Unit – 1

Overview of Business Systems

(I) Business Environment – Definition, Components, & Features (13/16 Marks)

Several internal and external factors directly or indirectly influence business operations. While some
of these are within the business’s control, most of these are not; and the business has to adapt itself
to avoid being affected by changes in such factors. Both of them combined forms the business
environment. Today’s fast-paced business world witnesses a trend of a rather dynamic business
environment – that is, it’s never stable. Hence, keeping track of these changing trends, demands,
strategies, and policies is crucial in the business world.

What Is Business Environment?

A business environment is a combination of internal and external factors and forces that significantly
influence the operations of a business.

The business environment comprises an internal and external environment that directly or indirectly
affects business operations.

Internal Environment: It includes all the factors that are well within the control of a company. These
factors are relatively predictable and can be worked on by the company to eliminate forces that
negatively impact its operations.

External Environment: It includes factors that exist outside the company’s control. They tend to be
unpredictable as a company cannot possibly control or predict a change in them. Their unpredictable
nature has the potential to abruptly hinder or even boost a company’s functioning.

Components Of Business Environment

The business environment can be categorised into two types based on the factors within the control
or outside the control of a business.

Internal Environment

The internal business environment constitutes several internal forces or elements within the control
of a business that influences its operations. These include:

Value System: It is the ethical belief that guides the business towards achieving its mission and
objective. The value system includes all components that form a business’s regulatory framework –
organisational culture, climate, work processes, management practices and organisational norms.

Vision, Mission, and Objectives: The vision, mission, and objective of a business relate to what it
wants to achieve or accomplish in future. It is the reason why the business exists.

Organisational Structure: It outlines how the activities are directed within the organisation to achieve
its goals. It includes the rules, roles, and responsibilities, along with how tasks are delegated and how
the information flows among the organisation’s levels.

Corporate Culture: It is a powerful system of shared norms and attitudes that works as a homogenising
factor for an organisation’s employees and gets appropriated by them.
Human Resources: Human resources form all the employees and other personnel associated with the
business. It forms the most valuable asset of the organisation as success or failure depends on it.

Physical Resources and Technological Capabilities: It includes tangible assets and the technical know-
how that play an essential role in ascertaining the business’s competitive capability and future growth
prospects.

External Environment

External components are those factors that a business cannot control. These exist beyond a business’
jurisdiction and supervision limit. External components influencing a business environment are further
classified into two categories:

Micro Environment

Macro Environment

Micro Environment

Micro environment is the business’s immediate external environment that influences its performance
as it has a direct bearing on the firm’s regular business operations.

It includes factors outside of the business’s control but can be analysed and worked upon by managing
the business to prevent any business losses.

Micro factors include:

Customers comprise the target group of the business.

Competitors are other market players who target a similar target group and provide similar offerings.

Media is the channel the business use to market its offering to the customer.

Suppliers include all the parties that provide the business with the resources it needs to perform its
operations.

Intermediaries comprise the parties involved in delivering the offering to the final customers.

Partners are all external entities like advertising agencies, market research organisations, consultants,
etc., who conduct business with the organisation and satisfy customer needs.

Public includes any group with actual or potential interest in the business’s operations or a group that
affects its ability to serve its customers.

Macro Environment: PESTLE

The macro environment includes remote environmental factors that influence an organisation. The
extent of influence a macro element can have on a business is significant as they usually affect the
industry as a whole.

These factors are classified under PESTLE: P – Political, E – Environmental, S – Social, T –

Technological, L – Legal, E – Economical.
Pestle Analysis Business Environment

Political Factors comprise government policies, political stability, corruption in the system, tax
policies, labour laws, and trade restrictions that affect the business or the industry.

Economical Factors relate to the economy of the country. They include economic growth, exchange
rate, interest and inflation rates, etc.

Social Factors comprise the demographics of the country. They include population growth rate, age
distribution, career attitudes, health consciousness, etc.

Technological Factors pertain to innovation in technology that affects the operations of the business.
This refers to automation, research and development activities, technological awareness, etc.

Legal Factors are laws that affect business operations. They include business-specific, industry-
specific, and even state-specific laws.

Environmental Factors comprise of all those that influence or are determined by the environment a
business operates in. It includes the weather, climate, environmental policies, and even pressure from
NGOs to care for the environment.
(II) Importance of Business Environment (6 Marks)

The market is essentially flooded with competing businesses. It is, thus, integral for a business to keep
a lookout for the forces that affect it.

