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Exploring the Connection between Environmental Fit and Organizational Performance

Does an organization that adapts to its environment perform better than one that does not?

From a practical perspective, asking if an organization that fits its environment will perform better than an organization that does not seems to make as much sense as asking if an individual who is qualified for a job will perform better than a person who is not. However, in the world of organizational studies, structural contingency researchers give considerable thought to understanding the environmental factors that influence organizational effectiveness, while often failing to prove a connection between fit and performance (March & Sutton, 1997) and not adequately considering managerial choice as a factor driving organizational fit. Contingency theorists argue that an organization that adapts to its environment will perform better than an organization that does not (Donaldson, 1996) and that mismatched characteristics within organizational configurations will prevent an organization from achieving natural harmony with its environment that will lead to better performance (Mitzberg, 1981). This paper explores contingency theory models to find if a connection exists between fit and environmental contingencies in order to understand if organizations that find a proper fit perform better than those that do not, and to identify applications of contingency models managers might consider for enhancing organizational performance.

Foundations of contingency theory

Structural contingency theory states that no single structure works for all organizations (Donaldson, 1996). The optimal structure of an organization differs according to situational or contingency factors like strategy, size, task, task uncertainty, and technology (Mitzberg, 1981). For example, Donaldson (2000) identifies four contingency factors that strategy determines: size, innovation, diversification, and geographical diversity. These contingency factors determine the nature of the organization's tasks, which take on two dimensions: task uncertainty and task interdependence. The nature of the task determines how the organization will coordinate the tasks. The coordination mechanism determines the structure required to fit the strategy. In short, "the causal chain is: strategy, contingencies, task, coordination mechanisms, and structure" (2000, p. 292).

Scott and Davis (2007) say that organizational strategy researchers attempt to understand why some organizations perform better than do others. The answer includes three elements. First, some organizations have structures more conducive to performance. Second, an organization might implement better strategies than those of competitors. Third, some structures and strategies work better in different contexts. In other words, performance follows when an organization locates in an attractive segment and chooses the right combination of strategy and supporting structure to compete (p. 310).

To build an effective organization, contingency theorists assert that managers must fit the structure of the organization with its contingency factors so the organization can adapt to the environment in which it operates. To build an effective organization using the contingency approach, managers assess the organization and the environment then apply a structural configuration that fits the organization to its contingencies. Organizations that are “in fit” outperform organizations in “misfit” (Donaldson, 1996; Kreitner & Kinicki, 2007; Scott & Davis, 2007).

When introduced in the 1950s, contingency theories revolutionized the field of organizational studies by synthesizing opposing theories from the classical management and human relations schools (Donaldson, 1996). Classical management theory held that the single best organizational structure was a top-down hierarchy through which senior management controlled the work behavior of employees. Human relations theory recognized human needs and proposed a bottom-up hierarchy that emphasized employee cooperation in organizational decisions. Contingency theory argued that both approaches were legitimate, depending on the situation. When the task is certain and the environment stable, the most effective structure is a mechanical hierarchy that centralizes knowledge and authority in management, while standardizing roles, behavior, and processes. A mechanical approach allows for efficient coordination, but discourages innovation. As task uncertainty grows and the environment becomes more dynamic, the organization must adopt an increasingly flexible and organic structure that disperses authority, and that involves employees in decisions. An organic approach introduces complexity and increases costs, but boosts innovation (Donaldson, 1996; Scott & Davis, 2007). Donaldson (1996) summarized the task of contingency research to be "the particular contingency factor or factors to which each particular aspect of organizational structure needs to fit" (p. 58).

Fitting technology to structure

Scott and Davis (2007) define technology as the work an organization performs, which can include the hardware, and employee abilities used to accomplish the work. Contingency theorists consider technology to be a primary factor that determines organizational structure (Kreitner & Kinicki, 2007). After finding distinct structures for effective and ineffective companies based on the degrees of technological complexity, Joan Woodward (Woodward, 1965 in Fry, 1982) concluded that technology determines organizational structure. Woodward found those organizations that have either low-complexity or high-complexity technology tend to have organic structures. Organizations with medium complexity tend to be more effective if they have a mechanistic structure (Fry, 1982) In other words, an organizational will be more effective if its structure matches its technology. Revisiting and building on Woodward's findings, Collins and Hull (1986) conducted a meta-analysis of 50 studies on technology-structure research to conclude the following: 1) The more technology requires interdependence among individuals and groups the more organizations must integrate or coordinate activities, and; 2) As technology becomes less routine, organizations adopt "less formalized" and less centralized structures (p. 548).

Differentiation and integration

Lawrence and Lorsch (1967) argued that different environments place different requirements on organizations, and that organizations exist because they have adapted to their environments. Organizations are open systems in which different forms of structure emerge as the organizations adapt to different environments. Two structural forces simultaneously fragment and bind an organization, differentiation and integration. Imbalance between these forces can obstruct the effectiveness of an organization. Differentiation is the specialization that causes people to think and act differently. Excessive differentiation causes inefficiency and conflict, breaking apart the organization. To offset differentiation and bind together the organization, managers use integration to achieve cooperation among specialists to achieve common goals. Lawrence and Lorsch concluded that successful organizations exhibit higher degrees of differentiation and integration as the complexity of the environment increases. In short, successful organizations adapt by effectively balancing integration and differentiation to fit their environment. Likewise, unsuccessful organizations develop too much differentiation without sufficient integration. Achieving integration becomes increasingly difficult as differentiation increases (Lawrence & Lorsch, 1967).

The key lesson from Lawrence and Lorsch for managers in a dynamic and growing environment is to strive continuously and creatively for integration (Kreitner & Kinicki, 2007). The dynamic environment may require the organization to build a more diverse employee base, which requires managers to master leadership that unites divergent people to work together toward common goals. In short, the more dynamic the environment, the more differentiated the organization needs to become (Lewin, Weigelt, & Emery, 2004).

Matching multiple contingencies

Lewin, Weigelt, and Emery assert that (2004) that an organization must not only fit contingency, but must also deal with the reality of dynamically adapting multiple and conflicting contingencies. Lawrence and Lorsch (1967) support this by showing how the different parts of an organization have different levels of environmental uncertainty that require different structures at different times. In other words, an organization may need to coordinate among departments that have different structures. In addition, Gresov (1989) found that organizations perform better when they achieve a fit between task uncertainty and horizontal dependence; arguing that multiple conflicting contingencies increase the challenge of finding the right fit and increase the chances that the organization will be in misfit [See Figure 2].

Structural adaptation to regain fit theory

Criticisms of contingency theory

Critics assert that no cohesive contingency theory exists, that "contingency theory" is a collection of different ideas that represent a contingency approach, which research does not validate because there seems to be neither a standard definition nor measurement for either fit or performance (Schoonhoven, 1981; Scott & Davis, 2007). Further, holding that contingency causes structure places contingency theory against strategic choice theory, which argues that organizations in misfit can regain fit by changing the contingency to fit the structure so the managers can retain the structure they prefer (Child, 1972).

James March and Robert Sutton (1997) expand their criticism beyond contingency theory to the entire field of organizational studies by arguing that most organizational performance research fails to identify a connection between performance and measured variables because researchers do not pay attention to the complications of dynamic competitive environments, attempt to simplify complex scenarios, and rely on retrospective accounts rather than direct observation. While organizations researchers are aware of these limitations, competing demands from academics for scholarship and business for results cause researchers to publish conflicting conclusions, inferring that data does not support a causal relationship between performance and variables while simultaneously inferring that the connection exists (March & Sutton, 1997).

Addressing the critics with SARFIT

Donaldson (1996) argues that the lack of empirical support may be due to simplistic analytical models that lead to erroneous conclusions. Donaldson attempts to address contingency critics by synthesizing divergent contingency theories and research into Structural Adaptation to Regain Fit Theory (SARFIT), which provides a model for analyzing more accurately the processes in structural adaptation. SARFIT holds that a fit between contingency and structure positively affects performance, while a misfit negatively affects performance. SARFIT identifies a cycle of organizational adaptation that underlies varying structural contingency theories, as follows: fit, contingency change, misfit, structural adaptation, new fit [See Figure 1]. More specifically:

  • The organization is initially in fit, which means it has a structure that matches its contingency variables. This fit positively influences performance.
  • The organization changes its contingency variable but attempts to retain its existing structure.
  • Failing to adapt to the change places the organization in misfit with its environment, which negatively affects performance.
  • When performance becomes unbearably low, the organization adopts a new structure that fits the new contingency level.
  • The new fit restores performance.

Empirical support for fit-performance connection

Analyzing studies of strategy and structure of 87 organizations in five countries using the SARFIT framework, Donaldson validated that organizations in fit outperform organizations in misfit, that strategy and structure affect performance, and that misfit precedes structural change that causes adaptation. Calling Fit Strategy the "meta-principle of effective organizational structure," Donaldson (2000) concluded that "organizational structure should be designed to fit the organizational strategy" (p. 292).

