What is System Theory? Definition, History, Features, and Pros/Cons

What is the System Theory?

The system theory of management sees organizations as complex systems made up of different parts that work together to achieve a common goal. Imagine a puzzle: each piece is important and fits together to create the whole picture. Similarly, in an organization, different departments like finance, management, sales, and production are like puzzle pieces that need to fit together for the organization to succeed.

System theory also known as system approach and system thinking says that these departments, are connected and affect each other. Changes in one department can impact the others. For example, if the sales department increases its targets, it might affect the production department’s workload. So, it’s important to understand how the different parts of the organization interact and influence each other.

The system theory of management also emphasizes that organizations are not isolated; they interact with the outside world. Just as a company needs supplies and customers, our puzzle needs pieces from other puzzles to complete it. These external factors, like suppliers, competitors, and customers, can have an impact on the organization.

To make the organization work well, everyone needs to focus on achieving common goals instead of just doing their own tasks. It’s like a team working together to win a game. By considering the organization as a whole system and understanding how the different parts fit together, managers can make better decisions and improve overall performance.

In simple terms, the system theory of management means seeing an organization as a puzzle, where all the pieces are important and connected. It’s about understanding how the pieces work together, how external factors influence the puzzle, and how everyone in the organization needs to work together towards common goals.

System Theory of Management: History

The system theory of organization was first formalized in the 1950s by Ludwig von Bertalanffy, an Austrian biologist. His work challenged reductionist approaches and advocated for a holistic perspective that recognizes the interrelationships within a system.

The theory gained popularity in management and organization studies, departing from the traditional view of organizations as mechanistic entities. It emphasized that organizations are dynamic systems comprised of interconnected subsystems.

Scholars like Kenneth Boulding and James E. Rosenzweig further developed and applied systems thinking to the study of organizations.

Also Read: Management Science Theory: Definition, Branches, Contributions, and Limitations

Today, systems thinking is integral to understanding organizational behavior, change, and development. It provides a framework for comprehending the complex interactions and interdependencies within organizations, aiding managers in effectively managing and adapting to organizational challenges.

Components of System Theory of Management

The system theory of management can also be studied on the basis of its components. System theory’s main components include the followings:


The environment refers to the setting in which an organization operates. It includes the external factors, such as the market, resources, and relationships, that impact the organization’s functioning.


Inputs are the resources an organization needs to carry out its operations. These include raw materials, human resources (employees), capital (money), information, and technology. Inputs are obtained from the environment and are essential for the organization to function effectively.


The process involves the transformation of inputs into outputs. It includes activities such as employee work, management tasks, and operational methods. Proper planning, decision-making, leadership, and control are important for a smooth and efficient process.


Outputs are the final products or services that an organization produces. These can be tangible goods, financial results, information, or human outcomes. The quality of outputs affects how customers perceive the organization and can influence its success in the market.


Feedback is the information an organization receives from both internal and external sources. It helps the organization evaluate its performance and make necessary adjustments. Feedback can influence future inputs and improve the overall functioning of the organization.

Also Read: Classical Management Theory: Definition, Features, Theories, and Pros/Cons

Characteristics of System Theory

The followings are the main features of the system theory of management.

  1. Goal-Oriented: Every system is purposeful and directed towards achieving specific objectives.
  2. Subsystem: Systems are composed of subsystems, which are the individual parts or components of the larger system. Subsystems interact with each other within the overall system.
  3. Synergy: The synergy effect states that the whole system is greater than the sum of its parts. The performance of the system depends on how well its parts are related and work together, leading to greater success.
  4. System Boundary: Each system has a boundary that separates it from its environment. The boundary determines what is internal and external to the system. In open systems, the boundary is flexible, while in closed systems are isolated from the environment.
  5. Open and Closed System: Open systems continuously interact with their environment, while closed systems do not interact and are self-contained. Open systems transform inputs into useful outputs required by the environment.
  6. Flow: Systems have a flow of materials, information, money, human resources, and other resources. Inputs are processed through conversion processes, resulting in outputs that are supplied in the market as products or services.
  7. Feedback: Feedback is a reaction or response from the environment. It helps evaluate the usefulness of the system’s outputs and plays a crucial role in evaluating and improving the system’s functioning. Feedback is essential for system control.

Contribution of System Approach of Management

The followings are the main contributions/advantages of the system approach of management.

  • Structured Analysis: It provides a way to understand organizations and management in a structured manner, making it easier to analyze complex situations.
  • Connectedness: It emphasizes that everything in an organization is connected and depends on each other, including the relationships with the external environment. This helps managers consider the bigger picture when making decisions.
  • Understanding the Whole: It encourages managers to look at the entire system and how different parts relate to each other. This helps in understanding complex organizational issues.
  • Realistic Approach: It takes into account that outcomes are influenced by various factors and variables, rather than relying on fixed rules. This helps managers deal with uncertainty and complexity more realistically.
  • Adaptability: It can be applied to different types of organizations, including new forms like project management organizations, by focusing on how different functions and activities are interconnected.
  • Effective Problem-Solving: It enables a comprehensive approach to problem-solving by considering how issues in one area may affect others. This leads to more effective solutions.
  • Transparency and Collaboration: It promotes openness and cooperation within the organization by recognizing that everything is connected. This encourages sharing information and working together towards common goals.

Limitations of System Theory of Management

The followings are the main limitations/disadvantages of the system theory of management.

  • Lack of Practical Application: The system approach can be too abstract and not easily applied to real-world problems. It doesn’t offer specific tools or techniques for integration or understanding the interdependencies between organizations and the environment.
  • Complexity for Large Organizations: It can be difficult to apply the theory to large and complex organizations where the distinction between system components becomes less clear.
  • Limited Guidance for Managers: The theory doesn’t provide specific tools or techniques for managers to follow. It is not a prescriptive management theory that offers clear guidelines for decision-making.
  • Excludes Important Factors: The theory doesn’t address power dynamics and social inequalities within organizations, and it may not provide a complete understanding of interactions and interdependencies.

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