Definition of Business Policy

Business Policy defines the scope or spheres within which decisions can be taken by the subordinates in an organization. It permits the lower level management to deal with the problems and issues without consulting top level management every time for decisions. Business policies are the guidelines developed by an organization to govern its actions. They define the limits within which decisions must be made. Business policy also deals with acquisition of resources with which organizational goals can be achieved. Business policy is the study of the roles and responsibilities of top level management, the significant issues affecting organizational success and the decisions affecting organization in long-run.

Features of Business Policy

An effective business policy must have following features-

1. 2. 3. 4. 5. 6. 7. 8.

Specific- Policy should be specific/definite. If it is uncertain, then the implementation will become difficult. Clear- Policy must be unambiguous. It should avoid use of jargons and connotations. There should be no misunderstandings in following the policy. Reliable/Uniform- Policy must be uniform enough so that it can be efficiently followed by the subordinates. Appropriate- Policy should be appropriate to the present organizational goal. Simple- A policy should be simple and easily understood by all in the organization. Inclusive/Comprehensive- In order to have a wide scope, a policy must be comprehensive. Flexible- Policy should be flexible in operation/application. This does not imply that a policy should be altered always, but it should be wide in scope so as to ensure that the line managers use them in repetitive/routine scenarios. Stable- Policy should be stable else it will lead to indecisiveness and uncertainty in minds of those who look into it for guidance.

Difference between Policy and Strategy

The term policy should not be considered as synonymous to the term strategy. The difference between policy and strategy can be summarized as follows1. 2. 3. 4. 5. Policy is a blueprint of the organizational activities which are repetitive/routine in nature. While strategy is concerned with those organizational decisions which have not been dealt/faced before in same form. Policy formulation is responsibility of top level management. While strategy formulation is basically done by middle level management. Policy deals with routine/daily activities essential for effective and efficient running of an organization. While strategy deals with strategic decisions. Policy is concerned with both thought and actions. While strategy is concerned mostly with action. A policy is what is, or what is not done. While a strategy is the methodology used to achieve a target as prescribed by a policy.

Demand forecasting A demand forecast is the prediction of what will happen to your company's existing product sales. It would be best to determine the demand forecast using a multi-functional approach. The inputs from sales and marketing, finance, and production should be considered. The final demand forecast is the consensus of all participating managers. You may also want to put up a Sales and Operations Planning group composed of representatives from the different departments that will be tasked to prepare the demand forecast. 6. 7. 8. 9. 10. 11. 12. 13. 14. Determination of the demand forecasts is done through the following steps: Determine the use of the forecast Select the items to be forecast Determine the time horizon of the forecast Select the forecasting model(s) Gather the data Make the forecast Validate and implement results The time horizon of the forecast is classified as follows: Description Forecast Horizon

Short-range Duration

Medium-range Usually less than 3 months, maximum of 1 year Job scheduling, worker assignments

Long-range 3 months to 3 years More than 3 years

Applicability

Sales and production planning, New product development, budgeting facilities planning

Quantitative Forecasting Methods

There are two forecasting models here (1) the time series model and (2) the causal model. A time series is a s et of evenly spaced numerical data and is o btained by observing responses at regular time periods. In the time series model , the forecast is based only on past values and assumes that factors that influence the past, the present and the future sales of your products will continue. On the other hand, t he causal model uses a mathematical technique known as the regression analysis that relates a dependent variable (for example, demand) to an independent variable (for example, price, advertisement, etc.) in the form of a linear equation. The time series forecasting methods are described below: Description Time Series Forecasting Method Nave Approach Assumes that demand in the next period is the same as demand inmost recent period; demand pattern may not always be that stable For example:

If July sales were 50, then Augusts sales will also be 50

Description Time Series Forecasting Method Moving Averages (MA) MA is a series of arithmetic means and is used if little or no trend is present in the data; provides an overall impression of data over time A simple moving average uses average demand for a fixed sequence of periods and is good for stable demand with no pronounced behavioral patterns. Equation:
F 4 = [D 1 + D2 + D3] / 4

