Forecasting : Roles, Steps and Techniques | Management Function

Meaning of Forecasting:
In preparing plans for the future, the management authority has to make some
predictions about what is likely to happen in the future.

It shows that the managers know something of future happenings even before
things actually happen.

Forecasting provides them this knowledge. Forecasting is the process of

estimating the relevant events of future, based on the analysis of their past and
present behaviour.

The future cannot be probed unless one knows how the events have occurred in
the past and how they are occurring presently. The past and present analysis of
events provides the base helpful for collecting information about their future
occurrence.

Thus, forecasting may be defined as the process of assessing the future normally
using calculations and projections that take account of the past performance,
current trends, and anticipated changes in the foreseeable period ahead.

Whenever the managers plan business operations and organisational set-up for
the years ahead, they have to take into account the past, the present and the
prevailing economic, political and social conditions. Forecasting provides a logical
basis for determining in advance the nature of future business operations and the
basis for managerial decisions about the material, personnel and other
requirements.

It is, thus, the basis of planning, when a business enterprise makes an attempt to
look into the future in a systematic and concentrated way, it may discover certain
aspects of its operations requiring special attention. However, it must be
recognised that the process of forecasting involves an element of guesswork and
the managers cannot stay satisfied and relaxed after having prepared a forecast.

The forecast will have to be constantly monitored and revised—particularly when

it relates to a long- term period. The managers should try to reduce the element
of guesswork in preparing forecasts by collecting the relevant data using the
scientific techniques of analysis and inference.

On the basis of the definition, the following features of forecasting can be

identified:
1. Forecasting relates to future events.

2. Forecasting is needed for planning process because it devises the future course
of action.

3. It defines the probability of happening of future events. Therefore, the

happening of future events can be precise only to a certain extent.

4. Forecasting is made by analysing the past and present factors which are
relevant for the functioning of an organisation.

5. The analysis of various factors may require the use of statistical and
mathematical tools and techniques.

Role of Forecasting:
Since planning involves the future, no usable plan can be made unless the
manager is able to take all possible future events into account. This explains why
forecasting is a critical element in the planning process. In fact, every decision in
the organisation is based on some sort of forecasting.

It helps the managers in the following ways:

1. Basis of Planning:
Forecasting is the key to planning. It generates the planning process. Planning
decides the future course of action which is expected to take place in certain
circumstances and conditions. Unless the managers know these conditions, they
cannot go for effective planning.

Forecasting provides the knowledge of planning premises within which the

managers can analyse their strengths and weaknesses and can take appropriate
actions in advance before actually they are put out of market. Forecasting
provides the knowledge about the nature of future conditions.

2. Promotion of Organization:
The objectives of an organisation are achieved through the performance of
certain activities. What activities should be performed depends on the expected
outcome of these activities. Since expected outcome depends on future events
and the way of performing various activities, forecasting of future events is of
direct relevance in achieving an objective.

3. Facilitating Co-ordination and Control:

Forecasting indirectly provides the way for effective co-ordination and control.
Forecasting requires information about various factors. Information is collected
from various internal and external sources. Almost all units of the organisation
are involved in this process.

It provides interactive opportunities for better unity and co-ordination in the

planning process. Similarly, forecasting can provide relevant information for
exercising control. The managers can know their weaknesses in the forecasting
process and they can take suitable action to overcome these.

4. Success in Organisation:
All business enterprises are characterised by risk and have to work within the ups
and downs of the industry. The risk depends on the future happenings and
forecasting provides help to overcome the problem of uncertainties.

Though forecasting cannot check the future happenings, it provides clues about
those and indicates when the alternative actions should be taken. Managers can
save their business and face the unfortunate happenings if they know in advance
what is going to happen.
Steps in Forecasting:
The process of forecasting generally involves the following steps:
1. Developing the Basis:
The future estimates of various business operations will have to be based on the
results obtainable through systematic investigation of the economy, products and
industry.

2. Estimation of Future Operations:

On the basis of the data collected through systematic investigation into the
economy and industry situation, the manager has to prepare quantitative
estimates of the future scale of business operations. Here the managers will have
to take into account the planning premises.

3. Regulation of Forecasts:
It has already been indicated that the managers cannot take it easy after they
have formulated a business forecast. They have to constantly compare the actual
operations with the forecasts prepared in order to find out the reasons for any
deviations from forecasts. This helps in making more realistic forecasts for future.

4. Review of the Forecasting Process:

Having determined the deviations of the actual performances from the positions
forecast by the managers, it will be necessary to examine the procedures adopted
for the purpose so that improvements can be made in the method of forecasting.

Techniques of Forecasting:
There are various methods of forecasting. However, no method can be suggested
as universally applicable. In fact, most of the forecasts are done by combining
various methods.

A brief discussion of the major forecasting methods is given below:

1. Historical Analogy Method:
Under this method, forecast in regard to a particular situation is based on some
analogous conditions elsewhere in the past. The economic situation of a country
can be predicted by making comparison with the advanced countries at a
particular stage through which the country is presently passing.

Similarly, it has been observed that if anything is invented in some part of the
world, this is adopted in other countries after a gap of a certain time. Thus, based
on analogy, a general forecast can be made about the nature of events in the
economic system of the country. It is often suggested that social analogies have
helped in indicating the trends of changes in the norms of business behaviour in
terms of life.

Likewise, changes in the norms of business behaviour in terms of attitude of the

workers against inequality, find similarities in various countries at various stages
of the history of industrial growth. Thus, this method gives a broad indication
about the future events of general nature.

2. Survey Method:
Surveys can be conducted to gather information on the intentions of the
concerned people. For example, information may be collected through surveys
about the probable expenditure of consumers on various items. Both quantitative
and qualitative information may be collected by this method.

On the basis of such surveys, demand for various products can be projected.
Survey method is suitable for forecasting demand—both of existing and new
products. To limit the cost and time, the survey may be restricted to a sample
from the prospective consumers.

3. Opinion Poll:
Opinion poll is conducted to assess the opinion of the experienced persons and
experts in the particular field whose views carry a lot of weight. For example,
opinion polls are very popular to predict the outcome of elections in many
countries including India. Similarly, an opinion poll of the sales representatives,
wholesalers or marketing experts may be helpful in formulating demand
projections.

If opinion polls give widely divergent views, the experts may be called for
discussion and explanation of why they are holding a particular view. They may be
asked to comment on the views of the others, to revise their views in the context
of the opposite views, and consensus may emerge. Then, it becomes the estimate
of future events.

4. Business Barometers:
A barometer is used to measure the atmospheric pressure. In the same way,
index numbers are used to measure the state of an economy between two or
more periods. These index numbers are the device to study the trends, seasonal
fluctuations, cyclical movements, and irregular fluctuations.

These index numbers, when used in combination with one another, provide
indications as to the direction in which the economy is proceeding. Thus, with the
business activity index numbers, it becomes easy to forecast the future course of
action.

However, it should be kept in mind that business barometers have their own
limitations and they are not sure road to success. All types of business do not
follow the general trend but different index numbers have to be prepared for
different activities, etc.

5. Time Series Analysis:

Time series analysis involves decomposition of historical series into its various
components, viz. trend, seasonal variances, cyclical variations, and random
variances. When the various components of a time series are separated, the
variation of a particular situation, the subject under study, can be known over the
period of time and projection can be made about the future.

A trend can be known over the period of time which may be true for the future
also. However, time series analysis should be used as a basis for forecasting when
data are available for a long period of time and tendencies disclosed by the trend
and seasonal factors are fairly clear and stable.

6. Regression Analysis:
Regression analysis is meant to disclose the relative movements of two or more
inter-related series. It is used to estimate the changes in one variable as a result
of specified changes in other variable or variables. In economic and business
situations, a number of factors affect a business activity simultaneously.

Regression analysis helps in isolating the effects of such factors to a great extent.
For example, if we know that there is a positive relationship between advertising
expenditure and volume of sales or between sales and profit, it is possible to have
estimate of the sales on the basis of advertising, or of the profit on the basis of
projected sales, provided other things remain the same.

7. Input-Output Analysis:
According to this method, a forecast of output is based on given input if
relationship between input and output is known. Similarly, input requirement can
be forecast on the basis of final output with a given input-output relationship. The
basis of this technique is that the various sectors of economy are interrelated and
such inter-relationships are well-established.

Decision Making: Features, Elements and

Principles
Everything you need to know about Decision Making. Decision making is the
selection of one course of action from two or more alternative courses of action.
It is a choice-making activity and the choice determines our action or inaction.

Let us make an in-depth study of Decision-Making:-

1. Definition of Decision-Making 2. Features of Decision-Making 3. Elements 4.
Importance 5. Scientific Process 6. Principles.
Definition of Decision Making:
The important definitions of management are as follows:
1. In Simple word:
“Decision-making is the selection of one course of action from two or more
alternative courses of action. It is a choice-making activity and the choice
determines our action or inaction.”

