Foundations of contingency theory

Structural contingency theory states that no single structure works for all organizations (Donaldson, 1996). The optimal structure of an organization differs according to situational or contingency factors like strategy, size, task, task uncertainty, and technology (Mitzberg, 1981). For example, Donaldson (2000) identifies four contingency factors that strategy determines: size, innovation, diversification, and geographical diversity. These contingency factors determine the nature of the organization's tasks, which take on two dimensions: task uncertainty and task interdependence. The nature of the task determines how the organization will coordinate the tasks. The coordination mechanism determines the structure required to fit the strategy. In short, "the causal chain is strategy, contingencies, task, coordination mechanisms, and structure" (2000, p. 292).

Scott and Davis (2007) say that organizational strategy researchers attempt to understand why some organizations perform better than do others. The answer includes three elements.

1. First, some organizations have structures more conducive to performance.
2. Second, an organization might implement better strategies than those of competitors.
3. Third, some structures and strategies work better in different contexts.

In other words, performance follows when an organization locates in an attractive segment and chooses the right combination of strategy and supporting structure to compete (p. 310).

To build an effective organization, contingency theorists assert that managers must fit the structure of the organization with its contingency factors so the organization can adapt to the environment in which it operates. To build an effective organization using the contingency approach, managers assess the organization and the environment then apply a structural configuration that fits the organization to its contingencies. Organizations that are "in fit" outperform organizations in "misfit" (Donaldson, 1996; Kreitner & Kinicki, 2007; Scott & Davis, 2007).

When introduced in the 1950s, contingency theories revolutionized the field of organizational studies by synthesizing opposing theories from classical management and human relations schools (Donaldson, 1996). Classical management theory held that the single best organizational structure was a top-down hierarchy through which senior management controlled the work behavior of employees. Human relations theory recognized human needs and proposed a bottom-up hierarchy that emphasized employee cooperation in organizational decisions. Contingency theory argued that both approaches were legitimate, depending on the situation. When the task is inevitable and the environment stable, the most effective structure is a mechanical hierarchy that centralizes knowledge and authority in management, while standardizing roles, behavior, and processes. A mechanical approach allows for efficient coordination but discourages innovation. As task uncertainty grows and the environment becomes more dynamic, the organization must adopt an increasingly flexible and organic structure that disperses authority and that involves employees in decisions. An organic approach introduces complexity and increases costs but boosts innovation (Donaldson, 1996; Scott & Davis, 2007). Donaldson (1996) summarized the task of contingency research to be "the particular contingency factor or factors to which each particular aspect of organizational structure needs to fit" (p. 58).