HISTORY OF CONTINGENCY THEORY

Reporter: Emiliana J. Lozano

 Overview of the theory
 Foundations of the Theory
 Ontological Framework for Analysis]
1. Through flow of energy
2. Outflow of energy
3. Repeated cycles of events
4. Negative entropy, viability and fitness
5. Production system
6. Feed-back or information possessing system
7. Environment
8. Tight loose coupling
9. Time lags
10. 10.System States
11. Differentiation
12. Equifinality
13. Path dependency
14. Build and test sufficient contingency theory model
• Sample case. The Organization of AT&T,
Historical Contingency Approach

I. Introduction
II. Early Days
III. Aftermath of the Antitrust
IV. Fight the Future
 HISTORY OF CONTINGENCY THEORY
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 one
variable, A, on another variable, B, is contingent upon
the third variable C. Thus, contingency theory is a
subset of this more general contingency approach in
science (Donaldson 2001).

.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 research
stream.

• Open system imports energy from the environment.

What is imported depends on the nature of the
system or subsystem. For organization, it might be
staff, money, technology, and information.

. Ontological Framework for Analysis

(Donaldson 1996; 2001, Scott 2003, Burton & Obel
2004, Brazil and Von de Ven 1985) revealed that fitness
concept is central to contingency theory.
Katz and Kahn (1996), Thompson (1967) and Hage
(1974) proposed the following elements as included in
open system approach, as they were introduced to
 organization theory.

Through flow of energy

This is the production or treatment process, where
nputs are transformed into outputs.

Outflow of energy
At the end of the conversion process, outputs from it
are often inputs to other organizations or individuals in
the environment, or input to other subsystem within the
system itself.

Repeated cycles of events

Production 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 dynamics
Negative entropy, viability and fitness
Negative entropy is synonymous with viability, and
hus maximizing viability means maximizing stored
nergy or, in business, monetary stocks. The trend
eported by Katz and Kahn thus becomes the goal of
he system, or the optimization criteria. Maximizing
tness in contingency theory should therefore equal
maximizing the stock of monetary resources overtime.

roduction system
The functionality of the productive system is to
maintain the open system. The system consumes energy
or money-in this maintenance, and the productive
ystem provide this by utilizing scarce resources from
he environment efficiently enough to create the needed
urplus.

eed-back or information possessing system

ystem is to keep the open system adoptive to changing
nvironments. The effect from environmental change on
productive system, if left unchanged, is a deterio-
ation of energy or monetary productive outcomes. By
rocessing information about the environment and the
roductive system and decide corrective action, the
formation processing system has the instrumental
alue of restoring an improving outcomes from the
roductive system in the face of competition and change.

nvironment
The system is dependent on environmental resources
sustain itself, and therefore has to adapt itself when
he environment changes.

ight loose coupling

An open system consist of different subsystem,
creasing in numbers as the system evolves towards
greater differentiation and complexity over time. These
different subsystems, such as strategy, structure,
culture and technology, are often thought of as being
ightly connected: if one changes, therefore, the other
must change accordingly. Tightly coupled systems tend
o be more rigid and more predictable than more loosely
coupled system.

Time lags
Time lags between actions and effects are present in
organization and this is to limited extent, at least
mplicitly, acknowledged in contingency theory; Model
of continuous adaptive sequences of fit and misfit, such
as Donaldson’s SARFIT model (1987) and Burton &
Obel’s diagnosis and design process model (2004)
assume such time lags (if not so the organization would
be in continuous fit).
tem States
n Hage’s (1974) translation, it is the scores on
cular (state) variable or stocks, which represent
itions of stability, homeostasis, even in changing
ronments. However, whether the state variables of
stem is steady or not, depend on the relational
em which governs them.

erentiation
s a organization survives and grows, open system
ry expects it to increase its division of labor. Von
alanffy (1956) terms progressive mechanization a
ral principle of organization, and this principle
rlies many contingency theory concepts, the most
ous being Burns and Stalkers (1961) continuum
organic to mechanistic organization mode.
Equifinality
According to this principle of open systems, also
ormulated by Von Bertalanffy (1940) a system can
each the same final state (of equilibrium) from
iffering initial conditions and hence by a variety of paths
Katz and Khan 1966).

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.

Build and test sufficient contingency theory model

Introducing Dubin’s (1978) model of theory building
or contingency, Fry & Smith (1987) asserts that a valid
model must comprise not only necessary but also
ufficient elements to explain the phenomena of
nterest.
. 2.1:An ontological framework of open system theory

ements of Dubin’s model of Eelements of open system theory

eory building

RIABLE
cessary and sufficient Production Information Environment Viability
ate variables: system system

System attributes

aracteristics Homeostasis
tem states: Growth Quantitative Equifinality Path
Decline growth dependency

LATIONSHIPS Relationships attributes

lationships Casual
between Feed-back
variables: Inflows Repetitive Tight/loose Time lags
Outflows
 Sample case. The Organization of AT&T, A
Historical Contingency Approach
Introduction
AT&T (American Telephone and Telegraph Company)
has been in the telephone business for more than 100
years. Obviously there have been major organization
change during this period of time.

. 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 federal
regulation.
• 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.

Finance Legal

AT & T

Public
Information
Relations

Long Lines Bell Operating Western Bell

Department Companies Electric Laboratories

Sales Engineering Paint

Traffic Directory Commercial Accounting

alysis :

• 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 legal
department, public relations and information services
as buffers to maintain a smooth day to day operating
business 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 past
decades 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 by
the U.S. Department of Justice (USDJ) both charging
monopoly and conspiracy to telecommunications
industry.
• 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, competitive
business.

I. Aftermath of the Antitrust

• The reorganization plan tools effect January 1, 1984.

• AT&T’s market share dropped from over 90 to about

50% when the Telecommunication Act was signed by
President 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 & T AT & T
Communication Technologies

Boll Network Technology International Consumer Information

Laboratories Systems Systems Products Systems

Marketing
Sacks

Design &
Development

Manufacturing

Distribution
& Services
alysis :

• 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 with
various circumstances only this time it took not even
a decade until everyone realized that things were
getting out of hand.
.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 price
reduction. However, the real competition for AT&T
wasn’t coming from inside the telephone industry
but among emerging market which could satisfy
consumer 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 TCI
and Media One, two large cable providers, hence
becoming the largest cable company in the United
States. It also brought IBM Global Network, a leading
provider of global data networking services.

• In October 2000 AT& T announced that would

restructure once again into four publicly held
companies, Broadband, Wireless, Business, and
Consumer.

• Figure 3 shows the organization structure of AT&T

with the example of their wireless division organized
along market.
 AT & T

AT & T AT & T AT & T AT & T

Broadband Wireless Business Consumer

Fixed Mobility International Mobile

Wireless Multimedia

alysis :

AT&T has made the transition from what was a matrix

structure 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
 institutionalized pressure to conform to shifting
consumer demands.

• There are sign that AT&T’s new divisional structure

puts 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 it
is 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 reintegrate
markets.

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

happen, we will see.