F forecast, D Demand, No. Period (see illustrative example simple moving average) A weighted moving average adjusts the moving average method to reflect fluctuations more closely by assigning weights to the most recent data, meaning, that the older data is usually less important. The weights are based on intuition and lie between 0 and 1 for a total of 1.0 Equation:

WMA 4 = (W) (D3) + (W) (D2) + (W) (D1) WMA Weighted moving average, W Weight, D Demand, No. Period (see illustrative example weighted moving average) Exponential Smoothing The exponential smoothing is an averaging method that reacts more strongly to recent changes in demand by assigning a smoothing constant to the most recent data more strongly; useful if recent changes in data are the results of actual change (e.g., seasonal pattern) instead of just random fluctuations

F t + 1 = a D t + (1 - a ) F t
Where F t + 1 = the forecast for the next period D t = actual demand in the present period F t = the previously determined forecast for the present period = a weighting factor referred to as the smoothing constant (see illustrative example exponential smoothing) Time Series Decomposition The time series decomposition adjusts the seasonality by multiplying the normal forecast by a seasonal factor

Significance tests
T-tests are appropriate for comparing means under relaxed conditions (less is assumed). Tests of proportions are analogous to tests of means (the 50% proportion). Chi-squared tests use the same calculations and the same probability distribution for different applications:

Chi-squared tests for variance are used to determine whether a normal population has a specified variance. The null hypothesis is that it does. Chi-squared tests of independence are used for deciding whether two variables are associated or are independent. The variables are categorical rather than numeric. It can be used to decide whether left-handedness is correlated with libertarian politics (or not). The null hypothesis is that the variables are independent. The numbers used in the calculation are the observed and expected frequencies of occurrence (from contingency tables). Chi-squared goodness of fit tests are used to determine the adequacy of curves fit to data. The null hypothesis is that the curve fit is adequate. It is common to determine curve shapes to minimize the mean square error, so it is appropriate that the goodness-of-fit calculation sums the squared errors.

One-sample t-test

(Normal population or n > 30) and

unknown

Paired t-test

(Normal population of differences or n > 30) and unknown

Two-sample pooled ttest, equal variances

(Normal populations or n1 + n2 > 40) and independent observations and 1 = 2 unknown

[13]

Two-sample unpooled t-test, unequal variances

(Normal populations or n1 + n2 > 40) and independent observations and 1 2 both unknown

[13]

One-proportion z-test

n .p0 > 10 and n (1 p0) > 10 and it is a SRS (Simple Random Sample), see notes.

Two-proportion z-test, pooled for

n1 p1 > 5 and n1(1 p1) > 5 and n2 p2 > 5 and n2(1 p2) > 5 and independent observations, seenotes.

Two-proportion z-test, unpooled for Chi-squared test for variance

n1 p1 > 5 and n1(1 p1) > 5 and n2 p2 > 5 and n2(1 p2) > 5 and independent observations, seenotes.

Normal population

Chi-squared test for goodness of fit

df = k - 1 - # parameters estimated, and one of these must hold. All expected counts are at least 5.[14]

 All expected counts are > 1 and no more than 20% of expected counts are less than 5[15] Normal populations Two-sample F test for equality of variances Arrange so H0 for > and reject

[16]

In general, the subscript 0 indicates a value taken from the null hypothesis, H0, which should be used as much as possible in constructing its test statistic. ... Definitions of other symbols:

, the probability of Type I error (rejecting a null hypothesis when it is in fact true)

= sample variance = sample 1 standard deviation

= x/n = sample proportion, unless specified otherwise

= sample size = sample 1 size = sample 2 size = sample mean = hypothesized population mean = population 1 mean = population 2 mean = population standard deviation = population variance = sample standard deviation

= hypothesized population proportion = proportion 1 = proportion 2 = hypothesized difference in proportion

= sample 2 standard deviation

= t statistic = degrees of freedom = sample mean of differences

of n1 and n2

= minimum

= hypothesized population mean difference

= F statistic

= standard deviation of differences

= sum (of k numbers)

= Chi-squared statistic