The Impact of Business Policy on Organizational Performance

The Impact of Business Policy on Organizational Performance

All management experts and authors believe that policy formulation is part of planning and define it in similar ways.  Yoder (1995:26) defines policy as the guideline to managerial action.  According to Ewurum and Unamka (1995:72) policy is the general guide to action.  It is a guide for making decisions in an enterprise.  Ugbaja (1996:112) defines policy as a guide for making administrative decisions.  Nwatu (1996:67) refers to the term, policy, as the organizational methods, procedures, rules and practices associated with implementing and executing strategy.

In this sense, policies and guides to carry out strategy: they set boundaries and limit the kinds and directions of actions which are to be taken.  They are the result of institutionalizing and operationalizing the chosen strategy and of getting the organization into a position of being able to execute the strategic plan effectively and efficiently.

Wundel (1995:82) describes policy as the standing line for all managerial relationships with employees.  It is a pre-determined, selected course as guideline toward accepted goals and objectives.  According to Wundel (1995:82) it is the framework of guiding principles that facilitates delegation to lower levels and permits individuals managers to select appropriate tactics and programmes.  It is a guide, setting out how and the boundaries or the general limit in which managerial action will take place.

Douglas (1997:252) states that a policy defines the area in which decisions and to be made, but it does not give the decision.  It represents the locality of standards of norms that govern the conduct of people in an organization.  According, it is an established way of doing business and directing actions in specified areas of management.  Ezeh (1997:2) sees policy as an administrative law governing executive actions within the organization.

Policy may take the form of written statements, or it may consist of unwritten understanding of past actions (which may or may not be intended to establish precedents or frames of reference for future action).  The need for both major and minor policy guides exits at all levels in the management structure.


According to Ewurum and Unamka (1995:73) a good policy has the following characteristics or qualities;

  1. It should be related to an objective of the business.
  2. It should be in writing and stated in words that are understandable.

According to Yoder (1995:30) the scope of policy statements may range widely from such lofty principles as “ensuring that customers are given complete satisfaction or have their money back” down to such mundane matters as “paying one-half of the tuition fees of employees who wish to further their education”.

Some policies concern operating procedures and amount to little more than work rules, as in the case of statements specifying the length of break and the method of obtaining reimbursement for travel expenses.  Yet others may provide vital support to an organizations strategic plan for example ANAMMCO’S policy of trying to standardize as many parts as possible in producing it’s many different models of Mercedez lorries is aimed at achieving greater mass production economic and minimizing the working capital tied up in parts inventories (Kroner, 2000:5).  According to Ezeh (1997:5) whatever the scope, and form, the managerial thrust of policy is to set organizational support strategic successes.

Examples of policies which an organization might adopt in support of it’s overall purpose and strategy include;

  1. A retail or departmental store giving the store manager authority to buy goods from local suppliers when they can get a better deal, rather than ordering from the regional warehouse.
  2. An oil company deciding to lease it’s properties and buildings for its service station operations so as to minimize long-term capital requirements.
  3. A graduate school of business deciding not to admit to it’s MBA program any applicant who does not have at least two years of business experience.
  4. A firm requiring each of it’s product divisions and profit centres to file weekly sales and profit reports with headquarters as a means of monitoring and evaluating progress toward corporate goals.
  5. A hospital requiring all patients to pay a N1,000 cash deposit on being admitted, as part of it’s plan for maintaining financial solvency.


According to Ezeh (1997:3) practically, it is the Board of Directors of the organization that considers and approves the over-all policies which are presented or recommended by the Chief executive and from there the staff members carry out their respective responsibilities in conformity with those broad approval by the board.  If the board wishes to formulate or initiate a policy, it will ask the Chief executive to bring in a recommended statement for the board’s consideration and action.

Accordingly, the recommended statements are thoroughly examined and considered against the backdrop of it’s feasibility and effects on the organization’s goals.  The considerations are in the context of environmental and internal conditions.  According to Akpala (1990:58), just as with objectives, policies are affected by environmental conditions and by the internal resources of the organization.  And, since an organization’s environment is constantly in the day – to – day operations of the organization.


