The Argument Of Contingency Theories

Organizations operate in many different environments and it is vital to assess how they influence their structures. Effective and efficient organizing has become increasingly important in the modern world characterized by rapid changes. Contingency approaches emphasize that in order for organizations to succeed they must adopt a structure suitable for the environment in which they operate.

Two types of theories are referred as contingency theories: theories of organizational structure and theories of leadership. In general, contingency theories are a class of behavioral theory that state that there is no best way to organize a corporation and the organizational structure of the company. An organizational or leadership style that is effective in some situations may not be successful in others. Therefore, the best way of organizing the company, is contingent upon the internal and external situation of the company.

External environments influence organizations in a varied number of ways. Critical external factors include, but are not limited to, the size of the organization, labor markets, availability and cost of capital, competitors, governmental laws and policies, ecological concerns, managerial assumptions about employees, strategies, technologies used, etc.

The main ideas of contingency theory are:

• There is no one best way of organizing or managing the company
• Organizations are open systems that need careful management to satisfy and balance internal needs and to adapt to environmental circumstances
• Different types of organizations are needed in different types of the environment
• Different approaches to management may be necessary to perform different tasks within the same organization
• Effective organizations not only have a proper ‘fit’ with the environment but also between its subsystems

Several contingency approaches were developed simultaneously in the late 1960s. The emergence of the theory was the result of criticisms of the classical theories such as Weber’s bureaucracy (Weber, 1946) and Taylor’s scientific management (Taylor, 1911) which had failed because they neglected that management style and organizational structure were influenced by various aspects of the environment: the contingency factors. The contingency approach originated with the work of Joan Woodward (1958), who declared that successful organizations in different industries with different technologies were characterized by different organizational structures.

In this essay I will discuss three influential contingency theories, those of Burns and Stalker (1961), Lawrence and Lorsch (1967), Fiedler (1967) and I will try to assess the relevance of contingency approach in organizations today.

Tom Burns and Graham Stalker in their book, “The Management of Innovation” (1961) studied about 20 Scottish and British electronics companies operating in increasingly competitive and innovative technological markets. Their findings demonstrated that organizations operating in stable environments are very different from those which have to face a changing and dynamic environment. The authors have discovered that differences in the way firms approached change and innovation related to the values and mission of the firms.

Burns and Stalker classified the firms into 2 categories on the basis of their managerial structures and practices: mechanistic and organic.

The authors found that mechanistic organizations are similar to bureaucracies and suited for relatively stable environmental conditions. Such organizations are clearly programmed, strictly controlled and hierarchically structured. Often they do not have mission and vision statements, and instead depend on established rules for guidance, measuring success by the degree to which staff conforms to process and procedure. Organizational tasks are typically broken down into specialized activities. Individuals are responsible for their specific functions in a relative isolation from the overall organizational goal.

The organic organizations are appropriate in unstable, turbulent, unpredictable environments. Organic organizations are orientated towards results, have a flat organization structure instead of a hierarchy, and little structure in terms of process and rules. They focus on results and employees receive positive rewards for creative and pragmatic contributions. Given these conditions it becomes necessary to review and redefine the responsibilities, methods, inter-role relationships, and even goals on a continual basis.

Burns and Stalker emphasized that each system is appropriate under its own specific conditions. Neither system was superior to the other under all situations. Since the 1960s much of writings in organization theories field is a constant debate between the machine/organ analogies, and attempts to develop growth models of how simple mechanistic forms can grow into the more complex organic forms.

Another significant study to demonstrate the relationships between environmental characteristics and effective organizational structures was conducted by Paul Lawrence and Jay Lorsch (1967). They studied ten US firms in three industries (plastics, food, containers) that confronted varying degrees of uncertainty, complexity and change.

The researchers found that successful firms in each industry had a different degree of differentiation. The firms operating in uncertain, complex, rapidly changing environments had more highly differentiated internal structures such as sales, production and R&D departments. Such organizations require the greater need for suitable mechanisms for integrating and resolving conflicts between various segments. Successful firms in more homogeneous and stable environment were more formalized and hierarchical in their forms. Authors concluded that in order to succeed firms must have internal structures as complex as environments in which they operate.

This seminal work of Lawrence and Lorsch refined the contingency theory by demonstrating that different markets and technological environments require different kinds of organizations, and that subunits or functional departments within an organization might be managed in different ways, due to variations resulting from their sub-environments.

Managerial leadership has influenced organizational activities in many ways. These influences include motivating subordinates, budgeting scarce resources, and serving as a source of communication. Contingency theories of leadership argue that no single leadership style is effective in all circumstances, but the leadership styles are contingent on the organizational and situational context. Fred Fiedler’s theory (1967) is the earliest and most extensively researched is also known as contingency model of leadership effectiveness.

Fiedler’s ideas, originated from trait and behavioral models, underline the importance of both the leader’s personality known as “leadership style” and the situation in which that leader operates “situational favorableness”. Fiedler was the first theorist who said that leadership effectiveness depends on the situation.

