Systems Theory in Business

Systems Theory in Business: Systems Theory Principles

What is Systems Theory?

Systems theory is an interdisciplinary study of systems, which are cohesive groups

of interrelated, interdependent components that form a complex and unified
whole. Systems theory views an organization as a collection of interrelated and
interdependent parts, which function together to achieve a common goal.

It originated from biology and engineering but has applications in fields like
business and information technology. A system—whether it is a cell, an organ, an
individual, a family or a corporation—is composed of interdependent elements
that share some common goals, interrelated functions, boundaries and an
identity.

Systems theories attempt to describe and account for the characteristics of

systems and the relationships among the component parts found within the
system.

Systems theories take the position that the whole is more than the sum of its
parts. The system cannot be fully understood by identifying each of its
component parts (von Bertalanffy, 1950, 1968). A language system, for example,
is more than the capacity to make vocal utterances, use grammar, and acquire
vocabulary. It is the coordination of these elements in a useful way in a context of
shared meaning.

Initially developed in the 1940s by biologist Ludwig von Bertalanffy to explain how
biological systems work, systems theory has since been applied to various fields,
including business management.

System theory defines a system as anything from a biological entity, an

ecosystem, a business organization or a society. It focuses on how different parts
(subsystems) work together to create a functioning whole. Systems theory states
that the system itself is more significant than all of the individual parts that
comprise it.
Systems theory is manifest in the work of practitioners in many disciplines, for
example the works of physician Alexander Bogdanov, biologist Ludwig von
Bertalanffy, linguist Béla H. Bánáthy, and sociologist Talcott Parsons; in the study
of ecological systems by Howard T. Odum, Eugene Odum; in Fritjof Capra's study
of organizational theory; in the study of management by Peter Senge; in
interdisciplinary areas such as human resource development in the works
of Richard A. Swanson; and in the works of educators Debora Hammond and
Alfonso Montuori.

As a transdisciplinary, interdisciplinary, and multiperspectival endeavor, systems

theory brings together principles and concepts from ontology, the philosophy of
science, physics, computer science, biology, and engineering, as well
as geography, sociology, political science, psychotherapy (especially family
systems therapy), and economics.

Key Principles of Systems Theory

 Interdependence: All components of a system are interconnected and

influence one another. A change in one part affects the entire system.

 Input-Throughput-Output: A system takes inputs (resources), processes

them, and produces outputs (goods or services).

 Holistic Approach: The whole is greater than the sum of its parts.
Understanding the overall system provides more insights than looking at
each component individually. A business is viewed as a whole, not just as a
sum of individual parts. Each department or unit within an organization is
connected and interdependent.

 Subsystems: Every business is made up of smaller components

(subsystems) that interact with each other. These can include departments
like marketing, finance, HR, IT, etc.

 Feedback Mechanisms: Systems respond to feedback to maintain stability

or adapt to changes. Feedback (both positive and negative) helps the
 system adjust and maintain equilibrium. In business, this can be customer
feedback, performance reports, or market analysis.

 Equifinality: There are multiple ways to achieve the same outcome. In

business, different strategies or management approaches may lead to
success.

 Entropy: Without proper maintenance and adaptation, a system tends

toward disorder. Businesses must continuously improve to avoid
stagnation.

 Boundaries: Every system has boundaries that separate it from its

environment. These boundaries define what is inside the system (internal
processes) and what is outside (external factors like competition, market
conditions, etc.).

 Homeostasis: Systems strive for stability or equilibrium (homeostasis). In a

business context, this refers to maintaining balance between inputs
(resources, materials) and outputs (products, services).

General systems theory distinguishes dynamic or active systems from static or

passive systems. Active systems are activity structures or components that
interact in behaviours and processes or interrelate through formal contextual
boundary conditions (attractors). Passive systems are structures and components
that are being processed. For example, a computer program is passive when it is a
file stored on the hard-drive and active when it runs in memory.

Importance of System Theory

i. Recognizes that conflicts can arise within a system which may cause the system
not to achieve its goals

ii. Allows an individual to recognize that he or she is a sub-system within a larger

system

iii. Stresses that sub-systems should work together harmoniously for a system to
achieve its goals
iv. Allows systems to be studied

System

An orderly grouping of interdependent components linked together according to

a plan to achieve a specific objective. System can be further described as a set of
items, equipment and people working jointly with an aim of achieving a common
goal.

Every system has causal boundaries, is influenced by its context, defined by its
structure, function and role, and expressed through its relations with other
systems.

A system is "more than the sum of its parts" when it expresses synergy or
emergent behavior.

