps in understanding the complexities of the environment that the senior management
faces in the policy formulation.
• By gaining an understanding of the business environment, managers become more receptive to
the ideas and suggestions of the senior management. Such an attitude makes the policy
implementation simpler.
• By being able to relate the environmental changes to policy changes, mangers feel themselves to
be a part of a greater design. This reduces feelings of isolation.

C. For understanding the organization:

• It provides a basic frame work for understanding strategic decision making while a
person is at the middle level of the management.
• It brings to the organization and to its managers “the benefit of years of distilled
experience in strategic decision making”.
• An understanding of organization in terms of business policy may lead to an
improvement in job performance.

D. For personal Development:

• It is beneficial for an executive to understand the impact of policy shifts on the status of
one’s department.
• It enables the executives to avail an opportunity with regard to career planning and
• It offers a unique perspective to executives to understand the senior management
• It provides powerful insights in dealing with policy-making at the macro level as well as
at an individual level through self-analysis.

Purpose of Business policy

• To integrate the knowledge gained in various functional areas of management
• To adopt a generalist approach to problem-solving.
• To understand the complex inter-linkages operating within an organization through the use of
systems approach to decision making and relating them to changes taking place in the external
Objectives of Business Policy
A. In terms of knowledge:
• Learner understands the various concepts like strategy, polices, plans, programmes etc.
• Gives knowledge about the environment (external & internal) and how it affects the functioning
of an organization.
• Through the tools of analysis and diagnosis a learner can understand the environment in which
the firm operates.
• Information about the environment helps in the determination of the mission, objective and
strategies of a firm.
• Through the knowledge gained in business policy, the learner is able to visualize how
implementation can take place.
• To survey the literature and learn about the searches taking place in the field.

B. In terms of skills:
• Attainment of knowledge leads to the development of skills.
• Develop an analytical ability and use it to understand the situation
• Develops the skills of identifying factors relevant in decision-making.
• Increases the mental ability of learners and enables learners to link theory with practice.
• Leads to the development of oral as well as written communication skills.

C. In terms of attitude:
• Development of generalist attitudes enables the learner to approach and assess a situation from all
possible angles.
• A generalist is able to function under conditions of partial ignorance by using his judgement.
• Necessity to possess a liberal attitude and be receptive to new ideas, information and suggestions
is important for a professional manager.
• An important attitudes is “to go beyond and think” when faced a problematic situation. It
develops a creative and innovative attitude which is the hall mark of a general manager.
• Classification of Policies Policies may be classified as follows:
A. On the Basis of Source:(Origin, Appealed, Imposed)
B. On the Basis of Functions:(HR, Finance, Production, etc)
C. On the basis of Expression: Oral, Written, Implied
D. Based on Scope: Basic, General
E. Based on Levels of Mgmt: Top Mgmt Policy, Middle Mgmt Policy & Operating Mgmt Policies
F. Based on Situation and Contingency: Normal, Contingency, Administrative or Major,
Departmental or Minor
On the Basis of Source
According to source, origin or emergence, policies may be of the following kinds:
• Originated Policy
It is also known as formulated policy. It is formulated by top management to guide
decision making at lower levels. Such policies are broad in scope and affect usually the
whole organization or its major segments. These policies are often written ones, typically
in the form of a policy manual of the organization.

• Appealed Policy
It is a policy formulated on the appeal or request of subordinates for filling the gaps left
by originated policies. In other words, when a subordinates refers an exceptional problem
of frequent nature not covered by existing policies, to his superior and appeals for a
policy decision. When the superior makes decision in such a case, it becomes a precedent
(policy) for future action. Such policies may be formulated at any level and are in the
nature of flowing upward policies. Imposed Policy. It is a policy, which an organisation
is compelled to adopt due to some outside forces, such as the government and its
regulatory agencies, trade association, trade unions.

On the Basis of Functions

Policies are needed in all areas of business of an enterprise. These may be classified on
the basis of different managerial functions as follows:
1. Production Policy
Raw material, purchase policy, repairs and maintenance policy, technology adoption and
development policy, quality control policy, inventory policy and research and
development policy are some examples in the category. Indent for the purchase of raw
materials should be made at least a week in advance is an example of Raw Materials
Purchase Policy.

2. Human Resource Policy

Examples in this category are recruitment policy, training policy, employee career
development policy, wages and salary policy, placement policy, promotion policy and
transfer policy, employee participation policy. Any vacancy shall be filled first by
promotion from within the organisation and then, if need be, from outside sources Is an
example of Recruitment Policy.

3. Marketing Policy
Capital structure policy, packaging policy, distribution policy, advertising policy,
customer service policy, credit policy, market research policy and important examples in
this category. Customer’s complaint must be responded within the next day is an example
of Customer Service Policy.

• 4. Finance Policy
Capital structure policy, fixed capital policy, working capital policy, investment policy,
research policy, divident policy are some examples in this category. Excess capital, if any
should be invested for short term only, preferably in limited company shares registered in
stock exchange is an example of Investment Policy.

