Rational, Natural, and Open Systems of Organizations in a Post-Pandemic Economy

If the average leader were to draw a picture of an organizational model, they would likely draw some version of the classic pyramid model of an organization chart. This is because most managers think of organizations as a structure (Őnday, 2018). Most are unaware of the basic principles of organizational theory. Conversely, these same managers could likely talk a lot about strategy. Understanding both strategy and organizational theory is essential to effective leadership. Davis and DeWitt (2021) say that organizational theory explains “why firms look and act the way they do, while strategy explains what effect these have on performance” (p. 1685). They liken organizational theory to biology and strategy to medicine (Davis & DeWitt, 2021).

Understanding both strategy and organizational theory is essential to effective leadership. Click To Tweet

Organizational theory was born in the 1950s as sociologists, political scientists, psychologists, engineers, management experts, and economists attempted to explain the science of organizations (Őnday, 2018). Nearly a decade of study led to the publishing of a book called Organizations in 1958 by James March and Herbert Simon (Davis & DeWitt, 2021). In addition, a journal called the Administrative Science Quarterly was launched in 1956, focusing on the interdisciplinary aspect of this emerging field of study (Scott & Davis, 2007).

Organizational theories often start with an image to describe the organization. Consider these images – a company as a mechanism to accomplish goals, a society with a social structure, and an organism making its way through an environment. Each of these pictures helps demonstrate the unique aspects of three different organizations and the patterns of relationships inside them (Scott & Davis, 2007). These three perspectives of the organization emerged in early organizational studies. They became known as rational, natural, and open systems (Őnday, 2018). Each perspective or paradigm offers a different approach to understanding organizational structures and their interactions (Scott & Davis, 2007).

Rational organizations are oriented toward the pursuit of specific goals. Click To Tweet

The rational system is the most dominant perspective embraced by most real-world managers and practitioners. The rational system is characterized by two structural features that set it apart from other organizations. Rational organizations are oriented toward the pursuit of specific goals. Additionally, the organization of resources in rational systems is highly formalized. The combination of these two features sets them apart from other types of collectives. Davis and DeWitt (2021) define rational systems as organizations that “are collectives oriented to the pursuit of relatively specific goals and exhibiting relatively high formalized social structures” (p. 29). The social cement that holds together and regulates interactions between members in these formal groups is called the normative structure, which includes values, norms, and role expectations (Őnday, 2018).

Participants in natural systems share a common interest in the organization’s survival Click To Tweet

On the other hand, natural systems emphasize goal complexity and an informal structure (Őnday, 2018). While these types of organizations often espouse goals, they do not necessarily guide the behavior of members, nor can they be used to predict future actions. Participants are motivated by their self-interests and look to impose these on the organization (Scott & Davis, 2007). The social cement that connects and regulates interactions among members in these informal groups is called the behavioral structure, which focuses more on the consistency and constancy of behaviors and less on the prescriptions of that behavior (Őnday, 2018). Davis and DeWitt (2021) define natural systems as organizations that “are collectives whose participants are pursuing multiple interests, both disparate and common, but who recognize the value of perpetuating the organization as an important resource” (p. 30). Social consensus and social conflict are two contrasting versions of social order in natural systems. The first has individuals seeking a common objective. The second is where the order is maintained through coercion, not consensus (Scott & Davis, 2007). In all cases, participants in natural systems share a common interest in the organization’s survival (Őnday, 2018).

For organizations to survive, they must adapt their structures and behaviors to respond to environmental elements. Click To Tweet

The rational and natural system definitions view the organization as a closed system isolated from the environment and containing a stable group of participants. The open system perspective is just the opposite. Developed later than the rational and natural systems, the defining characteristic of the open system paradigm is that the environment shapes, supports, and infiltrates the organization (Scott & Davis, 2007). For organizations to survive, they must adapt their structures and behaviors to respond to environmental elements (Őnday, 2018). Davis and DeWitt (2021) define open systems as organizations that “are congeries of interdependent flows and activities linking shifting coalitions of participants embedded in wider material-resource and institutional environments” (p. 32). Another critical aspect of open systems is the importance of cultural-cognitive elements. These are the portable ideas, conceptions, models, and scripts with which open systems continuously adopt and adapt intentionally and inadvertently (Scott & Davis, 2007).

