Contingency Theory

Key Variables for Performance

Specialization, formalization, decentralization, and divisionalization are some of the variables of organizational structure that have contingent effects on performance. Some of the contingency variables of organizational structure are size, diversification, and task uncertainty. For instance, size is a contingency of decentralization, in that the larger the organization is (i.e., the more members it has), the more complex are the issues in managing it; therefore, top management cannot make all the decisions, and some must be delegated down the managerial hierarchy. This reduces the number of levels in the hierarchy through which information must pass and brings decision making closer to the bottom level, which interacts with customers or clients and which produces products.

As another instance, diversification is a contingency of divisionalization. Undiversified (i.e., single product or service) organizations can be effectively organized as structures in which the main subunits reporting to the chief executive officer (CEO) are functions. In contrast, diversified (i.e., multiple product or service) organizations can be effectively organized as structures in which the main subunits reporting to the CEO are divisions, each containing its own operating functions (e.g., sales and production), so that each is an autonomous organization. In this way, diversification is also a contingency of decentralization.

Hence, both size and diversification are contingencies of decentralization. Thus, some structural variables have more than one contingency variable they need to fit to have high performance.

Task Uncertainty

Task uncertainty is a contingency of formalization, specialization, and decentralization. Where the task has high certainty, rules (formalization) can be formulated that provide guidance for effective decisions. The preprogramming of decisions also allows jobs to be narrowly defined and hence highly specialized. In contrast, where tasks are highly uncertain, it is not possible to formulate rules that provide guides for effective decisions, and jobs cannot be narrowly defined; hence formalization and specialization need to be low. Instead, more highly qualified and skilled employees need to be empowered to make some of the decisions, so that decentralization is higher. The higher the task uncertainty, the lower the formalization and specialization and the higher the decentralization need to be in order to fit the task to the uncertainty contingency.

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