5. Accounting Policy
Inventory valuation policy, depreciation policy, provisions policy (for bad debts etc)
deferred revenue expenditure policy etc. are examples in this category. Deferred revenue
expenditure (e.g., a huge amount spent on advertisment) should be spread over the years
of its benefit generation and written off every year accordingly, is an example of
Deferred Revenue Expenditure Policy.

On the basis of Expression:

• Oral
• Written
• Implied
• (D) Based on Scope: 

• Basic Policy: basic activities to run necessary activities.
• General Policy: More specific and apply to large segments of the organization
• Specific Policy: covers specific or particular activities under special guidance and
• (E) Based on Levels of Mgmt:
• Top Mgmt Policy: high level of significance
• Middle Mgmt Policy: more significant
• Operating Mgmt Policy: include operational aspect of functional area
• (F) Based on Situation & Contingency:
• Normal: Aim at smooth working of day to day operations
• Contingency: such an event which may take place unexpectedly
• Administrative or Major: when size of org. is small, president or GM personally
• Departmental or Minor: mainly concerned with functional operations of business
Factors Influencing Business Policy
• Internal Factors: new problems arise in org, new budget of dept, internal financial
matters, shareholders influence, trade union
• External Factors: consumers, government, international convention, competitors,

Limitations of Business Policy

• Inadequate Coverage: don’t cover each and every problem
• Limited Area: Policies don’t give enough room to managers to decide
• Consistency in policies: not very fruitful in rapidly changing business environment
• Policies are medium not end
• Cannot be covered all the aspects

5 Tips for Creating a Business Policy

• Drafting a new business policy is not merely a task of writing it down and telling other
employees the new rule. Creating a new business policy requires consideration of the
type of policy, ensuring it suits your business (and is compatible with your partner's
ideas, if applicable). Below are five things to consider when developing a business

The Policy's Impact

• Your foremost concern should be how that policy will affect your business's daily
operations. In any policy change, there is always someone who is unhappy. While the
majority of the time this unhappiness is irrelevant to the policy's necessity, it can
sometimes make the policy more of a problem than a benefit. If a policy will unduly
burden yourself or your employees, you might want to consider making changes to the
policy or to scrap the policy altogether. • Many business partners prefer to discuss and
mutually agree on instituting a new policy. If you believe that your partner would consult
rather than be told the new policy, consider setting a private meeting to discuss the topic.

The Policy's Implementation

• Some policies are necessary, but impossible to implement. Some policies are desirable,
but not worth the effort. Some policies are simple, but require complex steps to properly
implement. Prior to establishing a business policy, consider what you must do to put it
into effect. If you are able to complete the tasks necessary to implement a new policy,
analyze whether it is worthwhile to do so. A policy that seems problematic or difficult to
implement may need to be altered or abandoned.

The Policy's Relevancy

• A policy can be formal or informal, but whichever it is, it must still conform to your
business's operations. An extremely formal policy in an informal business will seem out
of a place and, potentially, need to be changed or simply forgotten soon after its
implementation. This consideration requires you to analyze the intent of the policy. If the
intent of a policy conforms to the general feel and operation of your business, its
implementation will likely be valuable.

The Policy's Effect on Efficiency and Reliability

• Efficiency and reliability are directly related to a company's success. An inefficient or

unreliable business will most likely fail quite quickly. If your policy is designed to create
a more efficient or reliable company, its implementation, no matter how troublesome or
problematic, will benefit the business in the long term. This may indicate that the policy
is worth instituting, regardless of the effort it requires.

The Policy's Foundation

• You should also consider the impetus(drive/thrust) for the policy. If you develop the
policy in response to a problem or complaint, analyze whether it will truly fix the
problem. If, however, you developed the policy solely because you wanted to, you may
be creating additional, unnecessary work.


• You can adapt the familiar five-step decision making process (outlined below) to decide
which program or service to assess.
• Step 1 Identifying/clarifying the decision to be made. If the decision has not yet been
isolated, it should be identified as a first step. Sometimes the decision to be made will
have been presented to the decision maker. In those situations, Step 1 calls for the
clarification of what the decision actually entails.
• Step 2 Identifying possible decision options. The next step requires the decision maker to
spell out, as clearly as possible, just what the decision alternatives really are. For
instance, if one were attempting to buy a bicycle, do the decision options only consist of
the different types of bicycles, or is another option to refrain from buying a bicycle
• Step 3 Gathering/processing information. Next, the decision maker collects or processes
information that can help guide the decision. If such information is already at hand, then
it simply needs to be processed; that is, studied and understood by the decision maker. If
there is no relevant information available, or if there is insufficient information, then such
information must be collected so it can be processed. The more significant the decision,
the more rigorous the information-gathering process.
• Step 4 Making/implementing the decision. After the information has been considered
according to its relevance and significance, a decision based on that information should
be made and, thereafter, implemented.
• Step 5 Evaluating the decision. In recognition of the fact that not all of one's decisions are
likely to be defensible, the final step in the five-step decision making process.


1. Identify Problem/Demand/Need/Objective
2. Environment Study And Analyses
3. Background Of Problem/Study Of Existing policy
4. Facts/information gathering and analyses
5. Designing options
6. Evaluating options
7. Identifying better option
8. Identifying implementing authority as per requirement
9. Evaluation of implementation time to time.