Changing one component of a system may affect other components or the whole
system. It may be possible to predict these changes in patterns of behavior. For
systems that learn and adapt, the growth and the degree of adaptation depends
upon how well the system is engaged with its environment and other contexts
influencing its organization.

Some systems support other systems, maintaining the other system to prevent
failure. The goals of systems theory are to model a system's dynamics,
constraints, conditions and relations; and to elucidate principles (such as purpose,
measure, methods, tools) that can be discerned and applied to other systems at
every level of nesting, and in a wide range of fields for achieving optimized
equifinality.

Other definitions of a system

a) A group of things or parts working together in a regular relation i.e. transport

systems, digestive systems, respiratory systems

b) An orderly set of ideas, theories, principles i.e. Archimedes principle, Judicial

system, Constitution etc.

c) An organized or complex unit i.e. Music systems, T.Vs, computers etc.

An analysis of many such definitions above reveals the following characteristics of
systems.

Classification of systems

Systems are classified in the following various ways;

1. Hard and soft systems

A hard system refers to a system whose goals and objectives are clearly defined
and the outcomes from the systems processes are predictable and can be
modelled accurately.

Example – Stock Management System.

A soft system refers to a system whose goals and objectives are not clearly
defined (conflicts) and whose outcome is unpredictable. The boundaries keep on
changing. They depend on human factors. Example – Political system.

2. Open and closed system

An open system is able to communicate with its environment. It receives inputs

from the environment and gives output to the environment. It adapts to changes
in the environment.

Examples include Banking system, business system, Education systems etc.

A closed system does not interact with its environment. It does not receive any
input nor does it give output. They do not receive modification from the
environment examples include Scientific systems, computer programs.

Difference between Open Systems and Closed Systems

Open System Closed System

- Interacts with the environment - Does not interact with the

constantly Environment

- Has infinite scope - Limited Scope

- Relevant variables keep on interacting - Self Contained

- Flexible and abstract - Rigid and mathematical

3. Abstract and Physical Systems.

Abstract systems are logical representation of actual systems. They can be in form
of simulations of actual systems or design models that represent the system.

Examples are house plans, data flow diagram (DFD), entity relationship
diagram (ERD), computer simulated games (for kids e.g. driving)

Physical systems are actual systems. This is a simple representation of a group of

both tangible and non-tangible components. E.g. an organization, a car etc.

4. Simple systems and Complex systems

A simple system has few components, and the relationship or interaction

between elements is uncomplicated and straightforward. A complex system has
many elements that are highly related and interconnected.

5. Open loop systems and closed loop systems

An open-loop system is one which does not act in a controlled manner, that is,
there is no feedback loop, and so it has no measure of performance against
standards. A closed-loop system is one that functions in a controlled manner.
Such a system accepts inputs, works upon them according to some predefined
processing rules and produces outputs. Such a system is controlled via a feedback
loop.

6. Stable/Static systems Vs Dynamic systems

A stable system undergoes very little change over time. A dynamic system
undergoes rapid and constant change over time.

7. Adaptive systems Vs Non-adaptive systems

An adaptive system is able to change in response to changes in the environment.

These systems can also be described as cybernetic or self-organising systems. A
non-adaptive system is not able to change in response to changes in the
environment.

8. Permanent systems Vs Temporary systems

A permanent system exists for a relatively long period of time. A temporary

system exists for a relatively short period of time.

Deterministic/mechanistic

Is a system where the end product is exactly known from their input. These
systems function according to some predetermined procedures and hence their
future behaviour can be predicted accurately depending on the situations
prevailing.

Examples – Orbit system (Future behavior of the planet can be accurately

predicted), computer systems etc.

Probabilistic/stochastic

Are systems whose output can only be predicted but not known precisely. These
systems operate on probability i.e chances, events and hence their future
behaviour cannot be predicted definitely.

Examples – Social systems (Business and Economic systems) which can be

affected by factors which are unpredictable.

Cybernetic/adaptive.

Are systems which adapt to their environment. They must react in order to
survive. They regulate their own behaviour by accessing the feedback i.e access
their output and adjust the input. If they don’t react they die/perish.

Examples – Human, Plants, Organizations.

