What is Systems Theory?
Systems theory treats an organization as a system. A system can be either closed or open, but most
approaches treat an organization as an open system. An open system interacts with its environment by way
of inputs, throughputs, and outputs.
Key Concepts of Systems Theory
In order to understand the theory, you must first get a firm understanding of a system. A system is any set of
distinct parts that interact to form a complex whole. Think of the universe. Its parts are as small as a
subatomic particle and as large as galactic clusters. Each part is distinct but interacts to form the universe.
An organization is also a system with parts such as employees, assets, products, resources, and information
that form a complex system.
Component # 1. Sub-System:
Each part of the bigger whole is a sub-system. These parts make the whole organization. Each sub-system is
part of the larger system which, in turn, is subsystem of a still larger system. For example, department is a
sub-system of the organization which is a sub-system of the industry, which, further is a sub-system of the
national economy which is a sub-system of the world economy.
Component # 2. Synergy:
The sum total of parts is less than that of the whole. If every department works independently, total output
would be less than what is produced by them together. Synergy defines relationships amongst all parts of the
organization e.g., if production and marketing departments have independent sub-departments to provide
them finance or labour, it will be less efficient than a system where both (production and marketing
department) are connected with one finance or personnel department of the organization as a whole.
Thus, systems approach does not just talk of the parts and their sub-parts but also their arrangement. All the
parts and sub-parts are arranged in such a manner that output of the whole (achieved through coordination
amongst subsystems) is more than the total of the output of individual parts.
Component # 3. Open and Closed Systems:
System can be open or closed. Open system actively interacts with the environment. It receives inputs as raw
material, labour, capital, managerial and technical expertise from the environment and sells outputs (goods
and service) to the society. The Government (framing the policies and imposing taxes) and competitors also
interact with business organizations.
A closed system has no or very little interaction with the environment. Practically, all organizations are open
systems though degree of openness with the environment varies according to nature of their operations. A
manufacturing organization, for example, is far more open than a religious organization (a temple or a
church).
Component # 4. System Boundary:
Each system has a boundary that separates it from the environment. The world outside the boundary of the
system is its environment. This boundary is overlapping (flexible) in case of open system and non-flexible
(rigid) in case of a closed system. More the interaction of an organization with its environment, more
flexible is its boundary. System boundaries are increasingly flexible in the modern world.
Component # 5. Flow:
It represents the movement of inputs (men, material, money, machine etc.) into the system from the
environment, their transformation into outputs (goods and services) and supply of outputs to the
environment.
Component # 6. Feedback:
Feedback mechanism helps in knowing whether or not output is accepted by the environment. The
information is feedback to the organization so that organizational operations can be assessed and if need be,
corrected. Feedback means response of the environment to organizational outputs.
The systems approach to management is diagrammatically represented as follows: