UNIT 2: BUSINESS POLICY AND DECISION MAKING

2.1 INTRODUCTION
This is the second unit of the course. Here, we will discuss about different concepts of business
policy. The development of business policy was due to the rising need of real life business.
Clear policies help each manager to understand the range within which he/she can make
decisions and thus, feels less uncertain as to whether he/she can give answers to subordinates
without ‘getting into trouble.’ We will also discuss different factors to be considered before
framing policies and how policies are framed. At the end of the unit we will explain role of
policy in strategic management and decision making.
Basic features of Business Policy
We have already discussed the basic features of business policy. As we know:
a. Policies should be framed in align with organizational goals and objectives.
b. Policies act as guidelines to the managers in deciding the course of action.
c. Generally policies are formulated at top or senior level and implemented at middle and lower
level. To understand the meaning of policy very clearly let us study few examples of policy
framing:
• A company will not consider addition of new products whose ROI is less than 5 %.
• No customer should be given credit for more than 30 days.
• Company will not consider any cost measures if it means compromising on the quality of the
products.

2.2 FACTORS CONSIDERED BEFORE FRAMING BUSINESS

POLICIES
Policy implies broad form of guidelines. Policy comes first and strategy of a policy in an
organisation. For adherance to that policy, organisation needs strategies for recruitment from
outside. Over a period of time because of changing business environment and growing
competition, business policies of many companies evolved into specific strategic processes.
Formulation of policy is the responsibility of the top management, while formulating corporate
policies, the board has to take into account several factors. The philosophy, the approach of the
organization needs to be considered while framing business policies.
For any business such policies should be properly elucidated and correctly understood by all
concerned. For effective formulation of policy
one should take into account the following aspects:
1. Policies should be based on organisational objectives.
2. Policies should be capable of relating objectives to functional areas.
3. Policies should follow accepted standard of business.
4. Policies should be definite understandable and preferably in writing.
5. Policies should be stable and flexible.
6. Policies should facilitate effect and cordinated among functional areas.
For sound policy making following are the critical factors;
a. Relationship to organization objectives: The policies should be based on organizational
objectives. In other words while framing policies one should take into account for what
purposes and objectives the business has been established and how this can be best achieved.
The policy should reflect the principles, practices and philosophies. If the policy fails to relate
organisational objectives and personal objectives of individuals and groups, then the firm will
find it difficult to achieve its objectives.
b. Simple understandable: The policy should be stated in definite, positive and clear
understandable terms. Understanding of policy is important on the part of those affected by it.
Clarity is the essence of good policy. If the policies are clear cut then personal opinion will not
affect in decision making.
c. Written policies: Policy should be written so that they can be integrated within system and
policy manuals. According to Henry Carl a policy conceived as admin tool does not exist unless
it is in writing. When the policies are in writing, it ensures uniformity of freedom of action on
the part of the management.
d. Stable: The policy must be stable but should not be rigid. When the policies are stable, they
inspire confidence in the mind of the employees, customer and dealers. Policy should not be
modified or altered frequently but should be stable for fairly long time, may be two or three
years. If the policies are changed on regular basis it may create confusion in the mind of those
who are going to follow them. It is essential that policy should be reviewed, evaluated and
revised as per the change in the market condition or urgency of the company and changes in
the environment. The policy should be flexible; it means it should be able to adapt to short term
changes.
e. Comprehensiveness: The policy should be comprehensive. It should cover all issues
concerned with the firm.
f. Complementary to one another: All policies in the functional areas must be complementary
to one another. Eg. Manufacturing policy and purchase policy should be complementary to
each other.
g. Supplementary to overall corporate policies: Supplementary policies add to and extend
overall organisational policies. They are derived from policies that are directed towards the
achievement of economic objectives and can be broken down into supportive policies. If the
policies are not supplementary, there might be conflict between departmental policy and overall
policy. Precautions need to be taken in policy framing as the policy involved large sum of
money and unsound decision may in danger the companies bargaining power. Therefore
following needs to be considered before framing policies:
• What purpose and objective will it serve?
• What principle, concept, practices and philosophies of organisation will
it protect?
• How much would be the cost of implementation?
• Is it feasible to implement the policy?
• What areas will it cover?
• Will it be acceptable to all?
In short while framing policies the objectives of the business firm, its management structure,
financial resources available at its disposal, attitude, social values and norms of the top
management, policies of sister concern, government rules and regulations and public opinion
need to be considered. A company you can never evade responsibilities towards the society and
therefore policies must incorporate the statement that reflects organization’s interest in the
welfare of the society. Ethical values should be given due consideration.