According to Trewartha and Newport (1996:150) policy serves to direct future action and is important in facilitating the achievement of coordination, in economizing managerial time, in establishing an organizational image.  Coordination implies the linking and relating together, the elements of a task so that all persons perform the right actions at the right time in seeking to accomplish goals.

Policy helps train future managers and through it, the effort of organization members can be inter-related so that they are working with one another rather than at cross purposes (Akpala, 1990:58) of course policies restrain freedom and authority of sub-ordinates by specifying actions that cannot be taken.

According to Ezeh (1997:3) while policy may be oral or written according to organizations, it has five major functions that affects every formal organization.  These are;

  1. It clarifies management viewpoints and philosophies with designated areas of operation.
  2. It provides a pattern within which administrative delegation of authority may be expedited and controlled.
  3. Policy establishes latitudes and guides within which authorized persons may take administration decisions and affect actions.
  4. It anticipates future conditions and situations and resolves how they will be dealt with, and
  5. Finally, it faster a favourable management climate, produces a feeling of confidence in making decisions, expedites decisions, encourages executive, self – reliance, growth and development and improvement of executive performance.


There are several operating areas in a business enterprises in which policies are made: these include the following:


According to Ugbaja (1996:117) in formal organizations, there are guides for making decisions in personnel policies, such policies include criteria for recruitment, selection and placement of employees. Other includes policies in respect of manpower training and development, compensation, condition of service, retrenchment, discipline and retirement.

Ugbaga (1996:117) states that the company’s policy on recruitment specifies the minimum qualification of applicants to the advertised posts. It will also specify the categories of staff that needs training and development programmed. Besides, there is minimum number of years to work before promotion will be given to the employees. Policies will also be made on how salaries and fringe benefits shall be taken on defaulting employees and how compensations or benefits will be paid to retrieves.


Financial policy of the company specifies the method of financing the business.  According to Douglas (1997:269).  The business owners may decide to finance the business through equity financing, short-term and/or long-term loans.  While in the first case, the company’s shares are issued to subscribes to become share holders, the second and third cases involves borrowing from individuals and financial institutions.

The financial policy also specifies how profits should be distributed as dividends and how the company should be refinanced if need be.


According to Douglas (1997:270) the procurement policy relates to management decision on sources of raw materials and machinery as well as equipment.  The policy specifies whether raw materials should be secured through local suppliers or through importation of the raw materials, equipment and machinery.

The high cost of foreign exchange for importing foreign raw materials has made many companies to adopt an in-ward looking policy for procurements.


The production policy specifies the method of production adopted by the company.  According to Douglas (1997:270) production technique may be labour or capital intensive.  If the production process is manual then labour intensive technique is adopted.  Otherwise, a capital intensive technique should be adopted.  However, the production policy usually adopted depends on nature of production – manufacturing; processing or assemblage.


Marketing policy relates to decisions taken by management on pricing, sales, distribution and promotion.  (Eze, 1997:52)  Pricing policy relates to price determination and specifically, the basis for determining price.  Thus, the pricing policy may be that product prices are determined by the product quality, competitors, price or production costs.

Related to pricing is discount.  The organization may adopt discount policy so as to enhance sales and turnover.  According, it uses cash discount to induce immediate payment and trade discount to induce bulky purchases.  Such pricing policies entail reduction in product price.

Another aspect of marketing policy is sale/distribution.  The management specifies policies that will guide sales and distribution of the product.  An important decision to make have is whether middlemen or sales representatives or direct marketing should be adopted.  According to Doylas (1998:52) the strategy usually adopted is the one that is cheaper and fruitful.

Finally, marketing policy also relates to decisions on how sales will be promoted.  The options open to management are the usual marketing tools or promotional tools.  These are known as promo tools and include advertising, personal selling, public relations/publicity and sales promotion (Doyles, 1998:52).  The strategy adopted usually depends on it’s relative impact on production costs and it’s effectiveness.