Characteristics of systems

i. A system is defined to fulfill a predetermined objective

ii. A system comprises of multiple components e.g. input, processor,
output.
iii. These different components are interdependent and interlinked i.e.
information must be flowing from one component to another.
iv. The different components of a system form a sub-system
v. A good system must have some control and this control helps it not to
operate beyond its boundaries
vi. A system must give priority to the objectives of the organization as a
whole as compared to the objectives of a sub-system

Components of a system

A system is made up of different components and these components are inter-

linked and work together with an objective to achieve. We may identify
components as follows:

a) Input: An operational system takes in some form of input from the

environment. The nature of input is influenced by the nature of the system.
The input is described as a data collection, data capture or just data entry
point.

b) Output: is the component that receives information that has been

processed by the system. The major objective of a system is to produce output
that is of value to its users. The output measures the system efficiency and
usefulness.

c) Processor: It is the element of a system that is involved in the actual

transformation of the input data into information that is given out by output.
This processor is the operational element of a system.

d) Comparator: This is the way the comparison of the actual result and the
plan is achieved .Modern systems the comparison is done by computer
programs

e) Effector: Actions to be taken are affected after the study of comparison

has been done by the time comparator.
f) Activator This is a decision element that evaluates in the light of
feedback , alternative course of action design to eliminate the deviant
behaviour of the operating system

g) Sub-optimization: This is a situation where the objectives of a subsystem

conflict with the objectives of the main system or a situation where the
sub-system achieve their objectives of the higher system.

h) Synergy: It is where two systems operate as one and produce more

results that each would achieve independently.

i) Symbiosis: It is where two systems operate as one and if one ceases

to exist , the other cannot function. It is thus based on take and give
relation.

j) Redundancy: It is where there is application between sub-systems such

that if and specific sub-subsystem ceased to exist , the whole system
would continue.

k) Factoring: It is the process of splitting disintegrating a system into sub

systems/ units as a mean of focusing on specific subsystem
requirements.

l) Decoupling: This is a process which in the subsystems are given

autonomy and independence i.e. the sub system operate independently
thereby pursuing own objectives and enhancing flexibility.

m) Decomposition: This is breaking down the system into smaller, more

manageable and understandable components called the subsystem. This helps
in focusing the attention on one subsystem at a time without interference
from other parts. Also permits different parts of the system to be built at
independent times and/ or by different people.

n) Modularity: A direct result of decomposition. Refers to dividing a system up

into chunks or modules of a relatively uniform size.
 o) Coupling: This is the extent to which subsystems are dependent on each
other. Subsystems should be as independent as possible. If the subsystems are
loosely coupled them, unfortunately one fails then the other will not be
affected.

p) Cohesion. This is the extent to which a subsystem performs a single

function. Biological systems are very cohesive. Any description of the system is
abstract since the definition is not a system itself.

q) Logical System Description; portrays the purpose and function of the

system without trying the description to any specific physical implementation.
r) The Physical System Description; is a material depiction of the system, and
the central concern is building the system.

s) Sub Optimization – An occurrence that occurs when the objective of one

element (subsystem) conflicts which the objective of the overall system.

Open vs. Closed Systems:

Open Systems: Interact with the external environment (businesses, ecosystems).

Businesses are open systems, meaning they interact with their environment.
Inputs (e.g., resources, materials, information) are processed internally and result
in outputs (e.g., products, services, profits).

Closed Systems: Do not interact with external environments (rare in the real
world). These systems do not interact with the external environment and are self-
contained. While no business is truly a closed system, internal departments
sometimes operate with limited external influence (e.g., internal quality control).

Examples of Systems in Business

Organizations as Systems: An organization is seen as an open system, where it

interacts with external factors like customers, competitors, and government
regulations while managing internal subsystems such as departments, teams, and
resources.
Supply Chain as a System: A supply chain is a system where suppliers,
manufacturers, warehouses, and retailers are interconnected to deliver products
to consumers.

Application of Systems Thinking in Business Management

What is Systems Thinking?

Systems’ thinking is a holistic approach that views problems and opportunities as

part of an overall system. It encourages understanding how interrelated parts of a
business work together and affect one another. Systems’ thinking helps in solving
failure or problems based on the following areas common to many businesses,
namely: 1. product development and product lifecycle management, 2. sales and
sales management, 3. pricing, 4. operations and quality assurance, and 5.
administration.

Encourages managers to see connections between different units, processes, and

external factors, fostering better decision-making and strategy formulation.

Systems thinking helps managers understand the complexity of business

environments, and foresee the impact of changes across the organization.

Fundamental Concepts of Systems Thinking

1. Interconnectedness

Systems thinking requires a shift in mindset, away from linear to circular. The
fundamental principle of this shift is that everything is interconnected, not in a
spiritual way, but in a biological sciences way.

Essentially, everything is reliant upon something else for survival. Humans need
food, air, and water to sustain our bodies, and trees need carbon dioxide and
sunlight to thrive. Everything needs something else, often a complex array of
other things, to survive.