2. According to George R. Terry:

“Decision-making is the selection based on some criteria from two or more
possible alternatives.”

Characteristics or Features of Decision Making:

The important characteristics of decision-making are as follows:
1. Decision-making is a selective process in which only the best possible
alternative is chosen.

2. Decision-making involves careful evaluation and analysis of all the possible

alternatives.

3. Decision-making is the responsibility of the management executives at all

levels.

4. It is a continuous process which goes on throughout the life of an organisation.

5. It is a mental process which involves deep thinking and foreseeing things.

6. It may be positive to do a certain thing or negative not to do a certain thing.

7. Decisions are normally taken on the basis of past experiences and present
circumstances for a future course of action.

8. It is not an end in itself but a means to reach the goal.

9. If necessary experts and specialists should be consulted before making a

particular decision.

10. Decisions exert great influence on the success or failure of an organisation.

Therefore, they should not be made in a hurry or without close security and
thinking.

Main Elements of Decision Making:

The main elements of decision-making are as follows:
1. Concept of Best Decision:
Rational decisions must conform the basic concept of good decision.

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Curdiff and Still:

Mentions three keys to rational decision-making:
(i) Conceptualization,

(ii) Information,

(iii) Prediction.

are the three main keys to rational decision-making. The problem should be
thoroughly analysed and all possible alternatives be folly considered.

Rational decisions require:

(a) Intelligence,

(b) Insight, and

(c) Lot of experience.

2. Organisational Environment of the Company:

Organisation environment also exert great influence on decision-making. Some
organisations believe in rigid centralisation while others have faith in
decentralisation and leave the routine decision-making function with the
departmental heads.

Further, in the interest of the company it has been suggested that the policy
matter decision must be left with the top management and leave the ordinary day
to day routine matter decisions to the various departmental heads. External,
Social, Political and Economic environment also influence decision-making. But
instable political conditions in the country are not conducive to important
decision-making.

3. Psychological Elements:
In psychological elements personal traits like preferences, intellectual maturity
experience, educational standard, social and religious designation and status etc.,
of the person responsible for the decision-making also exert great influence on
decision-making.

Further in company the manager’s habits, temperament, social environment,

upbringing domestic life and political learning’s all have to trace his choice of
alternative, consequently on his decisions.

4. Timing of Decisions:
Decisions must be taken at the appropriate time keeping in view the prevailing
conditions. Marketing aim should also be taken into consideration and time
required for achieving the aim. Any decision taken in time leaves a lasting
impression on the mind of those who are affected by the decision.

5. Communication of Decisions:
When a particular decision has been taken it must be communicated properly in
time to the persons concerned. Decision should be communicated to the
subordinate executives in a courteous, simple and understandable language.
There should not be any ambiguity in the language written. It should be in a vary
simple language.

6. Participation of Employees:
Participation of the employees in decision-making makes its implementation
easier. Employees participation has certain advantages and it ensures loyalty of
the employees towards the organisation. It arouses the feeling of oneness with
the company and the decision taken are considered as superior. It helps in
enhancing the efficiency of the organisation which helps in attaining the goals of
the organisation.

Importance of Decision Making in Management:

The Management and decision are two very important activities which cannot be
separated. Both move together. Decision-making is the main business of
management and it has been considered as soul of management. Decision should
always be taken after a great deal of deliberations and it should be taken quickly
and as far as possible intuition based.
Sound decisions are always information based and are a combination of:
(a) Judgement, and

(b) Information (on facts) based.

But information based decisions have many major problems, which arise at
irregular intervals. Sound decisions live for a long time because it is very difficult
and awkward to change decisions once they are made.

Scientific Process of Decision Making:

The process of decision-making has been divided under two heads:
1. Traditional method or Symptomatic Diagnosis.

2. Scientific method.

1. Traditional or Symptomatic Diagnosis:

This decision is taken on the basis of—limited knowledge, experience and
intuitions. There is no scientific analysis involved in this. In this decision taken are
not logical. This method is also known as “Symptomatic Diagnosis”. The
Physicians in ancient times diagnosed the ailment on the basis of symptoms only.
In the same way the management also resolves the various problems facing the
organisation on the basis of symptoms. Now-a-days an expert doctor relies not
only on external symptoms but makes use of accurate X-ray, E.C.G. reports etc.

2. Scientific Method:
The process of taking scientific decisions is as follows:
(i) Defining the problem, objectives and constraints are studied.