Research and Development

In this regard, management makes decision on when and how market research should be carried out and if a new production should be developed based on the research findings.  According to Doyles (1998:53) research and development policy is very vital because of the ever- changing business environment, competition and consumer behaviour.

The management has the responsibility of deciding whether it’s own marketing officers should conduct the research or whether professionals outside the company should be used.  Product development will then depend on the market research findings.


Lawrence and William (1995:330) define organizational performance as the achievement of business and responsibilities from the perspective of the judging parting.  Organizational performance can be looked at from different areas such as production quality, customer satisfaction, employee satisfaction, general reputation, financial strength and profitability.

 Developing Measures of Effective Performance

A basic element in the job of every general manager is measuring performance.  Measurement and evaluation are essential to knowing where the organization is in terms of it’s strategic plan.  According to Saser (1996:112) the starting point is to define what sorts of results constitute effective strategy execution.  From these, specific performance measures can be developed for the organization as a whole.  The job of each as manager and first level supervisor in the organization needs expected results and the objectives to be achieved.

According to Sasser (1996:114) usually a number of performance criteria will be used most of changing, policies must be reviewed continually if they are to remain current and dynamic.  Otherwise, policy formulation is planning and takes the same process as in decision making.

According to Ezeh (1997:7) all policy recommendations are subject to appropriate clearance and approval in conformity with established procedures observed by all levels of management.  This is because many managers in policy making levels sit in their comfortable offices waiting to receive orders like clerical officers.  In this regard, it should be observed that it is no longer tenable that only the board of directors make policies and the staff simply carry them out.

According to Akpala (1990:58) policy – formulation is hierarchical.  There is top management policy which emanates from the board of directors or other governing body and is communicated downwards though the managing director to enable action to be taken at every appropriate level of administration below.  But in the formulation of that policy all relevant information and recommendations are usually passed upwards.  So policy formulation is at levels and so also is the outcome of the formulation, the policy.

Akpala (1990:58) notes that in every company, there are a number of important issues that require the attention of top management, the board of directors.  These give rise to fundamental policies that emerge from the basic objectives related to organizational functional areas such as marketing, pricing, financial, personnel policies, etc.  In his analysis Douglas (1997:262) states that organizations should consider very necessary to develop well written policy manual which explains vividly policies and procedures of the organisation, and make them available to all senior and more especially, the top managers of the organizations.  This policy and procedures should be updated periodically; this is to evaluate their effectiveness and observance or otherwise which are typically quantifiable but some of what may be subjective; barely will a single standard suffice.  For obvious reasons, the objectives and performance standards attached to each job and each organizational unit should always device from those objectives stressed and implied in the strategic plan.  To the extent that management properly defines the performance expected at each organizational level, the entire organizational will tend to be performance and result – oriented.

Evaluating Actual Performance

According to Sasser (1996:115) once the performance standards are established, they become the real basis for evaluating individual efforts and the performance of organizational units.  Managers must insist that contributions and results be documented and rigorously compared against standards and objectives.  They must be informed and ready to intervene when actual performance falls short of the performance targets specified in the overall strategic plan.

Accordingly, when the results and performance of a product/division/activity are unsatisfactory it should be scrutinized for ways to overhaul it or if circumstances demand, to phase it out or abandon it at once.  It is in such instances that timely opportunity may exist to shift resources and energies into more productive endeavors.  In addition, general managers should use the time for evaluating actual performance also as a time for regularly reviewing, and appraising whether the organization is doing well.


The impact of effective business policy has been examined by various management experts and authors.  All seem to agree that effective and efficient performance of the organization.  Otherwise, the result has been poor.  In his own analysis, Ugbaja (1996:132) asserts that effective personnel policy in an organization results in effective staffing, staff development and adequate compensations for employees.  This situations is likely to motivate employees and make them more committed to their duties and this will ultimately enhance the organizational performance.

—-This article is not complete———–This article is not complete————

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The Impact of Business Policy on Organizational Performance

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