In organizational theory, organizations can be open or closed. A closed system has no contact with the world outside. An open system has to deal with the outside environment, including customers, competitors and the general economy.

Organization Theory

Organization theory deals with how organizations function, or fail to function.

  • How do organizations influence and mold the people working there? If, say, a company values aggressive, hard-driving salespeople and bureaucratic procedure, new hires will have to adapt to that.
  • How do those people shape the organization? Unionized labor, for instance, can often set limits on what management policies workers have to accept.
  • How does the organization affect its environment, and how does the environment affect the organization?
  • What determines whether organizations survive or run out of steam? 

Open system organization theory is one of the best-known ideas to come out of this school of thought.

Open vs. Closed

Traditional theories saw most organizations as closed. They follow their own path regardless of what the outside world does. A business's only interaction with the surrounding environment were the products or services it put out.

Starting in the 1960s, organization theorists reconsidered. They realized that organizations were usually influenced by their environment to some extent, which made them open, not closed.

Open System Organization Theory

Under open system organization theory, the characteristics of open system organization are shaped by specific and general environmental influences. Specific influences are the people and groups the organization deals with on a regular basis: customers, suppliers, distributors, regulators and competitors.

General environmental influences fall into four categories:

  • The cultural values of the surrounding society. A century ago, it was culturally acceptable to discriminate against women and minorities in hiring; now discrimination is a black mark against an organization's image.
  • Law and politics. It's not only socially unacceptable to discriminate based on gender, religion, race and ethnicity, in many cases it violates federal law. In recent years, a number of states have banned discrimination based on sexual orientation.
  • The economy. A regional recession can leave a business struggling to stay afloat. A booming economy with lots of jobs may force a company to boost pay and benefits to recruit enough workers.
  • Education. The quality of education affects the quality and ability of the local workforce. 

Characteristics of Open System Organization

Examples of closed systems include monopolies that can dictate terms to customers and rigid bureaucracies that resist any influence on their policies. An example of open system organization are the many businesses that respond to their environment. Some change their policies under pressure, such as when a company fires a leader who's been charged with sexual harassment.

The characteristics of an open system organization, if it's healthy, include active interaction with their surroundings. They solicit feedback from customers and potential customers with surveys, market research and evaluations. They also try to influence their environment through marketing, advertising and lobbying legislators.

Open system organizations consist of lots of subsystems such as departments and project teams. If one part of the organization fails, it doesn't mean the entire organization falls apart. In a healthy organization, the people in different departments, branches and teams interact and work together for their benefit and the company's.

Advantages of Open Systems

Closed systems are inflexible and stagnant. In a heavily bureaucratic organization, it's important to follow procedure, turn in reports and attend meetings even if they don't produce any worthwhile results. In an open-system organization, the outcome matters more than the process; if the standard approach doesn't get results, it's okay to change.

Closed systems can be more comfortable for the people inside them. People in closed systems always think they know the answers; people in open systems have to accept there's no one perfect way to succeed.