Mintzberg provides a practical application of structural contingency research

Exploring the factors that contribute to building effective organizations, Mintzberg (1981) found that problems in organizational design come from two mistaken assumptions: 1) organizations are alike, and 2) effective organizations have coherent component parts. To the contrary, organizational characteristics fall into natural configurations, which are simple structure, machine bureaucracy, professional bureaucracy, divisionalized form, and adhocracy. Mintzberg explored the natural configurations of organizations that result from elements of structure and situation to discover that consistency, coherence, and fit are the keys to successful organizational design. Mismatched characteristics within these configurations will prevent an organization from achieving a natural harmony, hindering performance.

Configurations and fit

Consolidating structural contingency research, Mintzberg provides a practical tool for helping managers determine the proper fit for environmental contingencies.  Following is a summary of Mintzberg's configurations, with a discussion of the ideal fit for each [See Figure 3].

Simple structure

In a simple structure, a few top managers direct the activities of a core group of employees. Commonly seen in entrepreneurial companies, the simple structure has minimal staff or middle line workers, little standardization, and makes limited use of planning, training or liaison devices. This lean and flexible structure can foster basic creativity, while allowing the organization to outmaneuver bureaucracies in a dynamic environment. However, the strict centralization threatens the long-term viability of the simple structure. Nearly all organizations start as simple structures with chief executives exercising considerable power. Simple structures abhor standardization, yet age and growth compel an organization to bureaucratize or remain dependent on the founder’s survival. Highly autocratic, the simple structure is out of fashion, but is a fit for startup organizations, for organizations in simple and dynamic environments, and for organizations that face extreme and hostile pressures.

Machine bureaucracy

A machine bureaucracy emerges as situational factors like age, growth, stable environment, and external controls drive an organization to coordinate work through standardization. Franchises like McDonald’s, In-and-Out, and Starbucks serve as classic examples of machine bureaucracies because they have achieved success through meticulous standardization that produces cheap and efficient products. In spite of being the most prevalent of the five configurations, the machine bureaucracy produces monotonous work, isolates employees, becomes obsessed with controlling markets and workers, and produces inflexible organizations.

Professional bureaucracy

The professional bureaucracy coordinates activities by standardizing skills of employees rather than processes. This design uses an operating core of highly trained professionals with a substantial operating staff. Used in hospitals, universities, legal firms, and other organizations operating in stable but complex environments, the professional bureaucracy decentralizes authority, putting power in the professionals and in the associations and institutions that train the professionals. The support staff handles the routine tasks that the professionals delegate. A parallel autocratic hierarchy emerges to control the staff. Standardization allows the professionals to perfect skills and to develop autonomy. However, the professional bureaucracy restricts the organization’s ability to adapt if the environment becomes unstable, does not produce integrated entities, and has difficulty quantifying goals.

Divisionalized form

The divisionalized form emerges when an organization needs to coordinate the activities of parallel operating units, which are led by autonomous middle-line managers. An organization divisionalizes to create semi-autonomous market-based units for diversified products while retaining centralized power. External controls from headquarters tend to push the divisionalized form toward machine bureaucracy, which discourages risk taking and innovation, while spreading consequences among divisions. As the organization grows, power tends to be gathered into a few hands, encouraging irresponsible practices. The divisionalized structure is fashionable, used throughout the Fortune 500 and in European companies. Hospital systems, unions, and government entities have also adopted the divisionalized structure. However, the divisionalized structure seems unsuited for professional environments because 1) successful divisionalization requires measurable goals and 2) the professionals in these organizations resist the resulting technocratic controls and top-down decision making that result from divisionalization.

Adhocracy

The opposite of bureaucracy, adhocracy is a structure in which power and control dynamically shift by mutual adjustment among competent professionals. While the experts in a professional bureaucracy work autonomously to perfect their skills, the experts in an adhocracy work as teams to create things. The adhocracy distributes power unevenly into the hands of the experts needed for a particular decision. Abundant managers have a narrow span of control, serving as experts who not only work with the teams but who also link the teams. The power base in adhocracy is in proficiency rather than authority, which erases the distinction between line and staff while engaging everyone in strategic management.

Adhocracies are a fit for organizations operating in complex and dynamic environments, which require sophisticated innovation and cooperative efforts from functionally diverse experts. While adhocracy can be extraordinary at innovation, the structure has difficulty accomplishing the ordinary because it requires inefficiency to be effective, is flooded with managers, requires resource-intensive communication and relationship systems, seemingly takes forever to accomplish simple tasks so that everyone can contribute, and is rife with ambiguity that causes conflict and political behavior.

Most organizations have characteristics from each configuration, but one likely dominates.

