CHAPTER 8

Business Policy
Formulation:
understanding the
process
RON McLELLAN and GRAHAM KELLY

Introduction
This paper is based upon a study of the contrasting processes used to
formulate business policy in a selection of European companies. The
characteristics of these processes are discussed to provide insights for
managers who need to formulate business policy to meet their own
organization's needs.
[ ... ]
The current uncertain business environment of many European com-
panies demands business policies that are more effective than those used
in the past. The ability to cope with a fall in demand for goods and
services, the increasing cost and scarcity of resources, the change in social
trends towards greater participation by the organizations' stakeholders
and the emergence of new competitors have combined to challenge even
the most adroit strategist.
[ ... ]
As a result, many companies at the present time are dissatisfied with
their effectiveness when designing a business policy that has to cope with
the changing demands of their environment. This is despite the outpour-
ings of a decade or more of advice and instruction designed to help
managers formulate business policies to suit their organization's opera-
tions.1 [ ... ]
Often a best policy is prescribed for all companies regardless of their
differences in size, history, operation and environment. In contrast, the

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D. Asch et al. (eds.), Readings in Strategic Management
Macmillan Publishers Limited 1989
 Ron McLellan and Graham Kelly 103

range of alternative processes available for formulating this policy is

largely ignored, despite the fad that the process used may have a large
effect upon the content of the policy and its successful implementation.2
It does seem that as the operating environments of organizations have
become more volatile, managers are turning to formal processes for
generating their business policies. As a result, formal systems are being
introduced by organizations that previously relied upon more informal
methods, although informality is sometimes assumed to allow organiza-
tions to respond quickly to the threats and opportunities of their
environments. While it may be true that some individual managers
believe they are more effective when unfettered by a formal system [... ]
it may be a romantic myth that their organizations can be equally as
effective without some degree of formality.[ ...] Furthermore, companies
that already use formal systems are expecting policies that can more
effectively meet the challenge of a changing environment.3 It is our
contention that the selection of a suitable process for formulating
business policy is the key to the generation by organizations of more
effective business policies.
We have been able to identify four different patterns of the process
used by companies to formulate their business policy. These patterns
should not be regarded as pure and rigidly deAned, or mutually exclusive,
but as generalized representations of what are exceedingly complex
processes of human interaction. We do not claim that the patterns that
we have identified describe the only process used to formulate business
policy, but that they are present in a number of organizations operating
under different environmental conditions. We believe that they are
distinguishable from each other and that these distinctions can provide an
opportunity for managers to analyse the process currently in use in their
own organization and, more importantly, to consider alternative pro-
cesses that may help obtain a better flt between the organization's
activities and the demands made upon it by the environment.
The four processes described below have been called Alpha, Beta,
Gamma, and Delta.

Policy formulation processes

Alpha process

The Alpha pattern of policy formulation process is characterized by the

formulation initiatives being taken by the operational units of the
organization. Their policy decisions are then passed upward in the
structure for approval and for aggregation with similar decisions made by