After reading this article you will learn about the meaning and types of policies.

Meaning of Policies:

The term policy is derived from the Greek word “Politicia” relating to policy that is citizen and Latin work “politis” meaning polished, that is to say clear. These policies which are generally formulated at top level helps managers sufficient freedom to make judgments and helps to achieve the organizational goals and objectives.

The term “Policy” is defined by koontz and O ‘Donnel as “policies are general statements or understandings which guide mangers thinking in decision making”. They ensure that decisions fall within certain boundaries. They usually don’t require action but are intended to guide managers in their commitment to the decision they ultimately make.

George R.Terry defined “policy is a verbal written or implied overall guide setting up boundaries that supply the general limits and direction in which managerial action will take place”.


According to JS Chandan, “Policy is a statement and a pre­determined guidelines that provides direction for decision making and taking action.

Brench defined, “policies are a pattern of direction for the guidance of those who carry responsibilities for the management of the activities of the enterprises.”

Thus the essence of policy is discretion strategy on the other hand, concerns the direction in which human and material resources will be applied in order to increase the chance of achieving selected objectives.

From the above definitions the following general characteristics can be identified:


(i) It is a guide to thinking in decision making and action.

(ii) Lays down course of action.

(iii) Lays down the limits within which decisions are made.

(iv) Framed at all levels of management.


(v) Does not become valid for all times. Periodically it is necessary to review and modifications are made.

Type of Policies:

Policies may be divided into different types of policies from different approaches.

A. On the Basis of Source:

Koontz and O’Donnell divide the sources of policy into the following four types:

(i) Originated Policy.


(ii) Appealed Policy.

(iii) Implied Policy.

(iv) Externally imposed policy.

1. Originated Policy:


By originated policy they refer to policy which originates from the top management itself. These policies are aimed at guiding the managers and their subordinates in their operations. They flow basically from the organisation’s objectives as defined by top management. From the broad policy at the top, other derived policies may be developed at subsequent levels depending upon the extent of decentralization. However all such policies, whether originated by top management or subordinate managers, are described as “originated policy”.

2. Appealed Policy:

It is meant decisions given in case of appeals in exceptional cases upto management hierarchy. In case of doubts, an executive refers to higher authority on how he should handle the matter. The direction that he gets is described as appealed policy and constitutes a precedent for future managerial action.

3. Implied Policy:


Implied policy is meant policies which emanate from conduct. It also originates where existing policies are not enforced. Again, guidelines may be provided by the decision makers unconsciously and become implied policies.

4. Externally Imposed Policy:

Policies may be imposed externally that is from outside the organisation on such as by Government control or regulation, trade associations and trade union etc.

B. On the Basis of different Levels:

Policies are divided into the following types on the basis of levels:


1. Basic Policies.

2. General policies.

3. Departmental Policies.

1. Basic Policies:

Policies which are followed by top management level are called as basic policies. For example, the branches will be opened in different place where the sales exceed Rs. Five, lakhs.


2. General Policies:

These policies affect the middle level management and more specific than basic policies.


Payment will be provided for overtime work only if it is allowed by the management.

3. Department Policies:

These policies are highly specific and applicable to the lower levels of management.



Tea will be provided free for workers in night shifts.

C. On the Basis of Managerial Functions:

Policies arise from decision pertaining to fundamental managerial functions are called managerial policies.

These includes the following policies:

1. Planning policies.

2. Organisation policies.


3. Motivation and control policies.

1. Planning Policies:

Planning policies involve the future course of action. Mere policies are formulated as to achieve the targets regarding the future. Planning policies may formulate for whole organisation or for divisional departments.

2. Organisation Policies:

These policies are highly specific to organisational goals and objectives.

3. Motivation and Control Policies:


Here policies are formulated to motivate people and control the activities, which leads to achieve the organisational objectives with the fullest satisfaction of employees.

D. On the Basis of Dissemination:

Policies can be classified into two types on the basis of dissemination:

1. Written statements—Explicit policies.

2. Oral dissemination—Implicit policies.

1. Explicit Policies:

Policies which are in writing or included in the manual or records are called explicit policies. In case of written statements adequate media should be used.


The following are some of the written media:

(a) Bulletins or notice boards.

(b) Hews releases.

(c) Company manuals or handbooks.

Advantages of written policy:

(a) All the members of the organisation can be guided as to the exact interpretation of policies so that they all possess a common understanding.

(b) It can be more easily reviewed from time to time to meet changing conditions.

(c) It can be checked more readily for compliance within the organisation.

(d) Policies becomes available in the same form to all concerned.

(e) They can be communicated and taught to new employees more readily.

(f) The process of writing down policies forces the managers concerned to think through more clearly about the policy.

Disadvantage of written policies:

(a) Written policies are inclined to promote rigid thinking and prevent flexibility which may be undesirable in special circumstances.

(b) It is difficult to adopt written policies to situations and conditions which change from time to time. There is bound to be a time lag for incorporation of such changes into existing written policies.

(c) Although in one sense there is uniform communication of policies in the form of a written statement it is likely to be interpreted in many cases differently depending on the background of the interpreter.

(d) In case of confidential policy statements, there is a greater chance of their being communicated to those from whom they are to be kept secret, thus, probably marring the strength of the organisation.

(e) Difficult to write it accurately and adequately.

