How do the four contingency variables influence organizations’ structure?

During 1970s, the United States of America was suffering unprecedented social, economic and political instability, with the great impact posed on western society by the crisis of oil, and the changing environment all the industries were facing. Previous management theories, such as scientific management theory, science of behaviour management theory and so on, only focused on how to improve enterprises’ internal organizational structure. Furthermore, what the vast majority of these theories pursued were models and principals of universal suitability and the best solution to the unstable environment.

Unfortunately none of these theories worked. As a result, people no longer believed that there would be any certain theory that could provide the best solution. Instead, they must use different methods under the changing conditions. In 1973, there was a new theory carrying, called contingency theory. In contingency theory, Jay Galbraith (1973) stated that there is no one best way to organize; any way of organizing is not equally effective. Whatever the way, in which organizations construct their organizational structure, it is dependent upon the following four contingency variables: technology, size, degree of environment and the organizations’ strategy.

This essay is focus on how the four contingency variables influence organization’s structure. The more contingency variables confronted by an organization, the more differentiated its structure needs to be. An organizational structure is a formal framework by which job tasks are divided, grouped and coordinated (Robbins, et al., 2003). The top managers of the organizations spend most of efforts to design the organization structure, in order to approach their objectives. To design the organizational structure, it involves six key elements, such as: work specialization, departmentalization, chain-of-command, span of control, centralization and decentralization, and formalization (Robbins, et al., 2003). The right organizational structure would allow their employees to accomplish organizational goals effectively and efficiently.

Technology and the organizational structure

Almost all the organizations use some kind of technology to convert their inputs to outputs. They combine their resources into a certain types of activities, in order to archive their goals. For example, Mitsubishi Motors Australia uses workers on assembly line to process and assemble the cars. Employees at Coca-Cola work on a continuous-flow production line to manufacturing Coca-Cola. And employees at MGC produce custom-made Wooden Jigsaw Puzzles for individual customers.

In the 1960s, British scholar, Joan Woodward studied several small manufacturing firms and divided them into three categories: unit production, mass production and process production. She found that the unit and process production line were most effective when matched with an organic structure and mass production was most effective when matched with a mechanistic structure (Robbins, et al., 2003).

Organic structure is a structure that is highly flexible and adaptive to the environment. It has a wide span of control, decentralization and a low formalization. On the other hand, mechanistic organization has a characteristic of high specialization, rigid departmentalization, a narrow span of control and a higher formalization (Robbins, et al., 2003). It has very little participation in decision making by lower level of employees. For unit production and the process production, it has the same characteristics such as low horizontal differentiation and low formalization which perfectly fit the organizational structure. The mass production has a visa versa characteristic to the unit production and the process production. Consequently, mass production is the most effective in a mechanistic structure (Woodward, 1968).

After analyzing her finding and categories of productions, Woodward had concluded several relationships between technological processes and organizational structure: (1) The more complex the technology the greater the number of managers and management levels; (2) Skilled workers undertake work in small groups, span of control is narrow; assembly line workers performing similar skilled tasks permit “flat” structures by managers; (3) The greater the technological complexity the larger the number of clerical and administrative staff (Woodward, 1970).

Size and the organizational structure

The size of the organization used to significantly affect the organizational structure. For example, a large organization with thousands of employees will tend to have more specialization, departmentalization, centralization and more rules than the small organizations (Galbraith, 1997). It means more specialised jobs, decreased span of control and the more formalised structure (Robbins, et al., 2003). However, the change of the organizational structure is not directly proportional to the increase in the size of the organization. For instance, if an organization, with a fairly mechanistic structure, that has already had 3000 employees, increases its number of employees by about 500, its mechanistic structure wouldn’t change much, though it will become more mechanistic. As the number of employee increases, specialization will switch to a higher degree and more departments will be divided. This will decrease the span of control or increase the number of managers needed to be in charge of those additional employees. It follows that the organization will have to pay more salaries.

On the other hand, a small organization with just a few employees tends to have an organic structure. Instead of having specialised jobs, narrow span of control and the formalised structure, the organic organization is more flexible and highly adaptive (Robbins, et al., 2003).

Environmental uncertainty and organizational structure

An organization has to face two environments: internal environment and external environment (Hampton, c1981). The internal environment is the general conditions with an organization, including owners, employees, directors and organizational culture. The external environment can be further divided into general environment and task environment. General environment is the broad conditions and trends in society that cannot be traced to other organizations, including economic, technological, socio-cultural, political-legal, international and demographic. Task environment contains specific groups that affect the organization directly, including customers, suppliers, labour market competitors, regulators and stakeholders (Zbar, 1996).

