Contingency Theory

Contingency theory is an outgrowth of systems design. Jay Galbraith (1973) states that in contingency theory:
* there is no one best way to organize
* any way of organizing is not equally effective

These run counter to the optimizing notions of many rational theorists. Scott adds that in contingency theory "the best way to organize depends on the nature of the environment to which the organization relates"

"Contingency theory is guided by the general orienting hypothesis that organizations whose internal features best match the demands of their environments will acheive the best adaptation" (Scott p. 89). The termed was coined by Lawrence and Lorsch in 1967 who argued that the amount of uncertainty and rate of change in an environment impacts the development of internal features in organizations.

Different subunits within an organization may confront different external demands. "To cope with these various environments, organization create specialized subunits with differing structural features" (Scott p. 89) -- for example, differing levels of formalization, centralized vs decentralized, planning time horizon. "The more varied the types of enviroments confronted by an organization, the more differentiated its structure needs to be" (p. 89).

Furthermore, the more differentiated the more difficult it will be to coordinate the activities of the subunits and more resources need to be applied for coordination.

Lawrence and Lorsch's classic 1967 study, especially the six companies in the plastics industry, highlight their argument that in complex environments the organization developed separate departments to confront these differing environmental segments. But these separate departments created coordination problems. Therefore, the extent that the companies could differentiate to the level required by the environment AND at the same time integrate these different departments into collective action determined the organization's success rate.

The inter-departmental conflict inherant in such differentiation is often caused by mutual task dependence, task-related assymmetries, conflicting performance criteria, dependence on common resources, communication obstacles, and ambiguity of goals as well as organizational differentiation (from Scott p. 270). While the rational perspective sees these conflicts as disruptive and best resolved, and natural perspective notes that conflicts are part of the negotiation process between coaliations and their conflicting interests and have an important (and possibly beneficial) effect on the organizational goals of the company.

Galbraith's view is similar to systems design in that it stresses information flows but adds that as uncertainty increases the amount of information required for decision making also increases. "Various structural arrangements, such as rules, hierarchy, and decentralization are mechanisms determining the information-processing capacity of the system" (Scott p. 90).

Integrating Rational and Natural System Perspectives Through Contingency Theory
Lawrence and Lorsch (1967) argue that if the open system perspective is taken, rational and natural perspectives identify different organizational types which vary because they have adapted to different types of environments. Unlike Etzioni's structural view which sees the two perspectives as two sides of the same coin, Lawrence and Lorsch see them as different organizations entirely.

The more homogeneous and stable the environment, the more formalized and hierarchical the form. Their view is ecological -- those organizations that can best adapt to the environment will survive. They see the rational system coming first because environments were initially stable and are becoming increasingly more volatile.