Structural Contingency Theory

Structural contingency theory is a paradigmatic framework for understanding how organizational factors of size and strategy and environmental factors, such as changes in technology and markets, shape the internal structure of organizations. Its three chief claims are (1) no one organizational structure is effective for all organizations, (2) some ways of organizing are better than others, and (3) organizations whose characteristics best match environmental requisites will do better than those whose features do not. The underlying premise is that organizations are not merely autonomous, self-directed entities oriented toward their individual ends but instead are components of larger social systems. As such, they are subject to external and internal pressures that must be taken into account when organizing tasks and lines of authority. Organizational size and strategy and environmental uncertainty generated by technological innovation and market change determine organizational hierarchies of authority, power and control, rules and norms governing decision making, communication and information flows, and patterns of both formal and informal behavior.

The goal of contingency theory is to identify and explain differences between organizations in terms of the relationships between structure and the contingencies shaping it. To achieve successful performance, an organization aligns its structure with these contingencies. In contrast to classical management theories of organizations that posit an all-purpose, best way to organize an enterprise, contingency theory turns toward identifying the appropriate (rather than maximal) degree of authority and specialization. Because organizations whose characteristics best match environmental requisites will do better than those whose features do not, some ways of organizing are better than others.

Contingency theory addresses a fundamental fact of organizational life: Changes in the size of an organization alter its structure. Growth increases the need for multidivisional structures to accommodate specialization. But it also determines the degree to which the activities of the enterprise follow a formal set of rules that govern authority relationships. As organizations increase their scale, they create rules and norms governing decision making, communication flows, and information processing. The design of organizations in the classical framework is based on the expectation that the optimal structure for any enterprise consists of a set of relationships in which planning and decision making emanate from the top and penetrate lower levels as tasks become increasingly routinized. In this framework, organizational effectiveness (success or failure) rests on the extent to which formal authority relationships regulate behavior as a firm grows. However, after a certain point, centralized decision [Page 937]making is inefficient. Bureaucracies are good examples of the threshold effects of growth on the internal arrangement of organizations. As the number of organizational members increases, a well-coordinated centralized structure is superseded by a decentralized one. Delegation of authority is the hallmark of large enterprises with complex structures, while smaller firms can maintain simpler command structures because management can personally make effective decisions.

Contingency theory also addresses the effects of strategic choice on organizational design. In order to achieve a high level of effectiveness, organizations adapt their structures to changes in strategies. Like size, strategy affects functional and divisional ways of assembling organizations. A divisional structure (i.e., differentiated by multiple product or services lines) best fits a diversified strategy because it has numerous product or service markets and these must be organized into their own divisions. In contrast, a strategy that issues in a single product line or a simple set of tasks fits best with a functional structure (i.e., differentiated by functions such as marketing, sales, and production) because its focus on a limited market or service requires specialization. Creating an increasingly differentiated structure introduces difficulty in the coordination of organizational processes, creates conflict, and increases the need for resources devoted to coordination and control. Increasing structural complexity includes the advantages of predictability and routinization but is often accompanied by the disadvantages of rigidity and organizational dysfunction.

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