2. Implicit Policies:

Implicit policies are disseminated merely by word of mouth through the key people in an organisation. Policies which are not in writing or not included in the manuals or records but which are well understood and practised are called implicit policies.

E. On the Basis of Functions:

Policies which affect the functions of business are called as functional policies.

Functional policies can be classified as follows:

1. Marketing policies.

2. Production policies.

3. Finance policies.

4. Personnel policies.

1. Marketing Policies:

Basically marketing policies relate to each of the “four Ps in marketing” namely.

(a) Product,

(b) Pricing,

(c) Promotion, and 

(d) Physical distribution.

(a) Product Policies:

In connection with product policies for example a policy decision might have to be taken as to whether to make or buy the product. Policy decisions might have to be laid down with regard to the nature and extent of diversification, for example whether diversification in the future will always be in terms of related products or whether new product ideas can be considered in connection with unrelated products.

The make or buy decision can also be a part of the product on policy but can be part of the marketing strategy which is concerned with the overall strategy of the business.

(b) Pricing Policies:

Policy decisions have to be taken in the area of pricing. The market segment or segments aimed at determination of price range. The policy decisions on pricing are also affected by the type of trade channels and the discounts that might have to be offered.

(c) Promotion Policies:

The promotional policy is also tied in with the pricing policies. The policy to concentrate on certain advertising media would be dictated in terms of product policies and the customer segment involved. Policy decisions would also help in arriving at the amount to be spent on promotional activities.

Certain organisations fix a policy of budgeting a certain percentage, say 5% of the rates for advertising expenditure. Some organisations adhere the policy of certain fixed return on investment for arriving at the advertising expenditure to be permitted.

(d) Physical Distribution Policies:

Policy decisions have to be taken in the area of physical distribution of the product which involves considerations of channels of distribution and logistics. Difficult policy decisions are involved in arriving at the selection of an appropriate set of distribution channels for the products of the company. Some organisations prefer to give sole distribution ships. Some others advocate the policy of direct selling.

2. Production Policies:

Production policy decisions involves with the following:

a) The size of the run,

b) Automation,

c) Production stabilisation,

d) Extent of making or buying component, and 

e) Inventory levels.

(a) The Size of the Run Policy:

This depend on the backlog or orders as well as the nature of automation introduced. It will also depend on the type of the market. The temptation is to increase the size of the run to take advantage of avoiding the setup costs. However, these have to be weighed against the cost of heavier inventories.

(b) Automation Policy:

The automation involves consideration of technical problems apart from economic aspects. The policy of increasing automation or mechanisation may be merely with a view to avoid repetitive and uninteresting work or it may be to reduce costs. Policy decisions, however, have to be taken in this behalf at the top level.

(c) Production Stabilisation Policy:

It is related to the size of the run and the extent of automation. Production has to be stabilized through proper timing as market demands cannot be overlooked.

(d) Make or Buy Policy:

It is related to both the marketing policy as well as production policy. Policy decisions have to be taken as to the extent of the product that has to be manufactured within the organisation itself and the extent, if any of purchases from outside.

(e) Inventory Levels Policy:

This policy involves with the levels of inventory or stocks. These should be maintained in the exact extent. Higher inventories increase the costs and reduce the ultimate profits.

3. Financial Policies:

Financial policies related to the following:

(a) Sources of capital

(b) Working capital

(c) Profit distribution.

(d) Depreciation allowances.

(a) Sources of Capital:

This policy involves the sources of capital, `that is from which ways, an organisation can accumulate its capital. For example in case of sole trader, he/ she provide the capital form his/her own money or by loans from individual or bank. In partnership, partners provide the basic capital. In companies, large capital is possible from large number of shareholders.

(b) Working Capital Policy:

The difference between the current assets and current liabilities is the working capital. Since the working capital determines how far the business organisation or business unit can immediately meet its obligations, the policy decision will have to take in the area of working capital. These policies are also concerned with the extent of bank borrowings permissible and allowances of credit facilities that should be extended to the customers.

(c) Profit Distribution Policy:

It involves with regard to how much profits should be distributed by way of dividends to the shareholders and how much should be kept back for future capital requirements. Some companies follow a policy of dividend equalization by setting aside profits in good years to be used for payment of dividend in lean years.

(d) Depreciation Allowance Policy:

Policy decisions have to be taken on the extent of depreciation to be written off whilst keeping in mind the tax provision as well as its possible use as a source of funds for the enterprise.

4. Personnel Policies:

This policy decisions have to be taken in connection with personnel administration.

These relate to the following.

(a) Personnel selection.

(b) Training and promotion.

(c) Remuneration and benefits.

(d) Industrial relations.

(a) Personnel Selection Policy:

It involves with the source of recruitment e.g., policy decisions may be taken with regard to the minimum educational or experience requirements.

(b) Training and Promotion Policy:

Policy decisions have to be taken with regard to manpower planning and filling up higher vacancies by promotion from within. A policy of promotion from within presupposes the existence of adequate training policies to develop persons for each higher positions.

(c) Remuneration and Benefit Policy:

These policies regard with the remuneration and other benefits of employees. Other benefits include sick leave, vacations, canteen facilities and working conditions. In case of sales force, some organisations prefer to rely merely on salaries, but some other companies wish to build in a commission component to provide the necessary incentive.

(d) Industrial Relations Policies:

Proper policy decisions must be taken in connection with dealing with labour disputes and avoiding them in the future.