Business as an open system, and how a business interacts with its environment

What the statement means

To call business an open system is to say two things. First, a business is a system: a set of connected parts that work together for a purpose. Second, it is open: it cannot shut itself off from the world around it, because it draws its inputs from that world, returns its outputs to it, and must keep adjusting to what happens there. The opposite, a closed system, would be a self-contained unit with no dealings with its surroundings. A business recognises that an external environment affects its performance and is in turn affected by it, so it is open, not closed. The statement is therefore true, and it explains why a manager must look outward as much as inward.

Business as a system

A system is an arrangement of parts forming a single whole for achieving set objectives; it may contain sub-systems and may itself be part of a larger system. Just as the human body has digestive, respiratory and nervous sub-systems that must work in step, a business has production, finance, marketing and personnel sub-systems, each with its own parts; personnel, for instance, divides into selection, training, pay and promotion. Seen by activity, a firm also has a decision-making sub-system that frames plans, a processing sub-system that turns materials and energy into saleable products, an information sub-system, a control sub-system, a memory that stores information, and a sensory sub-system that registers changes inside the firm and outside it.

The business is itself part of wider systems: the firm belongs to an industry, the industry to the country's industrial set-up, and that to the national economy, so each link affects the others. The whole is more than the sum of its parts: success depends on how closely the sub-systems are coordinated.

Why business is an open system

1. It is dynamic and adaptive. A business keeps changing because its environment keeps changing; it influences that environment and is influenced by it all the time.
2. It sits inside a supra-system. The economic, social, political, legal and technological forces around it form a wider system, and the economic system serves as its framework.
3. It is goal-oriented towards society. Its purposes, such as supplying goods and services, earning profit to survive and grow, dealing fairly with employees and meeting society's expectations, all point outward.
4. It is interdependent. Its parts interact closely, and there is interdependence between firms and industries too; people inside it form social relationships, which makes it a psychosocial system.
5. It can repair itself. Like the human body adjusting to its surroundings, an open system can correct itself, and its control mechanism helps it respond to opportunities and constraints outside.
6. It carries social responsibility. A firm that does not show concern for consumers, employees, creditors and society, as well as commercial viability, cannot survive for long.

How a business and its environment interact

The business environment is the totality of individuals, institutions and other forces outside a business that can affect its performance; it is interrelated, dynamic, uncertain and complex, and it has economic, social, technological, political and legal dimensions. The two interact in a cycle:

1. Inputs. The business takes men, machines, materials and money from its environment.
2. Processing. Its production, finance, marketing and personnel activities transform those inputs, guided by plans, objectives and policies.
3. Outputs. Goods and services go back to society, and through them the business affects its environment.
4. Feedback. Society raises or lowers its support, the inputs it supplies, according to how satisfied it is with the output; the firm uses this information to improve quality or change its plans.

Within this cycle each part of the environment acts in its own way. Workers increasingly want to take part in management, which calls for a democratic rather than autocratic approach. Consumers ask for products with the latest technology, so firms must respond quickly and research the market. National and world economic forces shape demand, production programmes and the supply of raw materials; a financial crisis can leave a firm short of liquid funds and paying high interest; and laws such as the Companies Act and the Income Tax Act govern what it may do. India's 1991 reforms showed this on a national scale: liberalisation, privatisation and globalisation brought more competition, more demanding customers and faster technological change, and firms had to change their ways. Understanding the environment helps a firm spot opportunities early, see threats coming, cope with change and plan better.

Applying this to an illustrative case

Consider a hypothetical maker of electric scooters in Hosur. Its inputs are battery cells, motors, steel, engineers, assembly workers and bank loans. Its sub-systems design the scooter, assemble it, market it and pay for it. Its output is scooters sold through dealers. Feedback arrives in many forms: buyers post complaints about range, dealers report slow sales in hilly towns, and a lender asks about falling margins. A dearer imported cell after a fall in the rupee raises costs (economic); new safety rules for batteries change the design (legal); younger buyers who want app-linked features push the firm towards software (technological); and employees who expect to be consulted change how supervisors lead (social). The firm survives only if its sensory and decision-making sub-systems pick up these signals and it changes its product, prices and methods in time. In return it shapes its environment: it creates jobs and trains local suppliers.

Conclusion

Business is an open system because it lives by exchange with its environment: it takes inputs, returns outputs and learns from feedback. Management's task is to integrate men, machines, materials, information and money inside the firm and to keep them in tune with the changing environment outside; an efficient business is not only a good mix of sub-systems but one that stays in step with its surroundings.