(ii) Analysis of the problem.

(iii) Development of alternative solution is searched.

(iv) Deciding upon the best solution.

(v) Converting the decision into effective action.

(vi) Follow up the decision.

(i) Defining the problem, objectives and constraints are studied:
Under this process the nature of problem is considered. Here, a careful study of
the external and internal aspects of the problem should be made carefully. The
objectives of resolving the problem and constraints in the way of resolving it must
also be given due weight-age in order to reach the correct decision.

(ii) Analysing the problem:

It involves careful appraisal of the alternatives and as such to decide which
departmental executive should take the particular decision. Who others should be
taken into confidence. Whether some specialists have also been consulted in this
connection and who should be informed of such decisions.

It should be noted here that all policies and operating decisions should be taken
by the top management while routine departmental decisions should be left to be
taken by Departmental Heads. To make an important decision thorough analysis
of relevant information is needed. If facts and factual information are not
available, they may be estimated to the best of information available.

(iii) Development of Alternative Solution:

To develop alternate solutions following courses be adopted:
(a) Spending more on advertisement and publicity,

(b) Developing the market promotion activities, or

(c) Appointing more salesmen,

(d) Improving the quality of the product,

(e) Packaging should be more attractive or reducing the price etc.

Management should not depend on one solution alone, because if that fails under
a peculiar situation the other one might be taken up in its place. It is therefore,
essential to consider all possible course of action.

(iv) Deciding upon the Best Solution:

It is essential that the decisions be effective there must be co-ordinated,
systematic and continuous information of all facts and situation. For example—All
decisions on the marketing problem are taken on the basis of complete
information available from internal and external sources. In deciding the best
solution several factors have to be taken into consideration.

Managerial Decision Making Process (5

Steps)
Decision making is crucial for running a business enterprise which faces a large
number of problems requiring decisions.

Which product to be produced, what price to be charged, what quantity of the

product to be produced, what and how much advertisement expenditure to be
made to promote the sales, how much investment expenditure to be incurred are
some of the problems which require decisions to be made by managers.

The five steps involved in managerial decision making process are explained
below:
1. Establishing the Objective:
The first step in the decision making process is to establish the objective of the
business enterprise. The important objective of a private business enterprise is to
maximise profits. However, a business firm may have some other objectives such
as maximisation of sales or growth of the firm.

But the objective of a public enterprise is normally not of maximisation of profits

but to follow benefit-cost criterion. According to this criterion, a public enterprise
should evaluate all social costs and benefits when making a decision whether to
build an airport, a power plant, a steel plant, etc.

2. Defining the Problem:

The second step in decision making process is one of defining or identifying the
problem. Defining the nature of the problem is important because decision
making is after all meant for solution of the problem. For instance, a cotton textile
firm may find that its profits are declining.

It needs to be investigated what are the causes of the problem of decreasing

profits. Whether it is the wrong pricing policy, bad labour-management relations
or the use of outdated technology which is causing the problem of declining
profits. Once the source or reason for falling profits has been found, the problem
has been identified and defined.

3. Identifying Possible Alternative Solutions (i.e. Alternative Courses of Action):

Once the problem has been identified, the next step is to find out alternative
solutions to the problem. This will require considering the variables that have an
impact on the problem. In this way, relationship among the variables and with the
problems has to be established.

In regard to this, various hypotheses can be developed which will become

alternative courses for the solution of the problem. For example, in case of the
problem mentioned above, if it is identified that the problem of declining profits
is due to be use of technologically inefficient and outdated machinery in
production.

The two possible solutions of the problem are:

(1) Updating and replacing only the old machinery.

(2) Building entirely a new plant equipped with latest machinery.

The choice between these alternative courses of action depends on which will
bring about larger increase in profits.

4. Evaluating Alternative Courses of Action:

The next step in business decision making is to evaluate the alternative courses of
action. This requires, the collection and analysis of the relevant data. Some data
will be available within the various departments of the firm itself, the other may
be obtained from the industry and government.

The data and information so obtained can be used to evaluate the outcome or
results expected from each possible course of action. Methods such as regression
analysis, differential calculus, linear programming, cost- benefit analysis are used
to arrive at the optimal course. The optimum solution will be one that helps to
achieve the established objective of the firm. The course of action which is
optimum will be actually chosen. It may be further noted that for the choice of an
optimal solution to the problem, a manager works under certain constraints.
The constraints may be legal such as laws regarding pollution and disposal of
harmful wastes; they way be financial (i.e. limited financial resources); they may
relate to the availability of physical infrastructure and raw materials, and they
may be technological in nature which set limits to the possible output to be
produced per unit of time. The crucial role of a business manager is to determine
optimal course of action and he has to make a decision under these constraints.

