HISTORY OF CONTINGENCY THEORYReporter: Emiliana J. Lozano

Overview of the theory Foundations of the Theory Ontological Framework for Analysis]

1. Through flow of energy2. Outflow of energy3. Repeated cycles of events4. Negative entropy, viability and fitness5. Production system6. Feed-back or information possessing system7. Environment8. Tight loose coupling9. Time lags10. 10.System States11. Differentiation12. Equifinality13. Path dependency14. Build and test sufficient contingency theory model

• Sample case. The Organization of AT&T, Historical Contingency Approach

I. Introduction II. Early DaysIII. Aftermath of the AntitrustIV. Fight the Future

HISTORY OF CONTINGENCY THEORYI. Overview of the theory

Contingency theory is a class of behavioral theory that claims that there is no best way to organize a corporation or to lead a corporation to make decisions,rather it depends on the situation and fitness between structure and context.

“Contingent” simply means that the effect of onevariable, A, on another variable, B, is contingent uponthe third variable C. Thus, contingency theory is a subset of this more general contingency approach inscience (Donaldson 2001).

II. Foundations of the Theory• Contingency theory is closely related to system

design (Scott 2003).

• It adopted an open systems view on organization

• System theory ontology can aid as framework for review and analysis of contingency theory researchstream.

• Open system imports energy from the environment.What is imported depends on the nature of thesystem or subsystem. For organization, it might bestaff, money, technology, and information.

III. Ontological Framework for Analysis(Donaldson 1996; 2001, Scott 2003, Burton & Obel

2004, Brazil and Von de Ven 1985) revealed that fitnessconcept is central to contingency theory.

Katz and Kahn (1996), Thompson (1967) and Hage (1974) proposed the following elements as included inopen system approach, as they were introduced to

organization theory.

1. Through flow of energyThis is the production or treatment process, where

inputs are transformed into outputs.

2. Outflow of energyAt the end of the conversion process, outputs from it

are often inputs to other organizations or individuals inthe environment, or input to other subsystem within thesystem itself.

3. Repeated cycles of eventsProduction and feed-back processes have a certain

“structural” stability is being recurrent and cyclic. Good examples are Burton & Obel’s ongoing design process (2004 :419) and Donaldson’s SARFIT model (2001 :11-16). Repetition is of course essential to system dynamicsand change.

4. Negative entropy, viability and fitness Negative entropy is synonymous with viability, and

thus maximizing viability means maximizing storedenergy or, in business, monetary stocks. The trend reported by Katz and Kahn thus becomes the goal of the system, or the optimization criteria. Maximizing fitness in contingency theory should therefore equal maximizing the stock of monetary resources overtime.

5. Production systemThe functionality of the productive system is to

maintain the open system. The system consumes energy-or money-in this maintenance, and the productive System provide this by utilizing scarce resources from The environment efficiently enough to create the neededsurplus.

6. Feed-back or information possessing systemThe functionality of the information processing

system is to keep the open system adoptive to changing environments. The effect from environmental change ona productive system, if left unchanged, is a deterio-ration of energy or monetary productive outcomes. Byprocessing information about the environment and the productive system and decide corrective action, the information processing system has the instrumental value of restoring an improving outcomes from theproductive system in the face of competition and change.

7. EnvironmentThe system is dependent on environmental resources

to sustain itself, and therefore has to adapt itself whenthe environment changes.

8. Tight loose coupling

An open system consist of different subsystem, increasing in numbers as the system evolves towards

greater differentiation and complexity over time. Thesedifferent subsystems, such as strategy, structure, culture and technology, are often thought of as beingtightly connected: if one changes, therefore, the other must change accordingly. Tightly coupled systems tend to be more rigid and more predictable than more loosely coupled system.

9. Time lagsTime lags between actions and effects are present in

organization and this is to limited extent, at least implicitly, acknowledged in contingency theory; Modelof continuous adaptive sequences of fit and misfit, suchas Donaldson’s SARFIT model (1987) and Burton &Obel’s diagnosis and design process model (2004) assume such time lags (if not so the organization wouldbe in continuous fit).

10.System States In Hage’s (1974) translation, it is the scores on

particular (state) variable or stocks, which represent conditions of stability, homeostasis, even in changingenvironments. However, whether the state variables ofa system is steady or not, depend on the relational system which governs them.

11.Differentiation As a organization survives and grows, open system

theory expects it to increase its division of labor. VonBertalanffy (1956) terms progressive mechanization ageneral principle of organization, and this principle underlies many contingency theory concepts, the mostfamous being Burns and Stalkers (1961) continuum from organic to mechanistic organization mode.

12.Equifinality According to this principle of open systems, also

formulated by Von Bertalanffy (1940) a system can reach the same final state (of equilibrium) from differing initial conditions and hence by a variety of paths(Katz and Khan 1966).

13.Path dependency While equifinality opens the possibility of choosing different paths towards future desired states of via-

bility, path dependency points at the constraints follow-ing from choosing one path at the expense of others.

14.Build and test sufficient contingency theory modelIntroducing Dubin’s (1978) model of theory building

for contingency, Fry & Smith (1987) asserts that a valid model must comprise not only necessary but alsosufficient elements to explain the phenomena of interest.

