Policy at one time was the term used to describe top-level decision making in organizations. In recent years, however, this managerial function has been extended and refined in both the academic and practitioner literature and taken on more elegant designations, such as strategy formulation and implementation or strategic management. Policy making now, more aptly, simply describes the development of organizational policies. Some policies appertain at the highest levels and are essential elements of the organization's strategy. But, the vast majority of policies apply at lower levels and are operational in nature.


Very simply, policies are standing plans that provide guidelines for decision making. They are guides to thinking that establish the boundaries or limits within which decisions are to be made. Within these boundaries, judgment must be exercised. The degree of discretion permitted will vary from policy to policy. Some policies are quite broad and allow much latitude, whereas others are narrowly constructed and leave little room for judgment. To illustrate, a policy of selecting the best qualified candidate for a managerial position permits more discretion than a policy of promoting the best qualified candidate from within the organization. The latter is a narrower policy because it limits the choices to current employees. A policy of promoting from within the organization based on standardized test scores and seniority would, of course, be an even more restrictive policy.

To better comprehend the nature of policies, it is useful to differentiate them from other standing plans—i.e., plans designed to deal with recurring issues—such as rules, standard operating procedures, and standard methods. Rules are specific statements of what must or must not be done in a given situation. Unlike policies, they provide no room for managerial discretion. "No smoking in the work area" and 'Wash your hands before leaving the restroom"' are examples of company rules. Rules by their very nature are designed to suppress thinking whereas policies require varying degrees of judgment.

Standard operating procedures (SOPs) are detailed instructions for the execution of a particular operation. They specify an exact chronological sequence of steps to be followed and permit little room for discretion. Most procedures cut across departmental lines and involve several employees. SOPs are frequently used to support the implementation of major policies. For example, a policy of purchasing from the qualified bidder with lowest price might be routinely implemented through a prescribed SOP.

Standard work methods are established ways of performing specific tasks. Like SOPs, they designate an exact sequence of actions but, unlike SOPs, they are concerned only with the task of a single worker. The prescribed set of steps in ironing and folding shirts at a commercial laundry is an example of a standard work method.


Policies perform several important functions in organizations. First and foremost, they simplify decision making. They delimit the area of search for possible alternatives and preclude the need for repeated, in-depth analysis of recurring, similar problems. Consequently, they promote efficiency in the utilization of managerial time.

Policies also permit managers to delegate to subordinates more decisions and more important decisions than they would otherwise. Thus, if a manager establishes a policy governing a specific class of decisions, he or she will feel more comfortable delegating these decisions to subordinates because they will have set guidelines within which to make choices. The delegation of decision-making authority is important because it frees up managerial time for activities such as opportunity finding and planning that typically are put off.

Finally, policies help secure consistency and equity in organizational decisions. Thus, if several managers make decisions in a particular policy area, their decisions will be consistent within the limits established by the governing policy. Equity is also promoted through the policy mechanism, especially with regard to personnel and vendors. For example, an announced policy of permitting the company employees with the greatest seniority to have first choice of vacation times would tend to be viewed as more equitable than allowing managers to make these decisions without guidelines. By the same token, a policy stating that supply contracts will be awarded to the lowest qualified bidder would normally be viewed as fair by vendors.


Policies can emerge in four very different ways. First, and most commonly, they may be originated by management. Managers originate policies to ensure that decisions within the organization will be in line with its objectives. Generally, they are written and embodied in the company's policy manual, if it has one.

The second way policies come about is through appeal. The appeal process typically works something like this. A situation develops where an executive is uncertain whether he or she has the authority to make a decision. Consequently, he or she appeals to higher-level management for the decision. Once the decision is made, it becomes precedent for similar decisions in the future. The process is analogous to the way common law develops in the Anglo-American judicial system. There is a danger, however, of allowing too many policies to be made through appeal. A set of unwritten, incomplete, and uncoordinated policies may emerge because the various appealed decisions will, in all likelihood, be made on the basis of the individual merits of the particular situations without regard for their broader implications.

Third, policies may be implied from the decisions and actions of the company's executives. In fact, it is not uncommon to find that some of the "real" policies of a company differ from its stated policies. For example, a company may have a stated policy of promoting strictly on the basis of merit whereas in reality, relatives and personal friends of top management are given priority.

