A young businessman had set up a wholesale business selling consumer goods in downtown Manila. His competitors, however, told him he won’t succeed.
Competition was indeed fierce. There were several wholesalers already established and they sold at cut-throat prices at razor-thin profit margins. To get market share, the new wholesaler would have to offer better prices without sacrificing profit. It seemed impossible.
But the young businessman was unfazed. Instead of fighting competition head-on through pricing, he offered better service.
He set up a store which looked more like a call centre. In the store sat sales people on tables with phones. From opening to closing of the “store,” the sales people would call customers and offer a wide range of consumer products.
The businessman via his sales people offered complete delivery of orders in two (2) days but customers could pick up their items at the store or at the nearby bodega or warehouse within the same day of the order. The sales people also offered discounts for cash payments.
The young businessman also hired talented managers to run his sales and operations. He set up an information system in which his sales people would know the inventory of items in real time and the status of pending orders. Sales personnel could therefore know what items were available and what were not. The businessman’s purchasers would know when items were close to out-of-stock and thereby order from suppliers.
The young businessman had clear policies for his sales and operations.
His sales policy focused on selling to paying customers, not selling to any customer. The businessman was strict when it came to giving credit. He insisted on cash on delivery and did not allow customers to pay later.
Many customers at first balked at buying from the businessman. Many customers were small groceries or family-run shops that were not cash-rich to begin with. They preferred terms of credit that would allow them to purchase as much as a month’s worth of stock and then pay for it as they collected from consumers buying from their stores.
But the businessman also had a service policy. He assured complete delivery of a customer’s order in two (2) days. A customer can also opt to pick up ordered items on the same day at an additional discount.
Customers gradually started buying from the young businessman. The young businessman convinced customers that having complete deliveries arrive fast was better for their business. With the assurance of having available items to stock in their grocery shelves, the customers realized they could sell more even if they had to pay cash in advance.
And so, the young businessman’s enterprise flourished. It flourished not only because he had a clear vision and strategy. It flourished not just because he invested in a talented organization and a real-time inventory management system. It flourished because he had a set of policies that governed how his strategy was executed and how his business would be run.
Whereas a vision and strategy define an organization’s direction, policies define the principles of the management of the organization.
Policies are not targets.
The young businessman mentioned above did not simply commit to deliver to customers in two (2) days. He set a customer service policy to which his business will deliver in two (2) days or else his sales people will apologize to the customer and ask him or her to either cancel or rebook.
Policies provide for clear paths of action.
The young businessman had an inventory policy. He set re-order points for his items that when reached, would trigger purchasers to order from suppliers. He also had a policy in which his executive manager would buy more fast-moving items when suppliers notify of upcoming price increases.
Policies are focused toward functions or to specific areas of the business.
The young businessman had policies for each of his departments. He had policies for hiring and retaining his managers. He had policies for managing his information technology (IT) hardware and software. And he had policies for purchasing, warehousing, and transportation.
Policies form the bridge between overall strategy and the execution of business procedures.
The young businessman had a vision and strategy for success. His policies connected the businessman’s lofty ideas to realities.
For example, one of his strategies was to have a real-time inventory management system that was ahead of its time (the businessman founded his enterprise in the 1970’s). To do this, he hired a skilled programmer to install a customized inventory information system. He set policies on the entry of transactional data and instilled daily cycle counting of items. He achieved the ideal of an inventory management system that accurately showed how much were on stock for hundreds of products at any time.
Many companies I’ve worked with have clear visions, objectives, and strategies. Some are doing very well. But when they come to me about problems in their business, almost always there was a policy that’s missing or just needs to be cleared up.
Policies not only have to be consistent with an organization’s objectives. They also have to be clear as guides to how an organization would act. They are no way the same as targets. They are specific to functions and they are the bridge between executive strategy and procedures at the grass-roots level.
Policies determine how an organization is managed and how it will behave with customers, suppliers, and stakeholders. It can make or break a business.
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