Contingency Theories

Contingency theory suggests that it is possible to organize too much to meet the needs of the environment. This would be a case of strategic misfit. Think of an example of misfit caused by an inappropriate organization design. Explain how a firm’s structure could systematically increase its costs and place it at a strategic disadvantage.

Contingency theory is the idea that there is no uniformly “best” structure for all firms in all circumstances. Contingency theory has focused on three factors that may affect the relative efficiency of different structures: * Technology and task interedependence * Example: Telecommunications advances have vastly improved the ability of engineers and product specialists located physically far apart to communicate and coordinate product design. This reduction in the costs of coordination reduces the need for members of a team to be in the same part of the firm’s formal organization or even to be part of the same firm. Hence, a firm might suffer strategic misfit if it is overly vertically integrated relative to the ability of coordination across firms. * Information flows * Example: According to the economist Galbraith, administrative hierarchy (bosses!) develop in order to handle “exceptions” – decisions that cannot be made easily by applying standard organizations routines. Successively higher levels of organization are needed to handle more difficult exceptions. What follows from this argument is that strategic misfit occurs as the amount, complexity and/or speed of information processing that a firm must undertake to make decisions changes but the firm does not change. A firm with a rigid hierarchy in an environment where responses must come more rapidly is disadvantaged. * The tension between differentiation and integration * Example: Lawrence and Lorsch note a tension in complex organizations between the benefits of creating independent specialized work groups (differentiation) and