4 Internal and 5 External Determinants of a Corporate Policy

Financial Theory and Corporate Policy (4th Edition)The corporate policy of an organization is influenced by various interrelated and interacting factors. These factors can be classified as internal and external factors. The determinants which are internal to the firm/organization and which influence the decisions directly are known as the internal factors. External factors include all those factors which act from outside the firm and influence the organization externally. We discuss these determinants one by one below:
The Four Internal Determinants
The determinants include the corporate mission, corporate objectives, corporate resources and the management values which are all internal to the organization and play a very important role in the formulation of corporate policy.
1. Corporate Policy
The policy maker has to understand the corporate mission, so that the policy is in tune with it. Corporate mission provides the company with the meaning for which it exists and operates. Because policy provides guidelines for managerial action, it has to be made in a manner that it accomplishes the corporate mission.
2.  Corporate Objectives
Another internal determinant of corporate policy are the corporate objectives. All organizations frame organizational objectives and work towards their achievement. Policy makers must take into account the economic, financial and other objectives of the company.
3. The Resources
The organization has to carry out its activities keeping in mind the resources it has. The corporate policy has to identify the various resources available and then only can it be made sound. The size of plants, capital structure, liquidity position, personnel skills and expertise, competitive position, nature of product etc. all elp
in the formulation of corporate policy.
4. Management Values
Corporate policy reflects the values imbibed in the organization. The personal values of the managers forming corporate policy influences its formulation. Management values differ from organization to organization. It is an important determinant of corporate policy.

The Five External Determinants
These include the forces external to the firm. The external determinants of corporate policy are industry structure, economic environment and political environment.
1. Industry Structure
The formulation of corporate policy is influenced by the industry in which the firm exists. The structure of industry comprises of size of firms, the entry barriers, number of competitors etc. The corporate policy is formulated keeping in mind competitors, strategies, policies etc.
2. Economic Environment
Economic environment comprises of the demand, supply, price trends, the national income, availability of inputs, the various institutions etc. It includes all these factors which influence the policies of the firm. Therefore, it becomes one of the most important determinants of corporate policy.
3. Political Environment
The firm has to carry out its activities in accordance with the government regulations and policies. If these are not complied with the firm would not be able to meet its objectives in an efficient manner. The various policies like monetary policy, fiscal policy, credit policy influence the corporate policy of the firm.
4.Social Environment
The firm affects various sections of the society. The various sections in turn influence the activities of the firm. The social beliefs of the managers influence policies. The religious, cultural and ethnic dimensions have to be dealt with while formulating policies of an organization.
5. Technology
Every now and then, new technologies are entering the market. An organization has to change with the changes in the environment. It has to remain up to date with respect to technology it uses. Thus technology also plays an important role in formulation of corporate policy.