5. Implementing the Decision:

After the alternative courses of action have been evaluated and optimal course of
action selected, the final step is to implement the decision. The implementation
of the decision requires constant monitoring so that expected results from the
optimal course of action are obtained. Thus, if it is found that expected results are
not forthcoming due to the wrong implementation of the decision, then
corrective measures should be taken.

However, it should be noted that once a course of action is implemented to

achieve the established objective, changes in it may become necessary from time
to time in response in changes in conditions or firm’s operating environment on
the basis of which decisions were taken.

The five steps in the decision making process are shown in

Models of Decision Making: Rational,
Administrative and Retrospective Decision
Making Models
The decision-making process though a logical one is a difficult task. All decisions
can be categorized into the following three basic models.

(1) The Rational/Classical Model.

(2) The Administrative or Bounded Rationality Model.

(3) The Retrospective Decision-Making Model.

All models are beneficial for understanding the nature of decision-making

processes in enterprises or organisations. All models are based on certain
assumptions on which the decisions are taken.

1. The Rational/Classical Model:

The rational model is the first attempt to know the decision-making-process. It is
considered by some as the classical approach to understand the decision-making
process. The classical model gave various steps in decision-making process which
have been discussed earlier.

Features of Classical Model:

1. Problems are clear.
2. Objectives are clear.

3. People agree on criteria and weights.

4. All alternatives are known.

5. All consequences can be anticipated.

6. Decision makes are rational.

ii. They are capable of processing ail relevant information

iii. They anticipate present and future consequences of decisions.

iv. They search for all alternatives that maximizes the desired results.

2. Bounded Rationality Model or Administrative Man Model:

Decision-making involve the achievement of a goal. Rationality demands that the
decision-maker should properly understand the alternative courses of action for
reaching the goals.

He should also have full information and the ability to analyse properly various
alternative courses of action in the light of goals sought. There should also be a
desire to select the best solutions by selecting the alternative which will satisfy
the goal achievement.

Herbert A. Simon defines rationality in terms of objective and intelligent action. It

is characterised by behavioural nexus between ends and means. If appropriate
means are chosen to reach desired ends the decision is rational.

Bounded Rationality model is based on the concept developed by Herbert Simon.

This model does not assume individual rationality in the decision process.

Instead, it assumes that people, while they may seek the best solution, normally
settle for much less, because the decisions they confront typically demand
greater information, time, processing capabilities than they possess. They settle
for “bounded rationality or limited rationality in decisions. This model is based on
certain basic concepts.

a. Sequential Attention to alternative solution:

Normally it is the tendency for people to examine possible solution one at a time
instead of identifying all possible solutions and stop searching once an acceptable
(though not necessarily the best) solution is found.

b. Heuristic:
These are the assumptions that guide the search for alternatives into areas that
have a high probability for yielding success.

c. Satisficing:
Herbert Simon called this “satisficing” that is picking a course of action that is
satisfactory or “good enough” under the circumstances. It is the tendency for
decision makers to accept the first alternative that meets their minimally
acceptable requirements rather than pushing them further for an alternative that
produces the best results.

Satisficing is preferred for decisions of small significance when time is the major
constraint or where most of the alternatives are essentially similar.

Thus, while the rational or classic model indicates how decisions should be made
(i.e. it works as a prescriptive model), it falls somewhat short concerning how
decisions are actually made (i.e. as a descriptive model).

3. Retrospective decision model (implicit favourite model):

This decision-making model focuses on how decision-makers attempt to
rationalise their choices after they have been made and try to justify their
decisions. This model has been developed by Per Soelberg. He made an
observation regarding the job choice processes of graduating business students
and noted that, in many cases, the students identified implicit favorites (i.e. the
alternative they wanted) very early in the recruiting and choice process. However,
students continued their search for additional alternatives and quickly selected
the best alternative.

Policies: Meaning and Types

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.
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.
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.

3. Department Policies:
These policies are highly specific and applicable to the lower levels of
management.

C. On the Basis of Managerial Functions:

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

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.

(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.

3. Financial Policies:
Financial policies related to the following:
(a) Sources of capital

b) Working capital

(c) Profit distribution.

(d) Depreciation allowances.