2.3 STEPS INVOLVED IN FRAMING BUSINESS POLICIES

Policy formulation is a process of determining and laying down general principles on the basis
of which business will be operated. Policy acts as guidelines to the manager. Policy provides
and guide for decision making and act as a framework for organisational activity. Policies
involved standing decision which are to be followed at different level in the organisation. The
policies framed by top level management act as a guide for formulation of lower level policies.
For example product policies are normally determined by top level management. But this
policy requires some supplementary policies like R&D, pricing, advertising etc. Manager at
low level may decide about the supplementary policies.
Policy formulation involves following steps:
1. Identification of the Situation: Policy framing is not a simple task. It is a complex process
which requires the help of the experts. The policies are required to reflect the good practices in
society. Policy making involves all levels in the working organization.
2. Problem Definition: This is an important step in policy formulation. It involves
identification of problem and determining the need for framing policy. Normally it is the
function of line manager to identify the problems in their respective department. Once the
problems are identified the top management will try to analyse pros and cons and will work
out possible alternative preposition and finally determine policy needs.
3. Policy Recommendation: The next step is policy recommendation which will suit the
situation. This depends on the level at which policies are formulated. A manager has to make
choice among the various proposals. He has liberty to accept or reject the proposal according
to their suitability. If he feels he may modify the proposal to suit the working condition.
4. Policy Proposal: The departmental managers have to develop policies related to their areas
in accordance with corporate policies. Policies framed should be based on the guidelines
provided by the overall corporate policies. The purpose of the policy is to guide the lower level
management and the operative in making decisions. Each departmental manager will submit
the departmental policy statement to the Managing Director.
5. Development of Policy: The draft policy should be given wide publicity among all who may
be expected to operate. The purpose is to receive constructive criticism and suggestions. This
leads to formulation of sound policies which are developed after detailed discussion. The
middle management gets involved from their relative areas of responsibility. When policies are
framed and developed in this manner, these policies will stand the test of time and will hold
even under condition of stress.
6. Dissemination the Policy: Once the policies are formulated in clear, precise, simple
statement in accordance with principles and rules of action, it must be disseminated to those
who are responsible for its implementation. Sometime policy is promulgated by word of mouth
or at meetings and seminars. In certain cases company may publish handbook of the policy.
7. Explanation of the Policy: Once the policies are disseminated, it is necessary to explain and
educate the exact meaning of the policy. The person concerned with implementation of such
policy should be explained in clear terms all aspects of policies which includes purpose,
components significance and its relevance the role of the person who is going to implement. It
is also necessary to educate the person that how that policy relates with overall organisational
goals of the company. Company may use different methods and techniques like elucidation,
explanation, illustration, demonstration, simulation and case studies etc for dessemination.
8. Acceptance of the Policy: Before accepting the policy the persons related with its
implementations of the policy, must understand the principles underlying it and rules of action.
Once the policy is operative, questions will arise and these questions require interpretation by
the top management. The interpretation gives an opportunity to the policy maker to modify and
improve it as per the situation.
9. Policy Implementation: Policy once formulated and interpreted needs to be implemented.
Policy implementation is a process of putting policy into effect. Managing Director being the
executive head is ultimately responsible for policy implementation.
10. Policy Review: The most important task is to assess policy at regular interval. There should
be continuous review of policies. It helps us to know whether the policy has been effective in
the areas at which it was aimed. The opinions, complaints, reactions, comments or suggestions
are received from the persons entrusted with the implementation of the policy. The
effectiveness of policy can be judged on the basis of net profit, investment earning per share or
on the basis of qualitative measurement like internal consistency of the implemented policy,
consistency with the external factors, appropriateness and workability.+