Davis and DeWitt (2021) point out that these three distinct and diverse views of organizations are described as perspectives or paradigms because they each represent a different conceptual umbrella for researchers to gather related information. They say these three perspectives are “varying approaches that bear a strong family resemblance” (p. 32). Davis and DeWitt (2021) also mention that these three paradigms “partially conflict, partially overlap, and partially complement one another” (p. 32). Researchers use these approaches to analyze organizations from three levels: the social psychological, organizational, structural, and ecological.

Scholars began to develop the rational, natural, and open systems perspectives on organizations from the beginning of the twentieth century until the early 1960s. However, the emergence of open system perspectives later in the process did not eliminate the need for rational and natural approaches. Instead, researchers combined open system approaches with the other two perspectives to create new theories and ways to understand organizations. Several examples are Lawrence and Lorsch’s Contingency Model, Thompson’s Levels Model, and Scott’s Layered Model (Scott & Davis, 2007). For example, Lawrence and Lorsch’s Contingency Model helps describe the organizational evolution in ancient Israel.

In 1967, Paul Lawrence and Jay Lorsch argued that the level of uncertainty and change in an environment would impact the development of an organization. They proposed that an organization exposed to a diverse and challenging environment would produce a more organic structure like the natural system. Exposure to a more homogenous and stable environment would lead to a more formalized structure, as the rational system explains. (Scott & Davis, 2007). This environmental impact on organizational development can be seen in the story of the Israelites as they escaped Egypt.

The first three months after the Israelites left Egypt were a challenging time for them as they worked to adjust to their new environment in the wilderness. During this time, an organic, natural structure was formed as Moses, their leader, acted as a judge for the various disputes among the people. Exodus 18:13 says, “Moses took his seat to serve as judge for the people, and they stood around him from morning till evening” (New International Version, 1978/2011). Moses’ father-in-law, Jethro, recognized that this type of organic, natural structure would only serve to wear Moses down in the months and years ahead. He knew Israel needed a formalized organization to deal with these disputes in their new, more stable environment. He tells Moses to appoint judges by selecting “capable men from all the people—men who fear God, trustworthy men who hate dishonest gain—and appoint them as officials over thousands, hundreds, fifties and tens” (New International Version, 1978/2011, Exodus 18:21). This is an example of an organization transforming from a natural to a rational system due to the stabilization of the open environment.

What is interesting to consider is how all these organizational theories will keep up with the increasingly high level of change in the business environment today. This rapid change is fueled by the rise of digital technologies (including AI), a never-ending thirst for innovation, and the globalization of finance, trade, and production. The post-pandemic world has also seen increased scrutiny and activism by employees and stakeholders to hold corporations accountable for their impact on the world. Roth (2021) says that the world is undergoing the most significant structural revolution in business and society since the end of World War II. He tells us there will be profound implications for management and organizational theory. Baum and Haveman (2020) say that we are entering “a brave new world” with the emergence of organizational forms that we have never seen before (p. 2020). Roth (2021) says that the “new normal” is so different that scholars need to “reassess the validity of theories that might be outdated now” (p. 539).

The world is undergoing the most significant structural revolution in business and society since the end of World War II. Click To Tweet

Consider first how the digital revolution has affected organizations. The falling cost of digital information storage, processing, and communication has increased the scale, scope, and complexity of challenges that organizations can address (Baum & Haveman, 2020). Davis and DeWitt (2022) say that this has changed how companies “raise capital, engage labor, acquire inputs, distribute to customers, and organize their internal processes” (p. 861). Many influential companies today do not have physical buildings full of employees doing observable tasks (Davis & DeWitt, 2022). This digital revolution has created companies that do not produce products but connect sellers and buyers like Airbnb, Turo, Etsy, Udemy, Gumroad, and eBay.

Innovation has removed the gatekeepers. Click To Tweet

There is also an intense drive for innovation affecting every aspect of society. Betta (2019) says that this thirst for innovation has created a phenomenon called “neocharisma,” where every individual thinks of themselves as creative and innovative. Where once large corporations or government entities were the center of innovation and creativity, now any individual can be an innovator. Innovation has removed the gatekeepers. Now, anyone can be an author with self-publishing on KDP, a radio personality with podcasting on Spotify, a musician with Soundcloud, a television star on YouTube, a distributor with drop-shipping on Amazon, or a celebrity with TikTok. Consider this: Joe Rogan, an independent podcaster, has over three times as many viewers as the top television show, Tucker Carlson Tonight (Sarmah, 2022). The rise of neocharisma has created both constructive and destructive innovation and directly challenges organizational theory and what it means to be an organization (Betta, 2019).

