System’s Approach to

Management
Session 10
• By a systems approach to management is
meant the study of a firm in its totality so that
the men and material resources of the firm can
be organized to realize the firm's overall
objectives as efficiently as possible.
• The Systems Approach to management theory,
views the organization as an open system
made up of interrelated and inter-dependent
parts that interact as sub-systems. 
• 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 organisation 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). 
• This approach recognizes that an organization
relies on the environment for essential inputs.
Further, the environment serves an outlet for its
outputs.
 Primary Characteristics of an Organizational
System

• The following are the chief characteristics of the System Approach to

Management:
• Sub-Systems - Each organization is a system made up of a combination
of many sub-systems. These sub-systems are inter-related.
• Wholism - Each sub-system works together to make up a single whole
system. Decisions made in any subsystem affect the entire system.
• Synergy - The collective output of the whole system is greater than the
sum of output of its sub-systems.
• Closed and Open Systems - The whole organization is an open system
made up of a combination of open and closed sub-systems.
• System Boundary - The organization is separate from the external
environment made up of other systems.
2
• An organisation as a system has five basic
parts:
i. Input,
ii. Process,
iii. Output,
iv. Feedback and
v. Environment.
 Components of an Organizational System

• The system approach envisions the organization as made up

five components:
• 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.
• The Environment - These components make up internal and
external factors that affect the system
 Closed and Open Management Systems

• Closed systems are the internal sub-units of

the organization that do not interact with the
external environment. 
• Open systems are internal sub-units that
interact with other systems (or sub-units
within other systems) that are outside of the
organization.
• In effect, all organizations are open systems.
 Advantages of Systems approach
• It assists in studying the functions of complex
organizations
• It is possible to bring out the inter-relations in
various functions like planning, organizing,
directing and controlling.
 Disadvantages
• This approach is somewhat abstract and
vague.
• It does not provide any tool and technique for
managers.
• It is not a prescriptive management theory, as
it does not specify tools and techniques for
practicing managers
 Implications of the System Approach

1. Every system is goal-oriented and it must

have a purpose or objective to be attained.
2. In designing the system we must establish
the necessary arrangement of components.
3. Inputs of information, material and energy
are allocated for processing as per plan so
that the outputs can achieve the objective of
the system
 Porter’s Value Chain- an application of the
System’s Approach
• How does your organization create value?
• How do you change business inputs into business outputs in such
a way that they have a greater value than the original cost of
creating those outputs?
• The value chain concept was first described in 1985 by Harvard
Business School professor Michael Porter, in his book Competitive
Advantage: Creating and Sustaining Superior Performance.
• The value that's created and captured by a company is the profit
margin:
• Value Created and Captured – Cost of Creating that Value =
Margin
• A value chain is a concept describing the full chain of a business's activities
in the creation of a product or service -- from the initial reception of
materials all the way through its delivery to market, and everything in
between.
• The value chain framework is made up of five primary activities -- inbound
operations, operations, outbound logistics, marketing and sales, service --
and four secondary activities -- procurement and purchasing, human
resource management, technological development and company
infrastructure.
• A value chain analysis is when a business identifies its primary and
secondary activities and subactivities, and evaluates the efficiency of each
point.
• A value chain analysis can reveal linkages, dependencies and other patterns
in the value chain.
Value Chain
 Primary Activities
• Inbound operations. The internal handling and management of resources coming
from outside sources -- such as external vendors and other supply chain sources.
These outside resources flowing in are called "inputs" and may include raw
materials.
• Operations. Activities and processes that transform inputs into "outputs" -- the
product or service being sold by the business that flow out to customers. These
"outputs" are the core products that can be sold for a higher price than the cost of
materials and production to create a profit.
• Outbound logistics. The delivery of outputs to customers. Processes involve systems
for storage, collection and distribution to customers. This includes managing a
company's internal systems and external systems from customer organizations.
• Marketing and sales. Activities such as advertising and brand-building, which seek to
increase visibility, reach a marketing audience and communicate why a consumer
should purchase a product or service.
• Service. Activities such as customer service and product support, which reinforce a
long-term relationship with the customers who have purchased a product or service.
 Secondary Activities

• Procurement and purchasing. Finding new external vendors, maintaining

vendor relationships, and negotiating prices and other activities related
to bringing in the necessary materials and resources used to build a
product or service.
• Human resource management. The management of human capital. This
includes functions such as hiring, training, building and maintaining an
organizational culture; and maintaining positive employee relationships.
• Technology development. Activities such as research and development,
IT management and cybersecurity that build and maintain an
organization's use of technology.
• Company infrastructure. Necessary company activities such as legal,
general management, administrative, accounting, finance, public
relations and quality assurance.
• The value chain framework helps organizations identify
and group their own business functions into primary
and secondary activities.
• Analyzing these value chain activities, subactivities and
the relationships between them helps organizations
understand them as a system of interrelated functions.
• Then, organizations can individually analyze each to
assess whether the output of each activity or
subactivity can be improved -- relative to the cost, time
and effort they require.
• Each of the activities in the Value Chain incurs costs
• Each of the activities of the Value Chain also adds value
• Value-Cost= Margin
• An organisation can increase margin in the following
ways:
• Decrease Cost associated with an activity
• Increase Value created/added by each activity
• Do both, decrease costs and increase value for an
activity
• Look at the various activities in the Value
Chain
• Analyse how for each activity, Margin can be
increased by either reducing the associated
costs or enhancing the value added by the
activity or both.
• For example:
• Take the activity of ‘Inbound Logistics’
• Inbound logistics adds value to a product by bringing in raw materials to the organisations
which are then processed to manufacture an output (a product)
• Inbound logistics also involves costs such as cost of the raw materials, cost of transporting the
raw materials to the organisation’s production facility
• An organisation can improve this activity thereby enhancing the contribution of this activity to
the company’s Margin [= Value less Cost]
• This, the company can do by reducing the cost : Reducing the cost of procuring raw materials,
reducing the inventory holding costs by ordering raw materials as and when needed rather than
stocking more than required raw materials, reducing the cost of transporting the raw materials
• The company can also increase Value by procuring high quality raw materials
• Thus, by reducing cost associated with this activity or increasing the Value added by this
activity, management can increase the contribution of this activity towards the Margin
• Similarly, the company can implement changes across the other activities of the Value Chain, all
thereby contributing towards a higher Margin.
• Benefits of value chains
• Support decisions for various business activities.
• Diagnose points of ineffectiveness for corrective action.
• Understand linkages and dependencies between different
activities and areas in the business. For example, issues in
human resources management and technology can permeate
nearly all business activities.
• Optimize activities to maximize output and minimize
organizational expenses.
• Potentially create a cost advantage over competitors.
• Understand core competencies and areas of improvement.