2.4 POLICY CYCLE AND ITS STAGES

The policy cycle is a tool used for analyzing the development of policy framing. Cycle divides
the policy framing process into several stages. It starts right from notional starting point at
which policy maker think about a particular problem and to come out with policy and till its
end that is its implementation. Policy formulation is a continuous process and not mere single
event.
i. Agenda Setting: Organisation faces many problems and issues which requires management
to take immediate attention. It is the responsibility of the policy maker to decide on which
matter or issue is important and which one to be tackled on urgent basis. The policy framing
starts with defining and identifying the problem. It is rightly said that problem known is 50%
problem solved; hence it is the core responsibility of the policy framer to correctly diagnose
the problem. Once the problem is identified policy framing becomes easier task.
ii. Policy Formulation: Once the problem is identified, efforts are made to resolve the problem
by framing right policies. Objectives are set so that it will become easier for the implementer
to understand the underlined purpose of policy framing. Once the policies are formulated, it is
essential to find out its commercial feasibility. For this purpose it becomes essential to identify
the cost and estimating the effect of solution. It is the critical job to select the best policy
amongst many.
iii. Legitimation: It is not enough to formulate the best policy but it is equally important to get
it accepted by those who are going to implement it. The policy framer had a challenging task
of getting support for the policy. It can involve one or more combination of legislative
approvals, executive approval, seeking consent through consultation with affected group /
interest groups. It is one of the important steps in policy cycle.
iv. Implementation: After educating policy and getting consent from the concern, the next step
is to implement the policy. Establishing and employing an organisation to take responsibility
for implementation is the critical factor. For implementation, all the resources like money,
material, manpower, finance legal framework and so on should be made available.
This will ensure effective implementation of policy. If the resources are properly made
available, it will enable smooth execution of the policy. Here attention should be made on the
fact that decisions needs to be carried out as planned.
v. Evaluation: Once the policy is implemented it becomes essential to know whether the policy
was able to achieve the desired results. Assessment of the policy requires knowing the extent
the policy was successful or whether the policy decisions were correct ones. It will be called
successful if it gives the desired results. If there is any deviation necessary steps should be
taken.
vi. Policy maintenance or termination: If the policy fails to give desired outcome then it
should be modified. If the policy is not suitable to the present situation then it should be
discontinued.
The policy cycle is useful in many ways. It can be applied to any kind of organization.

2.5 IMPLEMENTATION OF POLICY CHANGE

Change is a major part of our lives, whether it is change in industries, technologies or various
sectors such as transportation, education, health care, social policies or organizational policies.
Change refers to any variation in the working of the organisation. Change is vital. It is essential
for survival, growth of any organisation. A company may like to change its machinery due to
advancement of technology. It may change its pattern of distribution. Those companies who
are able to manage change will get competitive edge in the market. Today change is seen in
every functional areas. There are changes in ownership or control of a company, changes in the
management, changes in the of fund in the organisation. When there is change in the company,
the level of anxiety arises. Individuals become anxious during change and resist it even the
changes could be for their betterment.
1. Knowledge Change: A change in knowledge comes through education and learning process.
Sometimes it occurs due to experience of the people.
2. Attitudinal Change: The change is brought about in the attitude of the people. The attitude
may be positive or negative. The change in attitude can be brought in by several motivational
approaches.
3. Behavioural Change: This change is brought because of change in the behaviour of a
person. It is very difficult to notice such change in short span of time.
4. Organisational Change: Organisations involving changes in the norms, customs and belief
of the people at large have to initiate it in a planned manner. Thus change is a way of life.
People may accept it, if that change is beneficial to them or may resist, if they think the changes
are going to affect them negatively.