Emphasis is laid on maintaining continuous interaction with a company’s business environment.

Understanding this environment allows companies to –

Plan For Long Term: A sound knowledge of the business environment helps the company know its
advantages and limitations, making it easier to choose the better positioning and plan to stay in the
market for the long term.

Identify Opportunities and Trends – Timely analysis allows a company to identify and consequently
explore new opportunities and better performance ideas. A business opportunity is a factor that, upon
identifying, allows the initiation of a business venture or aids the development of an existing business.
An example of this is Nokia, a company that has previously held a whopping 49.9% of the global market
share for mobile phones. However, the company did not adapt to the market’s changing demands as
it failed to analyse new trends. Keeping a constant lookout for the new trends that rival firms are
setting allows the company to adapt accordingly.

Identify threats – Identifying potential threats to the business is another reason why a company needs
to keep a watch on its environment. Threats are factors that have the potential to hurt a business.
Steering clear of any possible threats ahead of time is integral for the survival of a company. Staying
updated and adapting to the turbulent state of the overall business environment grants the company
better flexibility when it comes to coping when a sudden, unexpected threat approaches the company.
Understanding these conditions and forces thoroughly allows analysts to determine what direction
the company should steer towards to stay relevant in the market.

Gain First- Mover Advantage – A company gains the first-mover’s advantage if it succeeds to identify
market demands at the right time. This allows the company to create its brand and gain brand
recognition which benefits the business in the long run. As time passes, competitors try to enter the
market after having examined the product’s expansive market demand. By that time, the first mover
has plenty of time to establish strong customer loyalty and hence a significant market share which will
be hard to compete with. A closer look at the history of Amazon shows how Jeff Bezos had recognised
the power of the internet after having come across a statistic that claimed that the internet would
change the way businesses operate. Identifying the internet’s potential ahead of time has made
Amazon the world’s largest e-commerce company today.

(III) Features Of Business Environment (6 Marks)

A business environment is:

Dynamic: The constant changing of the environment – be it socially, politically, economically and
technologically – results in the dynamic nature of the business environment. A heavy interrelatedness
of factors that consequently lead to this ever-changing environment is witnessed.

Unpredictable: Due to its dynamic nature, an air of uncertainty always persists. Precognition is
impossible, and hence, there is no way to foresee a future event that might impact the business
environment.
Complex: The interrelatedness of factors and circumstances form a rather tangled environment which
is often difficult to analyse. It is an arduous task to keep track of the sources and their impacts on
conditions and forces that make up the business environment. Hence, it is a complex task to measure
the relative impact a certain force may have on a business.

Susceptible: It is difficult to foresee the impact a slight change in the environment can have on a
business. An insignificant change may influence a company’s operations largely. It has the potential to
impact a business’ entire existence, its revenue and development.

Relative: The business environment is not the same at all places. It varies from place to place. The
political crisis in one nation affects the business environment only in that nation, not elsewhere.
Hence, the business environment is a relative concept.

Multiple-angled: A social, political or economic occurrence may have different impacts on different
businesses. A political move that seems beneficial for one business might seem threatening to
another. Hence, there exist multiple perceptions in a business environment.
(IV) What is the Systems Approach to Management? (13 Marks)

The Systems Approach to management theory, commonly viewed as the foundation of organizational
development, views the organization as an open system made up of interrelated and inter-dependent
parts that interact as sub-systems.

Thus the organization comprises a unified singular system made up of these subsystems. For example,
a firm is a system that may be composed of sub-systems such as production, marketing, finance,
accounting and so on. As such, the various sub-systems should be studied in their inter- relationships
rather, than in isolation from each other.

The system as a whole is affected by internal elements (aspects of the sub-units) and external
elements. It is responsive to forces from the external environment.

The system is considered open, as organizations receive varied forms of inputs from other systems.
For example, a company receives supplies, information, raw materials, etc. These inputs are converted
to outputs that affect other systems.

Generally, the systems approach assesses the overall effectiveness of the system rather than the
effectiveness of the sub-systems. This allows for the application of system concepts, across
organizational levels in the organization - rather than only focusing upon the objectives and
performances of different departments (subsystems).

Organizational success depends upon interaction and interdependence between the subsystems,
synergy between the sub-systems, and interaction between internal components (closed system) and
external components (internal system).

The systems approach implies that decisions and actions in one organizational area will affect other
areas. For example, if the purchasing department does not acquire the right quantity and quality of
inputs, the production department wont be able to do its job.

