Contingency theory is a behavioral theory that claims that there is no single best way to design organizational structures. The best way of organizing e.g. a company, is, however, contingent upon the internal and external situation of the company.
The contingency approach to organizational design tailors the design of the company to the sources of environmental uncertainties faced by the organization. The point is to design an organizational structure that can handle uncertainties in the environment effectively and efficiently.
Therefore, previous theories such as Weber's theory of bureaucracy and Taylor's scientific management approach sometimes fail because they neglect that effective management styles and organizational structures are influenced by various aspects of the environment: the contingency factors. Therefore, there can not be ONE optimal organizational design for every company, because no companies are completely similar, and because every company faces its own set of unique environmental contingencies that result in different levels of environmental uncertainties.
Some important contingencies for companies are listed below:
Suppliers and distributors
Consumer interest groups
Customers and competitors
When making an analysis of the contingencies in the environment, a
PESTEL analysis could also be very helpful.
Contingency theory has historically sought to develop generalizations about the formal structures that would fit the use of different technologies. This focus was put forward by Joan Woodward (1958), who argued that technologies directly determine organizational attributes such as span of control, centralization of authority, and the formalization of rules and procedures.
Theorists such as P.R. Lawrence and J. W. Lorsch found that companies operating in less stable environments operated more effectively, if the organizational structure was less formalized, more decentralized and more reliant on mutual adjustment between various departments in the company. Likewise, companies in uncertain environments seemed to be more effective with a greater degree of differentiation between subtasks in the organization, and when the differentiated units were heavily integrated with each other.
On the other hand, companies operating in more stable and certain environments functioned more effectively if the organization was more formalized, centralized in the decision-making and less reliant on mutual adjustment between departments. Likewise, these companies do probably not need a high degree of differentiation of subtasks and integration between units.
Tom Burns and G.M. Stalker found similar results in their research, where organizations operating in more stable environments tend to exhibit a more mechanistic organizational structure, where companies operating in more dynamic and uncertain environments tend to show a more organic organizational structure.
Business leaders should therefore look at the contingencies of the environment, and assess whether or not the organization is capable of handling the uncertainties of the environment, and whether or not the organization is able to process the required amount of information.