Contingency Theory: Implications for the Form and Size of Viable Organizations

If our projection of environmental trends proves accurate, the viable organization of the future will need to establish and integrate the work of organization units that can cope with even more varied sub-environments. The differentiation of these units will be more extreme. Concurrently, the problems of integration will be more complex. Great ingenuity will be needed to evolve new kinds of integrative methods. The viable organizations will be the ones that master the science and art of organization design to achieve both high differentiation and high integration. The high-performing plastics organizations offer at least one model of the direction in which such organizations may evolve. To conceive new organizational forms and to develop the managerial behavior needed in these viable organizations, managements will rely increasingly on formally designated organizational develop- ment departments. These departments, staffed by trained specialists in the behavioral and administrative sciences, will be involved in planning new organizational forms for the effective utilization of human resources and in training managers to operate effectively in these settings. As John W. Gardner suggests:

What may be most in need of innovation is the corporation itself. Perhaps what every corporation (and every other organization) needs is a department of continuous renewal that could view the whole organization as a system in need of con- tinuing innovation.

As the demands for both differentiation and integration become more acute, top management will also find it necessary to devote more and more of its explicit attention to the achievement of these organizational states.

The organizations that achieve these states of differentiation and integration will grow rapidly in size. They will do this simply because they will be able to perform their various purposes more effectively than separate smaller organizations. The factors we believe will contribute to the growth of these organizations can usefully be analyzed with the economic concepts of “vertical and horizontal integration.”

Vertical integration involves acquiring organizational control and property rights over the sources of semifinished and raw materials, or over distribution channels to the ultimate consumer. It is concerned with a single flow of materials and services from raw states to consumable form within one corporate entity. Such consolidations have often been initiated for defensive reasons—to reduce uncertainties about access to raw material sources and to markets. For whatever reason they occur, they have had the indirect effect of removing certain transactions of goods and services from the open marketplace and placing them within the purview of a single organization. The marketplace is, of course, one type of integrating device, and consolidations that convert marketplace transactions into intraorganizational transactions will not be viable over time unless the intraorganizational integrating devices prove more effective than the marketplace. With more sophistication in the design and use of integrating devices, more such vertical consolidations will be warranted. The limits on what can be done efficiently within a single organization will be pushed back. Thus the viable organization of the future will be a growing organization.

A somewhat similar trend will mark growth by horizontal integration. This is the process by which companies diversify into new product lines, becoming, in the current phrase, “conglomerate.” Again, these expansions are often initiated for defensive reasons—spreading of risks, shifting from a declining to an expanding product line, etc. Such an expansion, however, is likely not to be viable over time unless the organization creates among these diverse product lines a flow of ideas and methods superior to their dissemination among separate organizations. Horizontal integration will not be warranted unless a synergistic effect is achieved. Again it comes back to the organization’s ability to create superior integrating methods—in this instance, for the exchange of help among product divisions. As the capacity for solving these organizational issues increases, horizontal expansion will be fostered. Again the limits of what can be done more efficiently within a single organization will be pushed back, and organizations with this capability will expand.

The lines of growth examined here are already historical realities. Increased organizational capability will simply carry these existing trends much further. The traditional lines dividing industries will be further eroded. The original national identity of corporations will be further obscured. Competition will more and more be directly among all of these multipurpose corporations, regardless of their industry or national origins.

Source: Lawrence Paul R., Lorsch Jay W. (1967), Organization and Environment: Managing Differentiation and Integration, Harvard Business School.

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