08 - History Of Contingency Theory

HISTORY OF CONTINGENCY THEORY Reporter: Emiliana J. Lozano

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Overview of the theory Foundations of the Theory Ontological Framework for Analysis] 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Through flow of energy Outflow of energy Repeated cycles of events Negative entropy, viability and fitness Production system Feed-back or information possessing system Environment Tight loose coupling Time lags 10.System States Differentiation Equifinality Path dependency Build and test sufficient contingency theory model

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Sample case. The Organization of AT&T, Historical Contingency Approach I. II. III. IV.

Introduction Early Days Aftermath of the Antitrust 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 :1116). 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 deterioation 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 viability, path dependency points at the constraints following 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 eory building

Eelements of open system theory

RIABLE

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

aracteristics tem states:

System attributes Homeostasis Growth Quantitative Equifinality Path Decline growth dependency

LATIONSHIPS

lationships between variables:

Relationships attributes Casual Feed-back Inflows Repetitive Outflows

Tight/loose

Time lags

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 dominated organic management. • Figure 1 shows the pre-divestiture Bell System. Finance

Legal AT & T Public Relations

Information

Long Lines Department

Sales

Traffic

Bell Operating Companies

Engineering

Directory

Western Electric

Bell Laboratories

Paint

Commercial

Accounting

alysis :

• It would have been almost impossible to run a business 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 alternative 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 companies 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 Communication

Boll Laboratories

Marketing Sacks Design & Development Manufacturing

Distribution & Services

Network Systems

Technology Systems

AT & T Technologies

International

Consumer Products

Information Systems

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 organization 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 communication, 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 communication 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 Broadband

Fixed Wireless

AT & T Wireless

Mobility

AT & T Business

International

AT & T Consumer

Mobile 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 organization from the environment, minimize its dependence 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.