Posted by: Monideepa Tarafdar | October 21, 2009

“It Depends”

One of the most widely referenced “meta-level” theories in management is Contingency Theory which broadly suggests that there is no one “best” way for a company to structure, design processes or strategize. “It all depends”.

On what? Many things of course. But one, for instance, on the environment. What products firms sell will depend on what opportunities and constraints the environment has. Customers, competitors’ actions, government regulations, and social, technological, economic and political factors confluence to determine to a large extent what products and services a firm will find profitable to offer. Of course, the extent to which the environment will determine the “way” depends on how “unalterable” the environmental forces are. For mature industries such as general retail, the environment is fairly deterministic; thus the product mix is likely to be largely stable or similar over time. Whereas for industries where technology changes fast, such as consumer entertainment, the firm actually has a chance to shape the environment by taking the lead in developing new standards. Example – Google with its Android phone is seeking to create a new smart phone market based on a more open platform than the iPod or Blackberry. Two, on what the company has capabilities to do. Firms build abilities and assets to accomplish various activities and processes, related to the products they make/sell. New assets and capabilities take time to build, making it difficult for a company to quickly change its product-market choices. Agile firms can reconfigure faster. The Chapter 11 mechanism provides a good illustration. We have seen Northwest Airlines and General Motors in the recent past for instance, going into bankruptcy, staying there for several months or a few years, and then emerging with reconfigured processes, financials and new or changed products. The time  these companies spent in Chapter 11 was used to shed old capabilities and start developing new ones. And three, on the firm’s orientation. Firms may choose to be adventurous and “prospect” in bringing out new products in their industry (e.g. Apple) or fiercely “defend” their existing territory (e.g. Wal mart) (Miles and Snow 1978).

We find illustrations of the contingency view in a number of contexts. One, in how firms design their structure. We know that the structure of General Motors allowed for a great deal of autonomy to the divisional heads, because each brand (made by a division) was like a separate product and catered to a distinct population segment (Sloan Jr. 1990), whereas Toyota does not have the same degree of divisional autonomy, possibly because its products are not distinct as individual brands – they are all “Toyota” cars. Another context is that of information processing. How much information companies process is determined in part by what they do. Firms which offer more information or knowledge intensive products or time sensitive products or precision products need to process more information. Which is why firms in all industries do not invest in information technology to the same extent. Firms in banks and financial services (i.e. information and knowledge products) and airlines (i.e. time sensitive products) invest much more than those in manufacturing. A third context is that of leadership. Whether or not a particular leadership style is effective will depend in part on the task at hand and on the characteristics of the group that is performing it. Assembly line type environments (manufacturing and software coding) have structured and measurable workflows and hence a “task-oriented” leadership that defines requirements clearly and precisely, is strict, and does not make too many changes, is effective. R&D or sales type environments where individual skills are more important and tasks are not as structured require “relationship-oriented” leaders who are more willing to tolerate ambiguity and are willing to make allowances for individual preferences.

These and other contexts show that “It Depends” is an approach that companies often use, to design their strategies and structures.

References:

Miles, R. E., and Snow, C.C., Organization Strategy, Structures and Processes, McGraw-Hill, 1978

Sloan Jr. A. P., My Years with General Motors, Broadway Business, 1990


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