STRATEGIC MANAGEMENT & BUSINESS POLICY

B.B.A. – VI Semester
BBA 601
Unit – I: Nature & importance of Business Policy, Development & Classification of Business
Policy; Mechanism of Policy making
Meaning of Business Policy
Business Policy refers to a set of guidelines, rules, and principles formulated by top management to
guide and control managerial actions toward achieving organizational objectives.

It acts as a blueprint for decision-making, ensuring consistency and long-term orientation in

business operations. Business policies are the guidelines an organization formulates to govern its
actions. They define the limits and scope within which subordinates must make decisions. It allows
lower-level management to address issues and challenges without consulting top-level management
each time.

The term "Business Policy" comprises two words, Business and Policy. Business, as we know it,
means the exchange of goods and services for increasing utility. Policy may be defined as "the mode
of thought and the principles underlying the activities of an organization or an institution." Policies
are general statements of principles that guide the thinking, decision-making, and actions in an
organization.

Business policy is a set of principles and rules that directs the decisions of the subordinates. Policies
are framed by the top-level management to serve as a road map for operational decision-making. It
helps stress the rules, principles, and values of the organization. Policies are designed by taking
opinions and general views of several people in the organization regarding any situation. They are
made from experience and basic understanding. In this way, the people who come under the range of
such policies will completely agree upon its implementation. Policies help the management of an
organization to determine what is to be done in a particular situation. These have to be consistently
applied over a long period of time to avoid discrepancies and overlaps.

[Link]: “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 relation to its environment”.

Features of Business Policy: An effective business policy must have the following features:
a) Specific- Policy should be specific/definite. If it is uncertain, then the implementation will become
difficult.
b) Clear- Policy must be unambiguous. It should avoid the use of jargon and connotations. There
should be no misunderstandings in following the policy.
c) Reliable/Uniform- Policy must be uniform enough so that it can be efficiently followed by the
subordinates
d) Appropriate- Policy should be appropriate to the present organizational goal.
e) Simple- A policy should be simple and easily understood by all in the organization.
f) Inclusive/Comprehensive- To have a wide scope, a policy must be comprehensive.
g) Flexible- Policy should be flexible in operation/application. This does not imply that a policy
should always be altered, but it should be comprehensive in scope so that line managers can use it in
repetitive/routine scenarios.
h) Stable- Policy should be stable, else it will lead to indecisiveness and uncertainty in the minds of
those who look into it for guidance.
Nature of Business Policy
1. Top Management Function: Business policy is formulated by top-level management, such as the
Board of Directors and Chief Executives. It reflects their vision, philosophy, and long-term intentions.
Example: If the top management decides to focus on sustainability, the company may frame a policy
promoting eco-friendly production methods.

2. Long-Term in Nature: Business policies are generally concerned with long-term objectives rather
than short-term operational issues. They guide the organization over an extended period. Example: A
company adopting a “market leadership policy” aims at long-term dominance rather than short-term
profit maximization.

3. Future-Oriented: Business policy is forward-looking. It prepares the organization to face future

challenges and opportunities. Example: A technology company may frame a policy emphasizing
continuous innovation to remain competitive in future markets.

4. Broad and General Guidelines: Policies provide a general framework for decision-making rather
than detailed instructions. They set boundaries within which managers operate. Example: An HR
policy may state that promotions will be based on merit, but it may not specify every individual case.

5. Decision-Making Framework: Business policy provides a structured framework that guides

managers in making consistent and rational decisions. Example: A credit policy in a company guides
managers on whether to grant credit to customers or not.

6. Dynamic and Flexible: Business policies are not rigid. They are modified according to changes in
the business environment. Example: During an economic recession, a company may revise its
expansion policy to focus on cost control.

7. Integrative in Nature: Business policy integrates various functional areas such as marketing,
finance, HR, and operations to achieve common objectives. Example: If a company adopts a growth
policy, marketing must increase sales efforts, finance must arrange funds, and production must
expand capacity.