This approach recognizes that an organization relies on the environment for essential inputs. Further,
the environment serves an outlet for its outputs.

What are the components of an Organizational System?

The system approach envisions the organization as made up five components:

(FOR DETAILED DIAGRAM, REFER YOUR CLASS NOTES)

Inputs - Raw Materials, Human Resources, Capital, Information, Technology

A Transformational Process - Employee Work Activities, Management Activities, Operations Methods

Outputs - Products or Services, Financial Results, Information, Human Results

Feedback - Results from outputs influence inputs.

Advantages and Disadvantages of a Systems Approach

The advantages of the systems approach include:

• It assists in studying the functions of complex organizations

• It is probabilistic rather than deterministic.
• It has been utilized as the base for the new kinds of organizations like project management
organization.
• It is possible to bring out the inter-relations in various functions like planning, organizing,
directing and controlling.
(V) Functions of Management (13 Marks)

Planning

It is the basic function of management. It deals with chalking out a future course of action & deciding
in advance the most appropriate course of actions for achievement of pre-determined goals.

According to KOONTZ, “Planning is deciding in advance - what to do, when to do & how to do. It bridges
the gap from where we are & where we want to be”. A plan is a future course of actions. It is an
exercise in problem solving & decision making.

Planning is determination of courses of action to achieve desired goals. Thus, planning is a systematic
thinking about ways & means for accomplishment of pre-determined goals. Planning is necessary to
ensure proper utilization of human & non-human resources. It is all pervasive, it is an intellectual
activity and it also helps in avoiding confusion, uncertainties, risks, wastages etc.
Organizing

It is the process of bringing together physical, financial and human resources and developing
productive relationship amongst them for achievement of organizational goals.

According to Henry Fayol, “To organize a business is to provide it with everything useful or its
functioning i.e. raw material, tools, capital and personnel’s”. To organize a business involves
determining & providing human and non-human resources to the organizational structure. Organizing
as a process involves:

• Identification of activities.
• Classification of grouping of activities.
• Assignment of duties.
• Delegation of authority and creation of responsibility.
• Coordinating authority and responsibility relationships.

Staffing

It is the function of manning the organization structure and keeping it manned. Staffing has assumed
greater importance in the recent years due to advancement of technology, increase in size of business,
complexity of human behavior etc.

The main purpose of staffing is to put right man/woman on right job i.e. square pegs in square holes
and round pegs in round holes. According to Kootz & O’Donell, “Managerial function of staffing
involves manning the organization structure through proper and effective selection, appraisal &
development of personnel to fill the roles designed un the structure”. Staffing involves:

• Manpower Planning (estimating man power in terms of searching, choose the person and
giving the right place).
• Recruitment, Selection & Placement.
• Training & Development.
• Remuneration.
• Performance Appraisal.
• Promotions & Transfer.

Directing

It is that part of managerial function which actuates the organizational methods to work efficiently for
achievement of organizational purposes. It is considered life-spark of the enterprise which sets it in
motion the action of people because planning, organizing and staffing are the mere preparations for
doing the work.

Direction is that inter-personnel aspect of management which deals directly with influencing, guiding,
supervising, motivating sub-ordinate for the achievement of organizational goals. Direction has
following elements:

• Supervision
• Motivation
• Leadership
• Communication
 • Supervision- implies overseeing the work of subordinates by their superiors. It is the act of
watching & directing work & workers.

Motivation- means inspiring, stimulating or encouraging the sub-ordinates with zeal to work. Positive,
negative, monetary, non-monetary incentives may be used for this purpose.

Leadership- may be defined as a process by which manager guides and influences the work of
subordinates in desired direction.

Communications- is the process of passing information, experience, opinion etc from one person to
another. It is a bridge of understanding.

Controlling

It implies measurement of accomplishment against the standards and correction of deviation if any to
ensure achievement of organizational goals. The purpose of controlling is to ensure that everything
occurs in conformities with the standards. An efficient system of control helps to predict deviations
before they actually occur.

According to Theo Haimann, “Controlling is the process of checking whether or not proper progress is
being made towards the objectives and goals and acting if necessary, to correct any deviation”.

According to Koontz & O’Donell “Controlling is the measurement & correction of performance
activities of subordinates in order to make sure that the enterprise objectives and plans desired to
obtain them as being accomplished”. Therefore controlling has following steps:

• Establishment of standard performance.

• Measurement of actual performance.
• Comparison of actual performance with the standards and finding out deviation if any.
• Corrective action.