Inanimate objects are also reliant on other things: a chair needs a tree to grow to
provide its wood, and a cell phone needs electricity distribution to power it. So,
when we say ‘everything is interconnected’ from a systems thinking perspective,
we are defining a fundamental principle of life. From this, we can shift the way we
see the world, from a linear, structured “mechanical worldview’ to a dynamic,
chaotic, interconnected array of relationships and feedback loops.

2. Synthesis

In general, synthesis refers to the combining of two or more things to create

something new. When it comes to systems thinking, the goal is synthesis, as
opposed to analysis, which is the dissection of complexity into manageable
components. Analysis fits into the mechanical and reductionist worldview, where
the world is broken down into parts.

But all systems are dynamic and often complex; thus, we need a more holistic
approach to understanding phenomena. Synthesis is about understanding the
whole and the parts at the same time, along with the relationships and the
connections that make up the dynamics of the whole.

Essentially, synthesis is the ability to see interconnectedness.

3. Emergence

From a systems perspective, we know that larger things emerge from smaller
parts: emergence is the natural outcome of things coming together. In the most
abstract sense, emergence describes the universal concept of how life emerges
from individual biological elements in diverse and unique ways.

Emergence is the outcome of the synergies of the parts; it is about non-linearity

and self-organization and we often use the term ‘emergence’ to describe the
outcome of things interacting together.

A simple example of emergence is a snowflake. It forms out of environmental

factors and biological elements. When the temperature is right, freezing water
particles form in beautiful fractal patterns around a single molecule of matter,
such as a speck of pollution, a spore, or even dead skin cells.
Conceptually, people often find emergence a bit tricky to get their head around,
but when you get it, your brain starts to form emergent outcomes from the
disparate and often odd things you encounter in the world.

There is nothing in a caterpillar that tells you it will be a butterfly — R.

Buckminster Fuller

4. Feedback Loops

Since everything is interconnected, there are constant feedback loops and flows
between elements of a system. We can observe, understand, and intervene in
feedback loops once we understand their type and dynamics.

The two main types of feedback loops are reinforcing and balancing. What can be
confusing is a reinforcing feedback loop is not usually a good thing. This happens
when elements in a system reinforce more of the same, such as population
growth or algae growing exponentially in a pond. In reinforcing loops, an
abundance of one element can continually refine itself, which often leads to it
taking over.

A balancing feedback loop, however, is where elements within the

system balance things out. Nature basically got this down to a tee with the
predator/prey situation — but if you take out too much of one animal from an
ecosystem, the next thing you know, you have a population explosion of another,
which is the other type of feedback — reinforcing.
5. Causality

Understanding feedback loops is about gaining perspective of causality: how one

thing results in another thing in a dynamic and constantly evolving system (all
systems are dynamic and constantly changing in some way; that is the essence of
life).

Cause and effect are pretty common concepts in many professions and life in
general — parents try to teach this type of critical life lesson to their young ones,
and I’m sure you can remember a recent time you were at the mercy of an impact
from an unintentional action.

Causality as a concept in systems thinking is really about being able to decipher

the way things influence each other in a system. Understanding causality leads to
a deeper perspective on agency, feedback loops, connections and relationships,
which are all fundamental parts of systems mapping.
6. Systems Mapping

Systems mapping is one of the key tools of the systems thinker. There are many
ways to map, from analog cluster mapping to complex digital feedback analysis.
However, the fundamental principles and practices of systems mapping are
universal. Identify and map the elements of ‘things’ within a system to
understand how they interconnect, relate and act in a complex system, and from
here, unique insights and discoveries can be used to develop interventions, shifts,
or policy decisions that will dramatically change the system in the most effective
way.
These six key concepts are critical building blocks for developing a detailed
perspective of how the world works from a systems perspective and will enhance
your ability to think divergently and creatively for a positive impact.

Importance of Systems Thinking in Business Management

Improved Decision-Making: By understanding the larger picture, business

managers can anticipate the ripple effects of their decisions, reducing unintended
consequences.

Cross-Functional Collaboration: Encourages collaboration between different

departments by highlighting interdependencies, promoting a culture of teamwork
and shared responsibility.

Problem Solving: Helps managers identify root causes of issues instead of

focusing on symptoms, leading to more sustainable solutions. For example, if a
product consistently fails quality checks, the issue might not be with the quality
control team but with the suppliers or the production process.

Adaptability and Resilience: In a fast-changing environment, systems’ thinking

prepares organizations to adapt by understanding how internal changes impact
external factors.

Decision-Making: Managers use systems thinking to make informed decisions by

considering how changes in one part of the business will affect others. For
example, increasing marketing spend may boost sales, but it could strain
production or finance.

