A business run as an open system is affected by its environment. Open-system theory studies how your environment – the economy, the law and your customers' needs – affects the systems that make up your company. There are other approaches to analyzing business systems, but open-system theory has practical advantages when you're trying to improve business efficiency.

Organization Theory

Researchers have been studying business systems since the Industrial Revolution. The goal is to figure out what makes an efficient system that functions best in the modern economy. Organization theory has come up with several different ways to look at businesses and other organizations.

  • Rational system theories focus on goals, rules and business structure. It treats the business as an organization that runs best if it has highly formalized rules tightly managing the workforce. Change is best made from the top down.
  • Natural system theories analyze organizations as groups of people. They all support and work within the company, but each individual has their own interests and goals. These theories don't assume the organization's behavior is rational.
  • Open system theories were a break from the earlier schools. Rational and natural approaches both looked at businesses as if their environment was constant. Open system theories take the company's environment and the changes in it into account. 

The Company Environment

If you look at your business as an open system, it's shaped by four factors in your environment:

  • Cultural values: Includes standards for ethical business conduct, and balancing different values such as jobs versus pollution.
  • Economic conditions: Includes recessions, competition and unemployment.
  • Law and politics: Includes everything from regulations that apply to your business to protection for your intellectual property rights. 
  • Education: Affects the quality of the workforce, which has a direct effect on your business. That's particularly true if your company deals in technology, biochemistry or other fields that require highly educated professionals. 

Open-systems theory won't work for all organizations. Some systems are actually closed, such as powerful bureaucracies and monopolies. These organizations can ignore changes in their environment, at least for a while.

What Good Does It Do?

Organization theory is more than just a topic for academic papers. Several schools of thought on how to run a business have sprung out of the discipline. If you hire a consultant or a business efficiency expert, they'll probably draw on organization theory when they analyze your company.

Open-systems theories has advantages over other theories. Because it takes your environment into account, an open-system approach gets a more realistic picture of the pressures on you, your company and your workers. If your consultant is critiquing your product design and marketing system, for instance, a rational-systems analysis might just look at the rules and policies. An open-systems approach considers how the finished product will perform in the marketplace, which is ultimately the most important thing.