What is System Theory of Management? Definition, Components, Features, and Pros/Cons

What is System Theory of Management?

System theory of management refers to the goal-oriented mechanism composed of different parts that interact and are interrelated in a way that the collective efforts of all parts are greater than the sum of their individual parts.

In simple words, the system theory views an organization as a system that is composed of different parts, and for goal achievement, all these parts need to work collectively.

It is true that an organization is a system. Since a system is a collection of subsystems and all subsystems are related to each other. The activity of one subsystem affects the other subsystem.

The system approach defines all systems are composed of three elements input, process, and output which function in the environment. An organization as a system has input (human, physical resource), process (operation), and input (product, profitability).

Different departments such as production, finance, procurement, marketing, etc. are the subsystems of an organization, and their collective yet coordinated efforts are necessary for efficient output for the system i.e. organization.

Components of System Theory

The system management approach defines an organization system as following three components:


Input is the first step of the system approach. An organization’s input includes human resources, raw materials, physical resources, financial resources, equipment, technology, and information.


The organizational process consists of processing inputs to make them the desired outputs. The process may include transformation, operation, planning, leadership, and management control.


Output is the product of an organization. After successful processing, the output of an organization may be the desired product, service, employee behavior, productivity, profitability, loss, job satisfaction, etc. Organizational outputs are that customers consume perceive and provide feedback.

Characteristics of System Theory

The system approach is a balanced view of management which suggests that managers must take an overall balanced view because the best for the whole is not necessarily the best for each component of the system.

Some of the features of the system approach include:


An organization is a goal-oriented system. An organization’s all subsystems have certain goals to achieve and their collective efforts result in the achievement of the goals of the system.

Open Vs. Closed System

An organization is composed of both open and closed systems. A closed system is within the organization and does not interact with the external environment. Nor does it affect the environment nor is get affected.

An open system interacts with both the internal and external environment. It influences and gets influenced by the external environment. An open system is more complex than a closed system as it is related to the internal and external environment.


Related: Decision Theory of Management

Every system has its sub-systems. An organization as a system has various sub-systems such as its different business units, functional departments, employee groups, etc. They all are interconnected and interrelated to each other.


Synergy describes the efforts of the whole as greater than the efforts of individual parts. The system approach ensures synergy in the organization. This approach suggests to management that an organization’s subsystems should coordinate in such a way that the output should be always greater than the sum of the output of the individual subsystems.

System Boundary

Every system has a boundary. In an open system, the boundary is flexible and in a closed system, the boundary is fixed. The boundary of one organization is different from another organization.


Feedback is an essential component of the management system to provide information regarding output. This is required for taking corrective actions in the organization if the results deviate from standard results.

Contributions and Limitations of System Theory


  • It provides a holistic view of the organization.
  • It analyzes how different subsystems interact and relate to one another to produce synergistic effects.
  • It implies that the organizational system would experience environmental effects, allowing management to implement important tactics to counteract environmental influence.
  • This theory is helpful for managing large and complex organizations.


  • This theory is too abstract which is intangible in the real sense.
  • It is not possible to apply this concept in small organizations.
  • This approach does not provide specific guidelines to managers for functions and duties.
  • There are no specific tools of management suggested by this theory.

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