Organizational Contingencies

Organizational contingencies are factors that moderate the effect of organizational characteristics on organizational performance. Whether a particular level of organizational characteristic would lead to high performance depends on the level of the contingency factor. If there is a fit between the level of contingency and the level of organizational characteristic, then, other things being equal, superior performance results; if there is a misfit, performance suffers.

An organizational contingency is thus best understood as one of the variables in a three variable relationship, the other two variables being an organizational characteristic and organizational performance. Each of these variables has a fairly broad meaning:

1. Organizational contingencies include two general groups of factors: those internal to the organization, such as organizational size, technology, and strategy, and those external to it, covered by the umbrella term ”organizational environment.”
2. Organizational characteristics most frequently imply dimensions of organizational structure (e.g., formalization, centralization) and an overall structural type (e.g., bureau critic structure) or structural design alternative (e.g., divisional structure).
3. Organizational performance covers a wide range of measures, including standard financial measures, such as efficiency and profitability, and various indicators of effectiveness, such as rate of innovation and stakeholder satisfaction.

The concept of organizational contingency is the cornerstone of the contingency theory paradigm in organization studies. The contingency theory paradigm covers a plethora of contingency theories that focus on different organizational characteristics and various organizational contingencies. The earliest and arguably most developed stream within this paradigm focuses on those contingencies that influence organizational structure and is therefore usually referred to as structural contingency theory. Contingency theories have also spread to other areas of organization studies, including strategy and leadership.

The contingency approach to organizational structure was pioneered by Burns and Stalker (1961), followed closely by Woodward (1965) and Lawrence and Lorsch (1967) amongst others. The main organizational contingencies associated with organizational structure are organizational size, strategy, technology, and environment. Each of these contingencies is linked to a particular typology of organizational structures that highlights a specific set of the salient characteristics of organizational structure.

Organizational size is linked to a typology of organizational structures that distinguishes between simple structure (centralized, low on functional specialization and formalization) and bureaucratic structure (decentralized, high on functional specialization and formalization) (Blau 1970). Small organizations perform better with a simple, non-bureaucratic structure; but, beyond a certain size, a greater degree of bureaucratization is positively correlated with better performance (Child 1988).

Organizational strategy is linked to a typology of organizational structures based on the principle of departmental grouping. This typology distinguishes between functional structure, or U (unitary) form, in which activities are grouped by task (e.g., marketing, finance), and divisional, or M (multidivisional) form, in which activities are grouped by output (e.g., product 1, product 2). Functional structure is said to be better suited to a strategy oriented on the production of a single product line or service, or an undiversified strategy. Divisional structure is said to be better suited to a strategy of diversification. The dictum ”Structure follows strategy” refers specifically to the historical shift in the strategy and structure of large firms, first documented in the development of American industry (Chandler 1962). This shift involved the transition in strategy from single to multiple product lines and the concomitant structural innovation, the introduction of divisional structure, which made it possible to overcome the inefficiencies of functional structure (in particular, decision overload at the top of the organizational hierarchy).

Technology is linked to a typology of organizational structures that distinguishes between mechanistic structure and organic structure. In mechanistic structure, tasks are broken down into specialized, separate parts and are rigidly defined; there is a strict hierarchy of authority and control, and there are many rules; knowledge and control of tasks are centralized at the top of the organization; communication is vertical. In organic structure, employees contribute to the common task of the department; tasks are adjusted and redefined through employee team work; there is less hierarchy of authority and control, and there are few rules; knowledge and control tasks are located anywhere in the organization; communication is horizontal (Burns & Stalker 1961). Based on the degree of technological complexity, production processes have been subdivided into unit production (production of simple units to order or of small batches), mass production (production of large batches on an assembly line), and process production (continuous flow production of liquids, gases, or solid shapes). Mechanistic structure is said to be better suited for mass production, while organic structure is better suited for unit and process production (Woodward 1965).