8. Action-Oriented: Although broad in nature, business policies guide actual actions within the
organization. Example: A customer service policy ensures that employees respond to complaints
within 24 hours.

9. Based on Organizational Values and Ethics: Business policies reflect the ethical standards and
values of the organization. Example: A company may adopt a strict anti-corruption policy to ensure
ethical dealings.

10. Continuous and Evolving: Business policies evolve as the organization grows and as
environmental conditions change. Example: A small business may initially have informal policies,
but as it grows, formal written policies are developed.

Importance of Business Policy: Business policies play a crucial role in guiding and
regulating the functioning of an organization. They provide a framework for decision-making,
ensure consistency, and help organizations achieve their long-term objectives in a systematic manner.

1. Provides Clear Direction and Purpose: Business policies clearly define the mission, vision, and
objectives of the organization. They act as a roadmap that guides managers and employees toward
common goals. Without policies, organizations may suffer from confusion and a lack of direction.
2. Ensures Consistency in Decision-Making: Policies ensure that similar situations are handled
similarly, reducing uncertainty and bias. This brings uniformity and fairness in managerial
decisions across departments. Example: A uniform HR policy ensures equal treatment of employees.

3. Facilitates Strategic Planning: Business policies form the base of strategic management.
They help in Formulating strategies, selecting suitable courses of action, and implementing long-term
plans. Thus, policies bridge the gap between objectives and actions.

4. Improves Managerial Efficiency: Policies reduce the need for repeated decision-making by
managers. Once policies are framed, managers can take quick and effective decisions within
predefined limits. It saves time, reduces managerial workload, and enhances productivity.

5. Enhances Coordination Among Departments: Business policies help in coordinating the

activities of various departments, such as Marketing, Finance, Human Resources, and Production. All
departments work within a common policy framework, reducing conflicts and duplication of efforts.

6. Acts as a Tool for Control: Policies provide standards against which actual performance can
be measured. They help management in monitoring activities, evaluating performance, and taking
corrective actions. Thus, business policy is closely linked with the controlling function of
management.

7. Helps in Delegation of Authority: Clearly defined policies enable top management to delegate
authority to lower levels confidently. Employees can make decisions without constant supervision as
long as they follow policies. This promotes: Decentralization, Initiative, Accountability.

8. Facilitates Employee Guidance and Motivation: Business policies guide employees regarding:
What is acceptable behaviour, what actions are permitted, and what procedures must be followed.
When employees clearly understand policies, it boosts morale, confidence, and motivation.

9. Ensures Stability and Continuity: Policies ensure smooth functioning of the organization even
when top management changes, new managers are appointed, they provide continuity in operations,
and prevent disruption due to leadership changes.

10. Helps in Adapting to Environmental Changes: A dynamic business environment demands a

timely response to: Economic changes, Technological developments, Legal regulations, Competitive
pressures. Well-designed policies help organizations adapt and survive in a changing environment.

11. Promotes Ethical Behaviour and Corporate Governance: Business policies reflect the values
and ethical standards of the organization. They help in: Promoting transparency, ensuring legal
compliance, and enhancing corporate governance. This builds trust among stakeholders.

12. Improves Organizational Image: Clear and fair policies improve the organizations: Internal
culture, External reputation, Customers, investors, employees, and society views such organizations
as reliable and professional.
Difference between Strategy and Policy
Basis for
Strategy Policy
Comparison
Meaning Strategy is a comprehensive plan made Policy is the guiding principle that
to accomplish the organizational goals. helps the organization to make
logical decisions.
What is it? Action plan Action principle
Nature Flexible Fixed, but they allow exceptional
situations
Related to Organizational moves and decisions for Organizational rules for the
situations that have not been activities that are repetitive in
encountered previously. nature.
Orientation Action Thought and Decision
Formulation Top Level Management and Middle Top Level Management
Level Management
Approach Extroverted Introverted
Describes Methodology used to achieve the target. What should be done and what
should not be done

Development of Business Policies: The development of business policies refers to the systematic
process through which policies are formulated, shaped, and refined to guide managerial decisions and
organizational actions in order to achieve long-term objectives. Business policies are not formed
suddenly; they evolve with the growth of the organization and changes in the business environment.

How Business Policies Are Developed

1. Identification of Organizational Objectives: The first step in developing business policies is to
clearly define:
 Mission
 Vision
 Long-term goals
Policies must be aligned with the overall objectives of the organization.

2. Analysis of Business Environment: Management analyzes both:

 Internal Environment – resources, capabilities, strengths, and weaknesses
 External Environment – economic, political, legal, social, technological, and competitive
factors
This helps in framing realistic and relevant policies.

3. Assessment of Management Philosophy: Policies reflect the values, beliefs, and attitudes of top
management. For example:
 Risk-taking vs conservative approach
 Employee-oriented vs task-oriented culture

4. Study of Past Policies and Experience: Previous policies and past experiences are reviewed to:
  Identify successful practices
 Avoid past mistakes
This ensures continuity and improvement.

5. Generation of Policy Alternatives: Different policy options are developed for various situations.
Each alternative is evaluated based on:
 Cost
 Feasibility
 Risk
 Long-term impact

6. Selection of Appropriate Policy: The most suitable policy alternative is selected after careful
evaluation. The selected policy should be:
 Consistent with objectives
 Flexible
 Practical and simple

7. Approval by Top Management: Since policies involve long-term implications, final approval is
given by the Board of Directors and Top Management. This gives policies authority and legitimacy.

8. Communication of Policies: Policies must be: Clearly written, properly communicated to all levels
Effective communication ensures correct understanding and implementation.

9. Implementation of Policies: Policies are put into action by:

 Allocating resources
 Assigning responsibilities
 Coordinating departmental activities

10. Review and Revision: Business policies are periodically reviewed to ensure:
 Relevance
 Effectiveness
 Alignment with environmental changes
Necessary modifications are made when required.

Classification of Business Policy

ACCORDING TO THE LEVEL OF FORMULATION

a) Top Management policies: These are usually developed by the MD, VC, and GM. They are
usually about investments, diversification, acquisitions, available capital, HR requirements, R & D
requirements, problems with promotion, transfer, and achieving organizational goals, etc.

b) Middle-level Management policies: These are developed after talks between middle and upper-
level executives. They usually are about employee selection for a specific job, installing (fixing) new
equipment, resources, and their selection, deciding wages and salaries, and developing incentive
plans, getting finance to solve problems, etc.

c) Lower-Level Management policies: These are developed by the people who are usually
supervisors. They are directly related in achievement. They are in charge of providing tools, raw
materials, training, quality, discipline, and improving the morale of employees, motivating them, and
reducing absenteeism, etc.
d) Operational Level Management policies: This is usually written down rules and policies in
manuals and workbooks, which the operational level employees are supposed to follow.

ACCORDING TO FUNCTIONAL AREA

a) Production Policies: These involve policies regarding product line, type of product, selection of
technology, process, equipment, tools, location of plant, layout, budget, maintenance, inventory
control, quality, cost control, labor relations, etc.

b) Marketing and sales policies: These are related to market analysis, trends, demand forecasting,
the total concept of product mix, and market mix. Spotting present and potential market, the size and
nature of customers, competitors, distribution of products, promotion and pricing, selection, training
and developing sales force, division of market area, establishing sales volume and sales budgets, etc.

c) Financial Policies: These are required for prosperity and long-term survival. They include capital
requirements such as working, short, medium, and long-term, methods of fundraising, utilization of
funds, profit policy, accounting policy, allocation policy, finished goods inventory policy, provision
for bad debts, etc.

d) Personnel Policies: These are concerned with recruitment, selection, and utilization of human
resources. Sources of HR, training, promotion, transfer, wages, incentives, benefits, services, etc.