Finally, policies can be externally imposed. Not infrequently, outside institutions, such as various departments of government, trade unions, and trade associations, impose requirements on organizations. Labor contracts and federal regulations are familiar examples. Consider how the equal opportunity employment laws have led to major modifications in the personnel policies of many firms.


Policies are found at all levels of organizations. At the very top, key policies may be important elements of the company's overall strategy and help define how it differentiates itself from its rivals and competes in the marketplace. Such policies are commonly called functional strategies because they guide strategic decision making at the functional level. Consider Polaroid's principal functional strategies under its founder, Edwin Land. In the financial area, there were two atypical policies: no long-term debt and growth strictly through internal development (i.e., no acquisitions). The company's product policy was to bring only unique, high-tech products to the market. A key marketing policy called for very heavy initial advertising of new products. Other strategic marketing policies emphasized the introduction of successively less expensive camera models and the pricing of instant film as a high margin cash cow. Production policy dictated subcontracting of high-volume, repetitive manufacturing work and keeping technically critical, high value-added work in-house. Taken together, these policies defined, to a large extent, Polaroid's competitive posture during its "glory years."

High-level policies typically must be interpreted and narrowed at lower organizational levels. This reality results in a hierarchical structure of policies within organizations. To explicate, a company might have a functional strategy of aggressive price competition. At the sales manager level, this policy might be refined to state that the company will meet competitors' prices on all of the firm's nonproprietary products. And, at the district level, the policy might be narrowed again to read that district sales managers can make price concessions up to 10 percent on their own authority but, beyond that, they must get approval from above. As the example illustrates, policies tend to be broad at higher organizational levels and become successively more restrictive as they move down the hierarchy.


Organizational policies have a tendency to become obsolete. Stated policies commonly change much more slowly than do the conditions that led to them. One approach to dealing with this problem is to conduct periodic reviews or audits of the organization's policies. These audits can help identify and eliminate outmoded policies. This regimen, however, tends to result in a time lag between the actual need for policy changes and the recognition of that need. It is therefore prudent for managers also to review policies on a more or less ongoing basis by asking questions such as, "What is the purpose of this policy?" and "Does it still make sense?" If the answers are negative or ambiguous, the policy may be a candidate for modification or elimination before the next scheduled audit. The astute manager will particularly be on the lookout for appealed and implied policies that may not be contributing to the achievement of the firm's goals.


Thus far, the discussion has assumed a traditional hierarchical organization. But one might ask about the role of policies in the increasingly prevalent "empowered" organization where employees are encouraged to take ownership of their jobs and be entrepreneurial and innovative. In such organizations, there are typically fewer policies but those that are in place play an important role in establishing boundaries that place broad limits on employee behavior. Many of these policies will focus on legal and ethical behavior. For instance, a consulting firm might have a strict policy forbidding the disclosure of information about clients to outsiders. Establishing strategic boundaries represents a second crucial area of policy development in empowered organizations. To illustrate, a high-tech company might limit its product development opportunities to a defined set of technologies as a mean of reducing its risk and focusing its research and development initiatives.


Policy making is concerned with the formulation of general statements or understandings that guide or channel managerial decisions. Policies, whether written or implied, are essential components of a company's planning framework because they simplify the making of recurring decisions and facilitate the delegation of these decisions. Successive delegations tend to result in a hierarchy of policies within traditional organizations. In organizations where empowerment is practiced, the principal function of policies is to provide essential limits to otherwise broad employee discretion.

It is not overly far-fetched to suggest that without policies, because of excessive analysis and the concentration of decisions at the top, corporate decision making in the hierarchical firm could be slowed to the point of bringing operations to a virtual standstill. Conversely, in the empowered organization, there would be the potential for complete lack of control and chaos. Yet, in today's fast-moving business world there is also the great danger of policies becoming rapidly outmoded. For this reason, audits and ongoing reviews are a must if a company's policies are to remain effective decision guides.

[ Edmund R. Gray ]


Gray, Edmund R., and Larry R. Smeltzer. Management: The Competitive Edge. 2nd ed. Kendall/Hunt, 1993.

Koontz, Harold, and Heintz Weihrich. Management. 9th ed. New York: McGraw-Hill, 1988.

Newman. William H. Administrative Action: The Technique of Organization and Management. 2nd ed. Prentice-Hall, 1963.

Simons, Robert. "Control in an Age of Empowerment." Harvard Business Review 73, no. 2 (March/April 1995): 81-88.

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