The globalization of finance, trade, and production has also created significant organizational shifts. Companies in Western industrial nations now focus more on design and marketing. They are increasingly reducing their employee base and outsourcing their production, customer service, and even R&D to low-cost countries (Baum & Haveman, 2020). Technology, innovation, and globalization in the past decade have permanently altered what it means to be an organization. These trends have given rise to new terms like financialization, nikefication, uberization, amazonification (Davis & DeWitt, 2021), and pop-up stores (Betta, 2019). A decade ago, the top ten companies in the United States would top the list of revenues, number of employees, and market capitalization. In 2021, only Walmart and Amazon appeared on all three lists (Davis & DeWitt, 2022).

Internal and external forces are challenging the entire purpose of what it means to be an organization. Click To Tweet

Finally, internal and external forces are challenging the entire purpose of what it means to be an organization. The 1980s gave rise to the idea of shareholder primacy that corporations exist primarily to create shareholder value represented by changes in their share price (Davis, 2021). Whatever noble purpose they were founded on, corporations abandoned them in favor of shareholder value. In the post-pandemic world, democracy from above and within the organization is forcing a change (Davis, 2021). Davis (2021) says there has been an “unprecedented surge of worker activism,” demanding that companies “live up to the ideals they proclaim” (p. 909). Employee protests have occurred in Amazon, Netflix, Microsoft, and Google in recent years. There have also been outside pressures from global organizations like the World Economic Forum challenging companies to live up to a purpose other than profits. The rise of the use of environmental, social, and governance (ESG) metrics to measure the performance of “stakeholder capitalism” is evidence of this significant shift (Roth, 2021).

Organizational theory was born in the 1950s in a time of relative stability. Scholars sought to understand rational and natural organizations as closed systems, relatively safe from outside forces. The emergence of open system thinking helped researchers see the organization as an organism making its way through an environment and being impacted by those outside forces. Today, those outside forces have reached levels never imagined by early scholars. Today’s organizations are rapidly changing in the face of technology, innovation, globalization, activism, environmentalism, and new governance. Environmental forces are permanently altering the structure of organizations in an unprecedented way. Scholars and researchers in the field of organizational theory will need to hurry to keep up with these changes.

References

Baum, J. A. C., & Haveman, H. A. (2020). Editors’ comments: The future of organizational theory. The Academy of Management Review, 45(2), 268-272. doi:10.5465/amr.2020.0030

Betta, M. (2019). Business, organization theory, and the current challenge of neocharisma. Business and Society Review (1974), 124(2), 261-281. doi:10.1111/basr.12171

Davis, G. F. (2021). Corporate purpose needs democracy. Journal of Management Studies, 58(3), 902-913. doi:10.1111/joms.12659

Davis, G. F., & DeWitt, T. (2021). Organization theory and the resource-based view of the firm: The great divide. Journal of Management, 47(7), 1684-1697. doi:10.1177/0149206320982650

Davis, G. F., & DeWitt, T. (2022). Seeing business like a state: Firms and industries after the digital revolution. Strategic Organization, 20(4), 860-871. doi:10.1177/14761270221122404

New International Bible. (2011). The NIV Bible. https://www.thenivbible.com (Original work published 1978)

Őnday, Ő. (2018). The relationship between concepts of rational, natural and open systems: Managing organizations today. International Journal of Information, Business and Management, 10(1), 245-258

Roth, S. (2021). The great reset of management and organization theory. A European perspective. European Management Journal, 39(5), 538-544. doi:10.1016/j.emj.2021.05.005

Sarmah, M. (2022, February 4). What are Joe Rogan’s viewership numbers? Sportskeeda. https://www.sportskeeda.com/mma/news-what-joe-rogan-s-viewership-numbers

Scott, W. R., & Davis, G. F. (2007). Organizations and Organizing: Rational, Natural, and Open System Perspectives. Routledge.

 

Note: This paper was written as part of my requirements for a Doctorate in Strategic Leadership at Liberty University. I’m sharing this here for those who may be interested in some of the theories of leadership. Let me know if you have any questions.

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