ACCORDING TO EXPRESSION

a) Oral policies: These are word-of-mouth policies adopted usually when organizations are small and
face-to-face communication is desired. Direct communication with a better understanding is desired
for flexibility. However, it suffers from drawbacks like improper interpretation, being easily forgotten
when issued less frequently, etc.

b) Written Policies: These are put in black and white and stated clearly, for the personnel to
understand. Therefore, it is clear, complete, precise, contains legal terms use simple language, and is
warm to all those who read. It should be convenient for reference and application wherever and
whenever necessary. However, they too have disadvantages, as they are at times problem-creating if
not properly framed.

c) Implied Policies: These can be understood from the behaviour of executives; they are not stated or
written, they may be included in the philosophy of the business, social values, and even traditions.
Best suitable are dress codes, prohibition of smoking or drinking in working areas. Employing people
of a certain community, race, gender, etc., can only be an implied policy, but written policies like the
above can cause legal problems.

ACCORDING TO THE NATURE OF ORIGIN

a) Originated Policies: These policies are derived from the company objectives, which are determined
by the top management. Subordinates are supposed to readily accept such policies.

b) Appealed Policies: These are also known as “suggested policies”, since these are based on the
suggestions of employees, subordinate or consultants. They are more effective as they involve
employees and the top management.

c) Imposed Policies: These are not accepted willingly, but are rather forced by external forces like
government, trade unions, legal acts, society, etc. They have to be followed whether they like it or not.
d) Derivate Policies: These are derived from the basic or major policies and are operational. They are
guidelines in day-to-day operations and are usually developed by the respective departments or
sections.

ACCORDING TO THE SCOPE OF ORGANISATION

a) Basic Policies: They form the basis of the organization and are developed by top management.
They give an idea about the company, its activities, its environment, and its influence over other
policies, which is very important to the organization.

b) General Policies: They are usually developed by the middle-level management. Such policies are
very specific and apply to large segments of the organization.

c) Specific or departmental Policies: It is developed by a specific department for managing its

routine activities, i.e., day-to-day activities of the department.

ACCORDING TO THE NATURE OF MANAGERIAL FUNCTIONS

a) Planning Policies: These are connected with the path of action, which leads to company activities
and achieving organizational goals. They include;
  Establishing corporate objectives.
  Collecting and classifying information
  Developing an alternate course of action
  Comparison of objectives against feasibility, consequence, etc
  Optimum (minimum use of resources) course of action
  Establishing standards, rules, policies, procedures, programs, budgets, etc

b) Organizing Policies: These policies include

  Establishing and maintaining a clear and precise organizational structure
  Determining the role of each level of management
  Deciding authority, responsibility, degree of centralization, decentralization
  Line and staff relationship and their communication

c) Directional Policies: They are also called ‘actuating’ policies; they involve
  Providing effective leadership
  Assisting people in achieving their objectives and organizational [Link] people
into suitable tasks
  Effective communication with all members of the organization.
  Proper organizational climate for employee development and motivation

d) Controlling Policies: These are established to measure results. They involve measuring actual
results against standards or pre-established results. They involve
  Continuous observation of performance
  Measurement of results
  Finding deviation and taking corrective action
  Best mode of control
  Comparison of actual with standards
  Finding causes for deviations, pinpointing deviations that are significant
  Implementing corrective action when there is deviation

SITUATIONAL AND CONTINGENCY POLICIES

a) Normal Policies: These policies provide guidelines to the employees in the routine day-to-day
conduct of business and its smooth functioning.
b) Contingency Policies: These policies are made to meet unexpected moments or situations like
  Sudden floods, earthquakes, fire, famine, market slump
  Change in business cycles, war, labor strike, political problems, and social sensitivity.
  Situational beyond the control of the business unit, like economic policy, fiscal policy
changes, monetary policy, trade, or industrial policy being unfavourable.
  Competitors’ strategies in production, R & D, innovations, quality improvement, and new
techniques of production.
 Most companies that are farsighted prepare contingency policies well in advance, to help
them meet the situations whenever they arise.