Configurations as diagnostic tools

Mintzberg points out that virtually all organizations experience the pulls that underlie the five configurations, as follows: top management pulls to centralize power, the technostructure pulls to formalize, the operators pull to professionalize, the middle management pulls to break the organization into hostile units, and the support staff pulls to collaborate. The organization tends to organize close to one of these configurations; if one pull fails to dominate, organizational designers may need to balance two. To improve organizational design, managers should consider the pulls of their organizations to discover the configuration that serves as the best fit among component parts.

To design an effective organization, Mintzberg says that managers must find the proper fit among the parts, elements, and structure of the organization, which all should be in harmony with the situational factors that affect the organization. Managers should be less concerned about which configuration to use and more concerned about achieving configuration. In other words, managers should design organizations by fit, not fashion; pick the structure that fits the organization or create a new configuration.

Conclusion

While saying an organization must fit its environment in order to perform may seem intuitive, critics argue that little evidence exists to support a link between fit and performance. The dynamic nature of internal and external environments may ultimately require the field of organizational studies to go beyond contingency to chaos theory, which holds that events cannot be predicted, they can only be explained. Until a more accurate model comes forth, contingency theory remains not only influential, contingency theorists argue that empirical evidence firmly supports the assertion that an organization that fits its environment will perform better than an organization that does not. Drawing conclusions from extensive analysis of structural contingency research, Lex Donaldson's meta-principle of effective organizational structure seems to summarize effectively the key lesson from contingency theory: "The organizational structure should be designed to fit the organizational strategy" (2000, p. 291). While this does make as much sense as saying a person who is qualified for a job will perform better than a person who is not qualified for a job, the manager can only hope for an accurate prediction. Too many contingency factors, seen or unseen, can affect the outcome.


Works Cited

Child, J. (1972). Organizational structure, environment and performance: The role of strategic choice. Sociology , 6 (1), 1-22.

Collins, P. D., & Hull, F. (1986). Technology and span of control: Woodward revisited. Journal of Management Studies , 23 (2), 143-164.

Donaldson, L. (2000). Design structure to fit strategy. In E. Locke, The Blackwell Handbook of Principles of Organizational Behavior (p. 445). Oxford: Blackwell Publishers Ltg.

Donaldson, L. (2001). The contingency theory of organizations. London: Sage Publications.

Donaldson, L. (1996). The normal science of structural contingency theory. In S. Clegg, C. Hardy, & W. Nord, Handbook of Organizational Studies (pp. 57-76). London: Sage Publications.

Fry, L. W. (1982). Technology-structure research: Three critical issues. Academic of Management Journal , 25 (3), 532-552.

Gresov, C. (1989). Exploring fit and misfit with multiple contingencies. Adminstrative Science Quarterly , 431-465.

Kreitner, R., & Kinicki, A. (2007). Organizational Behavior. New York: McGraw-Hill Irwin.

Lawrence, P. R., & Lorsch, J. W. (1967). Differentiation and integration in complex organizations. Administrative Science Quarterly , 1-47.

Lewin, A. Y., Weigelt, C. B., & Emery, J. D. (2004). Adaption and selection in strategy and change. In M. S. Poole, & A. H. Van de Ven, Handbook of organizational change and innovation (p. 456). Oxford: Oxford University Press.

March, J. G., & Sutton, R. I. (1997). Organizational performance as a dependent variable. Organization Science , 8 (6), 698-706.

Mitzberg, H. (1981). Organization design: Fashion or fit? Harvard Business Review , 59 (1), 108-116.

Randolph, W. A., & Dess, G. D. (1984). The Congruence Perspective of Organization Design: A Conceptual Model and Multivariate Research Approach. The Academy of Management Review , 9 (2), 114-127.

Schoonhoven, C. B. (1981). Problems with contingency theory: Testing assumptions hidden within the language of contingency theory. Administrative Science Quarterly , 26 (3), 349-377.

Scott, W. R., & Davis, G. F. (2007). Organizations and organizing: Rational, natural, and open system perspectives. New Jersey: Pearson Prentice Hall.

Woodward, J. (1965). Industrial organization: Theory and Practice. London: Oxford University Press.

 

Addendum

Figure 2. Gresov's (1989) Multiple Contingencies Model

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Task Uncertainty

 

 

Low

High

 

 

Type 1

No conflicting contingencies.

Fit with both is possible.

Higher performance.

Type 3

Some conflict in contingencies. Greater design variation.

One misfit likely.

Lower performance.

Low

Horizontal Dependence

Type 2

Conflicting contingencies.

One misfit inevitable.

Lower performance.

Equifinality of design.

Type 4

No conflicting contingencies.

Fit with both is possible.

Higher performance.

High

 

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