The leadership style is the consistent system of interaction that takes place between a leader and work group. In order to classify leadership styles, Fiedler has developed an index called the Least-Preferred Coworker (LPC) scale. To get an LPC score a leader is asked to think of co-workers with whom he/she has ever worked and choose the one with whom the work was the most difficult. Then this person is rated on a number of eight-point bipolar scales (friendly/unfriendly, hostile/supportive, etc.). The responses are then summed and averaged: high LPC scores are interpreted as an indication of human relations orientation of a leader, while low LPC scores show a task orientation.

The situational favorableness is a measure of the degree to which the situation of the work group affects the leader’s ability to influence group members. Fiedler then extends his analysis by focusing on three key situational factors, which are leader-member, task structure and position power.

In leader-member relations Fiedler states that leaders will have more influence if they maintain good relationships with group members who like, respect, and trust them, than if they do not. Fiedler determines the task structure as the second most important factor in structural favorableness. He argues that highly structured tasks, which specify how a job is to be done in detail, provide a leader with more influences over group actions than do unstructured tasks. Leaders, who are authorized to hire and fire, to discipline and reward, have more power than those who do not. For example, front office manager has more power than a room clerk.

By classifying a group according to three variables, it is possible to identify eight different group situations or leadership style. According to Fiedler, there is no ideal leader. Both low-LPC (task-oriented) and high-LPC (relationship-oriented) leaders can be effective if their leadership orientation fits the situation. Fiedler stated that it would be easier to change the situation (i.e. the work environment) to fit the leader’s style. As such, the organization should not choose the leader who fits the situation but should change the situation to agree with the style of its leader since the leader’s personality is not likely to change.

The following aspects can be considered as strengths of Fiedler’s theory: it is predictive and supported by a lot of empirical research; it does not require that people be effective in all situations and provides a way to assess leader style that could be useful to an organization. However, among the theory’s weaknesses are the fact that it is cumbersome to use, it doesn’t explain what to do when there is a mismatch between style and situation; it doesn’t take into account situational variables, like training and experience, which also have an impact in a leader’s effectiveness. Finally, the LPC measure has a low reliability and its meaning is unclear, which put in doubt whether it is a true measure of leadership style.

Today’s organizations are quite complex and there cannot be one correct strategy that works in all situations. The contingency approach stresses the absence of a single best way to manage and emphasizes the need for managerial strategies based in all relevant facts. In other words, each manager’s situation must be viewed separately, a wide range of external and internal factors must be considered and then the focus should be on action that best fits the given situation.

Contingency theory is often called the “it all depends” theory, because when a contingency theorist is being asked for an answer, the typical response will be that it all depends. While this may sound simplistic, assessing the contingencies on which decisions depend can be a very complex.

The appropriate management style and organizational structure depend on the environmental context of the organization concerned. The ability to manage change is now recognized as a core organizational competence. In order to prove the relevance of contingency theory to the modern enterprises I would like to analyze what has happened to the offshore banking industry from 2001 up today and how these changes has influenced to redesign completely the organizational structures of offshore banks and how this change was managed and implemented.

Increasing pressure from FATF and OECD on tax evasion issues, anti-money laundering concerns as well as prevention of the terrorism financing from the end of 2001 started to change the environment in which offshore banking was operating. Therefore offshore banks had to adjust their organizational structures and the way these banks have been managed.

Increasing importance of the role of compliance processes at offshore banks has changed the organization structures of banks as well as operations processes in the way, where the importance of the compliance departments have become a necessity to survive. Compliance officers have become managers of one of the most important internal processes – compliance with the laws and regulations. Therefore now offshore banks operations are centered on the compliance department, rather that business/client management department. This issue in fact is going beyond just offshore banking sector; it has influenced drastic changes of many countries’ legislation, supervisory and regulation processes as well.

So a massive task of reorganizing not just internal organizational structures of banks, but regulating agencies was undertaken in a very short period of time. Those countries and their financial institutions which were able to adapt to the changes rapidly, survived, but entire industries and dozens of banks went out of business because of their failure to act as open systems and balance internal needs and external environmental forces. The change was massive and organizations had to deal with many important issues, interrelated and so interdependent, that in many cases organization have failed to manage the change in order to deal with the following problems:

Lack of suitable qualified compliance personnel – no professionals available;

Lack of appropriate training and educational programs – no educational institutions;

Increased expenses for appropriate compliance practices – lower profitability, dilemma of choice for the CEOs – continue as usual to satisfy shareholder’s needs and create financial benefits for themselves in a short term rather than comply with the demanded change but reduce the performance of the company;

Resistance of business departments to accept the necessity of increased compliance interference – struggle for power within companies;

Insufficient laws and regulations – government agencies lagging behind with legislative change, banks had to establish their new internal rules and procedures for compliance;

Those offshore banks which where managing their organizations consciously or unconsciously employing contingency theories of organizations, have managed to adopt to the new environment, therefore the relevance of these theories is undisputed to the modern companies, at least in the offshore banking sector.