Fig. 2.1:An ontological framework of open system theory

Elements of Dubin’s model of Eelements of open system theory theory building

VARIABLE Necessary and sufficient Production Information Environment Viability State variables: system system

System attributes

characteristics Homeostasis system states: Growth Quantitative Equifinality Path

Decline growth dependency

RELATIONSHIPS Relationships attributes Relationships Casual

between Feed-backvariables: Inflows Repetitive Tight/loose Time lags

Outflows

Sample case. The Organization of AT&T, A Historical Contingency Approach

I. Introduction AT&T (American Telephone and Telegraph Company)

has been in the telephone business for more than 100 years. Obviously there have been major organizationchange during this period of time.

II. Early Days • The roots of AT&T stretch back to 1875 when

Alexander Graham Bell invented the telephone.

• From 1913 to the mid 1970s AT&T operated in a fairly stable environment under state and federalregulation.

• AT&Ts vertical integration and organization by function reflected this stable environment.

• There was no need for change, mechanistic domina-ted organic management.

• Figure 1 shows the pre-divestiture Bell System.

AT & T

Finance

Information

Legal

Public Relations

Long LinesDepartment

Bell OperatingCompanies

Western Electric

BellLaboratories

Sales Engineering Paint

Traffic Directory Commercial Accounting

Analysis :

• It would have been almost impossible to run a busi-ness as Bell System, with its numerous regulatory jurisdiction and hundreds of thousands of employees,had it not been highly decentralized (Temin 1987:58)

• However, headquarters made vast usage of the support staff to decouple the rest of the organization from the governmental interventions. It kept a legaldepartment, public relations and information servicesas buffers to maintain a smooth day to day operatingbusiness within the Baby Bells.

• On June 17, 1971, president of the Baby Bells met

with corporate headquarter in Detroit with only one agenda:organization.

• AT&T had finally become aware that over the pastdecades inertia had crept in, making the company unable to respond to changing demands.

• Three alternatives to reorganize the structure were proposed:

1. Keep the original structure 2. Customer/Network/Operator services alterna- tive rather than craft lines 3. Market segmentation

• None was chosen right away • 1974 saw to antitrust suites against AT&T, one filed

by its growing competitor MCI and the other one bythe U.S. Department of Justice (USDJ) both chargingmonopoly and conspiracy to telecommunicationsindustry.

• In 1980, AT&T was found quality in the MC/suit, having to pay $1.8 billion of damages. Two years later the USDJ and AT&T settled the antitrust suit.AT&T agreed to divest itself of its operating compa-nies which would become unregulated, competitivebusiness.

III. Aftermath of the Antitrust• The reorganization plan tools effect January 1, 1984.

• AT&T’s market share dropped from over 90 to about50% when the Telecommunication Act was signed byPresident Clinton in 1996.

• The new organization had 373,000 people and

$34 billion in assets (AT&T History 2001).

• The new structure reflected a trend more and more companies picked up in the 1980s: a matrix.

• Figure 2 shown the post-divestiture Bell System

AT & T

AT & TCommunication

AT & TTechnologies

BollLaboratories

NetworkSystems

TechnologySystems

International ConsumerProducts

InformationSystems

Marketing Sacks

Design &Development

Manufacturing

Distribution& Services

Analysis :

• The industry environment had now been officially thrown open to fierce long-distance competition.

• AT&T reinvented itself choosing a matrix structure with market segmentation overlapped by functions.

• In 1991 AT&T paid $7.4 billion to merge with NCR.

• The matrix structure couldn’t resist the aggressive growth of AT&T, new acquired companies with a different line of business couldn’t fit into the organi-zation and once again AT&T saw itself struggling withvarious circumstances only this time it took not even a decade until everyone realized that things were getting out of hand.

IV.Fight the Future• The future of AT&T began only in 1996 with the

Telecommunication Act signed by Pres. Clinton.

• AT&T sold operation that supposedly were not fitting the company’s goals anymore.

• Competition was fierce, but mostly driven by pricereduction. However, the real competition for AT&T wasn’t coming from inside the telephone industry but among emerging market which could satisfyconsumer needs for communication: wireless and broadband internet.

• With the rise of the Internet and wireless communi-cation, two technological forces that indicated yet another major change in the industry environment,AT&T started losing customers. Their product was still the same as a century before-offering communi-cation services.

• AT&T successfully launched On Internet service in 1996, AT&T WorldNet Services, and acquired TCIand Media One, two large cable providers, hence becoming the largest cable company in the UnitedStates. It also brought IBM Global Network, a leadingprovider of global data networking services.

• In October 2000 AT& T announced that would restructure once again into four publicly heldcompanies, Broadband, Wireless, Business, and Consumer.

• Figure 3 shows the organization structure of AT&T with the example of their wireless division organizedalong market.

Analysis :

• AT&T has made the transition from what was a matrixstructure in 1984 to clearly divisional from in 2001.

• AT&T has made the first step to decouple its organi-zation from the environment, minimize its depend-ence on critical resources. It has followed

AT & T

Fixed Wireless

Mobility International MobileMultimedia

AT & TBroadband

AT & TWireless

AT & TBusiness

AT & TConsumer

institutionalized pressure to conform to shiftingconsumer demands.

• There are sign that AT&T’s new divisional structureputs pressure onto competitor to adapt this form.AT&T covers the whole range of communication services-long distance, local phone service, wireless,and broadband internet-for all consumer, thereby itis able to sell solutions, not just single products,making use of economies of scale, for example, sharing knowledge, cutting costs on marketing, etc.this might be as well the first step to reintegratemarkets.

• AT&T is equipped to fight the future. What will

happen, we will see.