Organizational environment is linked to the two sets of typologies: the mechanistic-organic typology and the typology based on the degree of differentiation and integration. Both typologies pertain to one important characteristic of the environment – environmental uncertainty. The first, mechanistic-organic typology, has been already described above. It is sufficient, then, to state here that mechanistic structure is said to be better suited to relatively stable and certain environments, while organic structure is said to be better suited to volatile and uncertain environments (Burns & Stalker 1961). The second typology emphasizes two organizational characteristics: (1) differentiation, i.e., differences in cognitive and emotional orientations among managers in different organizational departments, and the difference in formal structure among these departments, and (2) integration, or the quality of collaboration between departments. It has been noted that organizations that perform well in uncertain environments have high levels of both differentiation and integration; in contrast, organizations that perform well in less uncertain environments have lower levels of differentiation and integration (Lawrence & Lorsch 1967).

Theories focusing on leadership present the most elaborate models of contingency outside structural contingency theory. The essence of a contingency approach to leadership is that leaders are most effective when they make their behavior contingent upon situational factors, such as group member characteristics. For example, a manager who supervises competent employees might be able to practice consensus readily. Fiedler’s (1967) theory of leadership is the most widely cited. Its key proposition is that leaders should adopt a more task oriented style, if the situation is one of high or low control for the leader, but that when a leader has moderate control, a relationship oriented style works best. In practical terms, the theory suggests that leaders can improve their situational control by modifying leader-member relations, task structure, and position power.

Another example of the contingency approach outside structural contingency theory is Mintzberg’s (1990) decision making framework for dealing with environmental uncertainty. The framework suggests that a rational model of strategy should be followed in a relatively certain environment, while under more complex environmental conditions the decision maker may need to adopt a more emergent approach to strategy. The practical implication is that the decision maker should engage other members of the organization, allowing strategy to emerge from existing structures and processes in the context of continuous interaction.

Contingency theory of ownership represents an example of the more recent extensions of the contingency approach to other areas of organization studies. Contingency theory of ownership suggests that in the “opaque” industries -industries which have highly specific capital investments and where the monitoring of managers thus requires special expertise and information, which most shareholders are unlikely to possess (e.g., microprocessors, pharmaceuticals) – large block owner managers may be more effective. Alternatively, in the more ”trans parent” industries – industries characterized by less firm specific capital and thus by relatively simpler monitoring requirements (e.g., textiles, steel) – large block outsider owners may be more effective (Kang & Sorensen 1999).

To return to the general discussion of organizational contingencies, the contingency paradigm belongs to a group of organization theories espousing an adaptationist view of organizations (which also includes, among others, resource dependence theory, transaction cost economics, and neoinstitutional organizational sociology). This view holds that organizations are capable of changing their structures, procedures, and practices in such a way as to adapt their characteristics to the requirements and pressures of their environment and to improve thereby their performance and/or survival chances. Contingency approach suggests that organizational change can be described by the following model of ”structural adaptation to regain fit” (SARFIT) (Donaldson 1987): an organization initially in fit changes its contingency and thereby moves into misfit and suffers declining performance. This causes adoption of a new structure so that fit is regained and performance restored. Hence, the cycle of adaptation: ”fit – contingency change – misfit – structural adaptation – new fit.”

To put research on organizational contingencies into a historical perspective, the contingency theory paradigm emerged in the early 1960s as a counterpoint to classical management theory. The main quest of classical management theory was to find the best organizational structure. In contrast, contingency theory declared that there was no one best structure that would fit any organization under any circumstances and focused instead on specifying what structure would be more appropriate for a particular set of conditions. The emergence of contingency theory can be regarded as the beginning of modern organizational analysis as we know it now.

Research on contingencies, particularly structural contingencies, flourished during the 1970s and 1980s. Since then, its popularity within organization theory has declined. New theories, such as resource dependence (Pfeffer & Salancik 1978), neoinstitutionalism (Powell & DiMaggio 1991), and organizational ecology (Hannan & Freeman 1989), have subsumed or superseded contingency theory. The general contingency principle – that different organizational structures, procedures, and practices are suitable to different environmental conditions -has, however, permeated practically all modern organization theories in some shape or form. Contingency theory has also spread to other disciplines such as public administration, information technology, marketing, and accounting, which continue to draw upon and to develop its principles. Contingency theory (unlike many more recent organizational theories) has also found its way into most of the introductory textbooks on organizational behavior, organizational theory, and organizational design. The theory’s intuitive appeal, ease of representation, and reasonably unequivocal managerial implications all contributed to this wide acceptance. The concept and the theory, however, are far from being common sense and common knowledge, as research on managers suggests (Priem & Rosenstein 2000).