Strategic Planning: Systems thinking helps businesses develop long-term

strategies by understanding the interconnectedness of various departments. A
decision to expand into a new market involves not just the sales team but also
production, supply chain, and HR for staffing.

Risk Management: By examining the relationships between subsystems,

businesses can predict risks and address vulnerabilities. For instance, a delay in
raw materials may affect production, which then impacts sales.
Continuous Improvement: Systems thinking encourages continuous feedback
loops, where businesses can learn and improve from past actions. For example,
using customer feedback to improve products or services enhances business
operations.

Cross-Department Collaboration: By understanding that business units are

interconnected, systems theory encourages collaboration. For instance, launching
a new product requires marketing, finance, and production to work together
seamlessly.

Examples of Systems Thinking in Business

Strategic Planning: When creating long-term strategies, companies use systems

thinking to understand how market trends, customer behavior, and technological
advances influence various business units.

Operations Management: In managing operations, managers need to think about

how production, inventory, human resources, and sales units work together to
ensure efficiency.

Change Management: When introducing a new policy, managers consider how it

will affect other areas of the business, from employee morale to customer
satisfaction.

Interrelationships Between Different Business Units

Business Units as Subsystems

A business unit is a subsystem within the overall organization. It can be a

department (e.g., marketing, sales, finance) or a functional area (e.g., production,
human resources).

 Subsystem Interdependence: These subsystems depend on one another to

function effectively. For example, marketing depends on production for
products, while production depends on finance for budget allocations.
Key Business Units:

Marketing and Sales: The marketing department drives demand by promoting

products and generating leads, while sales work on converting those leads into
revenue. A strong collaboration between these units ensures higher sales and
customer satisfaction.

Finance: The finance department manages budgets, funding, and investments. It

interacts with every unit by allocating resources and measuring financial
performance. For example, finance must coordinate with production to fund new
manufacturing equipment.

Human Resources (HR): HR manages recruitment, employee performance, and

organizational culture. HR's effectiveness directly impacts all other units because
it provides the human capital necessary for operations.

Operations/Production: The production or operations unit is responsible for

delivering goods or services. It works closely with sales, marketing, and finance to
ensure products are made efficiently and meet demand.

Information Technology (IT): IT supports every business unit by managing data,

systems, and technology infrastructure. IT enables smooth communication, data
flow, and automation across departments.

Customer Service: This unit handles customer interactions post-sale, ensuring

customer satisfaction and retention. Feedback from customer service often drives
changes in product design, marketing strategies, and operations.

Examples of Interrelationships in Business Units

 Marketing and Production: Marketing provides insights on customer

preferences and demand, which guides production planning. Production
relies on these forecasts to ensure they manufacture the right quantity of
products. Poor communication between these units can lead to
overproduction or underproduction, affecting inventory and sales.
  Finance and Operations: Finance allocates budgets for various operational
activities. If the operations team requests more resources without
considering financial constraints, it may lead to cash flow problems.
Conversely, finance needs to understand operational needs to allocate
budgets effectively.

 Human Resources and Strategy: Human resources management (HRM)

plays a key role in implementing corporate strategy by ensuring the right
talent is recruited, trained, and motivated. Strategic decisions about
expansion or downsizing will directly impact HR activities, including hiring,
training, or laying off employees.

3. Challenges in Managing Interrelationships

 Silo Mentality: One of the biggest challenges in managing interrelationships

is the "silo mentality," where different business units focus only on their
own objectives without considering the broader organizational goals. This
can lead to inefficiencies and conflicts.

 Communication Barriers: Miscommunication between departments can

result in operational delays, errors, or financial losses. Clear and open
communication channels are essential for the smooth functioning of the
system.

 Goal Alignment: Ensuring that each business unit's goals are aligned with
the overall organizational strategy is crucial. Misaligned goals can create
friction and reduce the overall performance of the organization.

4. Managing Interrelationships Effectively

 Cross-Functional Teams: Encourage collaboration by forming cross-

functional teams to work on key projects. This approach helps break down
silos and ensures that all perspectives are considered.

 Integrated Management Systems: Use of enterprise resource planning

(ERP) systems to integrate all departments, allowing real-time data sharing
and improved decision-making across units.
  Feedback Loops: Establish feedback mechanisms to allow continuous
monitoring of how changes in one unit impact others, and adjust processes
as needed.

Conclusion

Understanding and applying systems theory and systems thinking in business

management is essential for optimizing efficiency, improving decision-making,
and fostering collaboration between business units. The interconnectedness of
different subsystems in an organization requires a holistic approach to
management, where all units work together toward achieving organizational
goals. This ensures adaptability, resilience, and sustained competitive advantage
in dynamic business