Mechanism of Policy Making

Meaning of Mechanism
The term mechanism refers to a systematic process, procedure, or structured set of steps through
which a particular activity or function is carried out in an organized manner.

In management and business policy, a mechanism is the step-by-step method adopted to formulate,
implement, and control decisions or policies. Mechanism of policymaking means the structured
procedure through which policies are framed, approved, implemented, and reviewed.

The mechanism of policymaking refers to the systematic procedure through which business policies
are formulated, approved, implemented, and reviewed. It involves a series of logical steps that ensure
policies are rational, practical, and aligned with organizational objectives. The main points of the
policymaking mechanism are explained below:

1. Identification of Need for Policy

The first step in the policymaking mechanism is identifying the need for a new policy or modification
of an existing one. This need may arise due to internal problems, performance gaps, conflicts, changes
in market conditions, government regulations, or technological advancements. Recognizing the need
ensures that the policy addresses a real issue rather than being framed unnecessarily.

2. Environmental Analysis
Once the need is identified, the organization conducts a thorough analysis of both internal and
external environments. Internal analysis includes examining strengths, weaknesses, available
resources, and organizational capabilities. External analysis involves studying economic, political,
legal, social, and technological factors. This step ensures that the policy is realistic and adaptable to
environmental conditions.

3. Setting Objectives
Before formulating a policy, clear objectives must be defined. Policies are framed to achieve specific
goals and must align with the organization’s mission and vision. Clearly defined objectives provide
direction and serve as a basis for evaluating alternatives. Without proper objectives, policymaking
becomes vague and ineffective.

4. Collection of Information
In this stage, relevant data and information are gathered from various sources such as reports, research
studies, industry benchmarks, expert opinions, and past experiences. Accurate and reliable
information helps management make informed decisions and reduces the chances of errors.

5. Development of Alternatives
After collecting information, different possible alternatives are developed. Instead of choosing the
first solution available, management generates multiple options to solve the problem. This encourages
creativity and ensures that the best possible course of action is selected.
6. Evaluation of Alternatives
Each alternative is carefully evaluated based on feasibility, cost, risks involved, legal compliance, and
long-term impact. The advantages and disadvantages of each option are compared. This systematic
evaluation helps in selecting the most suitable and effective alternative.

7. Formulation of Policy
The selected alternative is then converted into a formal written policy. The policy clearly defines its
scope, rules, guidelines, responsibilities, and limitations. A good policy should be clear, flexible,
consistent, and simple to understand. Written documentation ensures uniformity and avoids
confusion.

8. Approval by Top Management

After formulation, the policy is submitted to top management or the board of directors for approval.
Approval gives the policy official status and authority. It also ensures that the policy aligns with the
overall strategic direction of the organization.

9. Communication of Policy
Once approved, the policy must be effectively communicated to all concerned employees and
departments. Communication may take place through meetings, circulars, policy manuals, or training
programs. Clear communication ensures proper understanding and smooth implementation.

10. Implementation
In this stage, the policy is put into action. Departments execute the policy according to the guidelines
provided. Proper delegation of authority, coordination among departments, and allocation of resources
are necessary for successful implementation.

11. Monitoring and Review

The final step involves monitoring the effectiveness of the policy. Management evaluates whether the
objectives are being achieved and identifies any problems in implementation. Since business
conditions change over time, policies must be reviewed and modified when necessary to maintain
relevance and effectiveness.

Conclusion
The mechanism of policymaking is a continuous and systematic process that ensures policies are well-
planned, practical, and aligned with organizational goals. A proper mechanism reduces uncertainty,
improves coordination, and enhances overall efficiency in the organization.