Contingency Theory

Timeline 1960s-70s – Tom Burns and George Stalker conduct an experiment to see how the environment affects a firm’s organizational and management systems. -Joan Woodard conducted a study to determine how technology affects organizational structure.

Contingency Theory There is no one best way to structure and manage organizations. Structure and management are contingent on the nature of the environment in which the organization is situated. Argues for “finding the best communication structure under a given set of environmental circumstances.” Management of Innovation - Burns and Stalker (1968)

Key Concepts Focus on determining the best management approach for any given situation. Two types of environments: Stable (little to no change) and Innovative (great changes) Two types of management systems: Mechanistic (similar to bureaucratic classical theory) and organic (nonbureaucratic, similar to behavioral management)

In a stable environment, mechanistic works best, In an innovative environment organic works best Organizational structure is affected by technology.

Key Players & Major Contributors Tom Burns George Stalker Joan Woodward Frec Emerdy Eric Trist

Burns and Stalker (1968) Management of Innovation Organizational systems should vary based on the level of stability in the environment Two different types of management systems Mechanistic systems - appropriate for stable environment Organic systems - required in changing environments (unstable conditions) Management is the Dependent Variable Variations in environmental factors lead to management

Lawrence and Lorsch (1969) Key Issue is environmental uncertainty and information flow Focus on exploring and improving the organization’s relationship with the environment Environment is characterized along a certainty-uncertainty continuum

Organisational structure

Defining Organizational Structure The formal arrangement of jobs within an organization. Organizational Design A process involving decisions about six key elements: Work specialization Departmentalization Chain of command Span of control Centralization and decentralization Formalization

Mechanistic- Organic Organisation Organic Organization Highly flexible and adaptable structure Non-standardized jobs Fluid team-based structure Little direct supervision Minimal formal rules Open communication network Empowered employees Mechanistic Organization A rigid and tightly controlled structure High specialization Rigid departmentalization Narrow spans of control High formalization Limited information network (downward) Low decision participation

Structural Contingency Factors Structural decisions are influenced by: Overall strategy of the organization Organizational structure follows strategy. Size of the organization Firms change from organic to mechanistic organizations as they grow in size. Technology use by the organization Firms adapt their structure to the technology they use. Degree of environmental uncertainty Dynamic environments require organic structures; mechanistic structures need stable environments.

Structural Contingency Factors Strategy Frameworks: Innovation Pursuing competitive advantage through meaningful and unique innovations favors an organic structuring. Cost minimization Focusing on tightly controlling costs requires a mechanistic structure for the organization. Imitation Minimizing risks and maximizing profitability by copying market leaders requires both organic and mechanistic elements in the organization’s structure

Structural Contingency Factors (cont’d) Strategy and Structure Achievement of strategic goals is facilitated by changes in organizational structure that accommodate and support change. Size and Structure As an organization grows larger, its structure tends to change from organic to mechanistic with increased specialization, departmentalization, centralization, and rules and regulations.

Structural Contingency Factors Environmental Uncertainty and Structure Mechanistic organizational structures tend to be most effective in stable and simple environments. The flexibility of organic organizational structures is better suited for dynamic and complex environments.

Contingency Theory Argues that there are no universally applicable management theories or techniques. What you do “depends” on the “situation”. -internal contingency factors -external contingency factors

Internal Contingency Factors Tasks People Purpose Tech- nology Structure

Technology and Structure Organizations adapt their structures to their technology. Woodward’s classification of firms based in the complexity of the technology employed: Unit production of single units or small batches Mass production of large batches of output Process production in continuous process of outputs Routine technology = mechanistic organizations Non-routine technology = organic organizations

External Contingency Factors Socio-cultural Factors Economic Factors Technological Factors Political/ Legal Factors

General Environment of Coca Cola Sociocultural Economic Baby boomers drinking less Immigrants drink less Concerns about recycling Concerns about health Increased acceptance in China and India Easier access to refrigeration Slow economic growth Prospect of economic recovery Mideast crisis affect oil prices Coca Cola Technological Political Increased health standards for bottling Stricter liability legislation New recycle friendly canning tech. New promotional opportunities via the internet Threat of substitute drinks

I O Putting it together: A Contingency Model of Organizations Tasks Socio-cultural Economic Tasks I O People Purpose Techn Structure Technological Political

Task Environment Strategies Competitive Strategies Cooperative Strategies

Competitive Strategies Pricing Promotions Production (demand smoothing, forecasting, reduced cycle time)

Cooperative Strategies Cooptation Bargaining Joint Ventures (Coalitions) Lobbying Representation Socialization Domain Shifts

Summary: Systems and Contingency Theories - Recognize that external factors as well as internal factors affect management.

- Provide us with a way of distinguishing between environments Summary... - Provide us with a way of distinguishing between environments Degree of change Stable Dynamic Simple Complex Least uncertainty Complexity Greatest uncertainty

Summary... - Provide a way of distinguishing between organizations. (open versus closed organizations)

Summary... - Provide a way of distinguishing between situations faced by organizations (or the same organization over time). (Different contingency factors may become more or less important.)

Summary... - Shows that organizations have choices in dealing with their environments -do nothing and be at the mercy of the environment -react -anticipate -proact -change environments