Whenever managers develop or change an organizational structure, they have to go through the process of organizational design. During the process, managers must measure the environmental uncertainty and complexity (Galbraith, 1997). None of the organizations is 100% closed. If it’s open, it has to face the external environment, which is consisted of some elements out of their control, such as global competition, accelerated products innovation by competitor, rapidly developing innovative technology and international situations (Larwen and Lorsh, 1967). Therefore, the manager prefers to reconstruct their organizational structure to be able to adapt themselves to the change of the environment, in order to properly react in time. On the other hand, in a stable and simple environment, the organization will tend to have a mechanistic structure, which brings in effectiveness and efficiency to the organization in order to approach their goals and objectives (Robbins, et al., 2003).

After studying the relationship between organizational structure and the environmental conditions, Lawrence and Lorsch (1967) found that, under conditions of environmental change, organisations tended to differentiate their structures, which is to break down its structure to deal with environmental segments, which created the potential for loss of control or direction and the need to somehow integrate through committees or liaison officers. The greater the differentiation, the more elaborate the integrative mechanisms employed.

Strategy and the organizational structure

There is a definite link between strategy and the organizational structure. To achieve their goals, it is logical that the organizational structure must match the organizational strategy. Chandler’s (1962) classic argument is that to be successful an organizational structure has to be consistent with strategy, even though a number of factors such as the degree of uncertainty, size of a firm, and the technology used in an organization, will have an important impact upon success.

Strategy determines the goal that an organization plans to achieve and the organizational structure required. Current strategy frame-works include the following three types: innovation, cost minimization and imitation (Robbins, et al., 2003).

Innovation requires an organic organizational structure (Robbins, et al., 2003). Innovation is the determining factor that contributes to whether a developing organization or an organization sufficient budget can expand their scale (Carnall, 1997). To be innovative, flexible strategies are needed to best fit different factors that influence the development of organization. As the change in strategies will lead to the change in organizational structure, a flexible organizational structure is in turn required. The specialization, departmentalization, centralization and formalization would be low in its structure (David K. Banner, T. Elaine Gagne. c1995).

Cost of minimization requires a mechanistic organizational structure (Robbins, et al., 2003). An organization with limited budget pursues a tightly controlled cost. Having a stable and simple environment can save the mount of effort that would otherwise be spent on adapting itself to a rapidly changing environment. Its structure will be of high specialisation, rigid departmentalisation, clear chain of command, narrow spans of control centralisation and high formalisation (David K. Banner, T. Elaine Gagne. c1995).

Imitation requires a combination of both organic and mechanistic organizational structure (Robbins, et al., 2003). Some organizations wish to minimize the risk and maximize the profit. Therefore, they use the mechanistic structure to maintain right controls and low costs but create more organic organizational subunits or divisions to pursue new directions (David K. Banner, T. Elaine Gagne. c1995).

Of all the strategies, imitation is usually preferable to the vast majority of organizations, because it enable an organisation not only to minimize the cost but also to develop among competition.

Conclusion

The four contingency variables, significantly affect the organizational structure.

Variables Org. Structures

Technology Unit production Organic

Process production Organic

Mass production Mechanistic

Size Large Mechanistic

Small Organic

Environment Rapidly changing Organic

Stable Mechanistic

Strategy Innovation Organic

Cost of minimization Mechanistic

Imitation Both

Whenever a particular structure is to be implemented, all four variables must be taken into account, as they are inter-related to each other. In addition, as the contingency variables keep changing over time most organizations are in a state where both organic and mechanistic structures apply. In my opinion, the combination of both structures is the only way in which organizations could well develop and expand their value to be more competitive.

References:

Banner, David K., Gagne, T Elaine. (c1995), Designing effective organizations: traditional & transformational views, Sage Publications, Thousand Oaks, Calif

Carnall, Colin A. (1997), Strategic change, Butterworth-Heinemann, Oxford

Galbraith, J.R. (1997), Organization Design, Addison-Wesley, Reading, Massachusetts

Hampton, David R. (c1981), Contemporary management, 2nd edition, McGraw-Hill, New York

Hickson, David John, McMillan, Charles J. (1981) Organization and Nation: the Aston programme IV, Gowe, Farnborough, Hampshire, England

Lawrence, Paul R., Lorsch, Jay William. (1967), Organization and environment: Managing differentiation and integration, Division of Research, Graduate School of Business Administration, Harvard University, Boston

Robbins, S. P., Bergman, R., Stagg, I., & Coulter, M. (2003) Management, 3rd edition, Prentice Hall, Sydney

Woodward, Joan. (1968), Management and technology, H.M.S.O., London

Woodward, Joan. (1970), Industrial organization: behaviour and control, Oxford University Press, London

Zbar, Vic. (1996), Key management concepts: unlocking 10 of the best
management books, Macmillan Education Australia, South Melbourne