Despite its favorable status, contingency theory is continually being called into question because of its apparent inability to resolve persistent theoretical and empirical problems. One of the main lines of critique is captured by the concept of “equifinality”: even if the contingencies facing the organization are the same, the final state or performance can be achieved through many different organizational structures (all roads may lead to Rome) (Pennings 1987). The possibility of multiple, equally effective designs undermines the predictive value of the contingency approach (Galunic & Eisenhardt 1994). Another line of critique concerns managerial preferences: managers may vary in their response to contingency according to their perceptions, interests, and power. They may prefer to minimize misfit rather than to maximize fit (Drazin & Van de Ven 1985). Thus, there is a degree of ”strategic choice” in organizational structuring (Child 1972), particularly apparent in the case of top managers.

Given criticisms of contingency theory, there is a need for more research, particularly in the area of structural contingency theory. One may want to consider, for instance, how classical contingency arguments hold under more dynamic conditions that characterize contemporary organizations. Contingency studies might be designed to permit comparative evaluation of several forms of fit. Relatedly, one might attempt to delineate the boundaries of proactive behaviors possible at the organizational and individual manager level. Other areas of contingency theory, such as those in leadership or strategy, may also benefit from a more explicit examination of fit in their area.

References:

1. Blau, P. M. (1970) A Formal Theory of Differentia­tion in Organizations. American Sociological Review 35(2): 201-18.
2. Burns, T. & Stalker, G. M. (1961) The Management of Innovation. Tavistock, London.
3. Chandler, A. D., Jr. (1962) Strategy and Structure: Chapters in the History of the American Industrial Enterprise. MIT Press, Cambridge, MA.
4. Child, J. (1972) Organization Structure and Strate­gies of Control: A Replication of the Aston Study. Administrative Science Quarterly17: 163-77.
5. Child, J. (1988) Organization: A Guide to Problems and Practice, 2nd edn. Paul Chapman, London.
6. Donaldson, L. (1987) Strategy and Structural Adjustment to Regain Fit and Performance: In Defense of Contingency Theory. Journal of Management Studies24: 1-24.
7. Donaldson, L. (2001) The Contingency Theory of Organizations. Sage, Thousand Oaks, CA.
8. Drazin, R. & Van de Ven, A. (1985) Alternative Forms of Fit in Contingency Theory. Administrative Science Quarterly 30: 514-39.
9. Fiedler, E. (1967) A Theory of Leadership Effectiveness. New York, McGraw-Hill.
10. Galunic, D. C. & Eisenhardt, K. M. (1994) Renew­ing the Strategy Structure Performance Para­digm. In: Cummings, L. L. & Staw, B. M. (Eds.), Research in Organizational Behavior,Vol. 16. JAI Press, Greenwich, CT, pp. 215-55.
11. Hannan, M. T. & Freeman, J. (1989) Organization Ecology. Harvard University Press, Cambridge, MA.
12. Kang, D. L. & Sorensen, A. B. (1999) Ownership Organization and Firm Performance. Annual Review of Sociology 25: 121-44.
13. Lawrence, P. R. & Lorsch, J. W. (1967) Organization and Environment: Management Differentiation and Integration. Harvard Business School Press, Boston.
14. Mintzberg, H. (1990) The Design School: Reconsi­dering the Basic Premises of Strategic Manage­ment. Strategic Management Journal 11: 171-95.
15. Pennings, J. (1975) The Relevance of Structural-Contingency Model for Organizational Effective­ness. Administrative Science Quarterly 20: 393-410.
16. Pennings, J. M. (1987) Structural Contingency The­ory: A Multivariate Test. Organization Studies 8(3): 223-40.
17. Pfeffer, J. & Salancik, G. R. (1978) The External Control of Organizations: A Resource Dependence Perspective. Harper & Row, New York.
18. Powell, W. W. & DiMaggio, P. J. (1991) The New Institutionalism in Organizational Analysis. Univer­sity of Chicago Press, Chicago.
19. Priem, R. L. & Rosenstein, J. (2000) Is Organization Theory Obvious to Practitioners? A Test of One Established Theory. Organization Science 11(5): 509-21.
20. Woodward, J. (1965) Industrial Organization: Theory and Practice. Oxford University Press, Oxford.

Back to Sociology of Organizations