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Contingency theory is a class of behavioral theory that claims that there is no best way to organize a corporation, to lead a company, or to make decisions. Instead, the optimal course of action for organizational effectiveness is contingent (dependent) upon the internal and external situation. Several contingency approaches were developed concurrently in the late 1960s.
They suggested that previous theories such as Weber's bureaucracy and Taylor's scientific management had failed because they neglected that management style and organizational structure were influenced by various aspects of the environment: the contingency factors. There could not be "one best way" for leadership or organization.
Historically, contingency theory has sought to formulate broad generalizations about the formal structures that are typically associated with or best fit the use of different technologies. The perspective originated with the work of Joan Woodward (1958), who argued that technologies directly determine differences in such organizational attributes as span of control, centralization of authority, and the formalization of rules and procedures.
Gareth Morgan in his book Images of Organization describes the main ideas underlying contingency in a nutshell:
- Organizations are open systems that need careful management to satisfy and balance internal needs and to adapt to environmental circumstances
- There is no one best way of organizing. The appropriate form depends on the kind of task or environment one is dealing with.
- Management must be concerned, above all else, with achieving alignments and good fits
- Different types or species of organizations are needed in different types of environments
Fred Fiedler's contingency model focused on a contingency model of leadership effectiveness. This model contains the relationship between leadership style and the favorableness of the situation. Situational favorableness was described by Fiedler in terms of three empirically derived dimensions
1. The leader-member relationship, which in the most important variable in determining the situation's favorableness
2. The degree of task structure, which is the second most important input into the favorableness of the situation
3. The leader's position power obtained through formal authority, which is the third most important dimension of the situation
Situations are favorable to the leader if all three of these dimensions are high. That is, if the leader is generally accepted and respected by followers(first dimension), if the task is very structured (second dimension), and if a great deal of authority and power are formally attributed to the leader's position (third dimension), then the situation is favorable.
William Richard Scott describes contingency theory in the following manner: "The best way to organize depends on the nature of the environment to which the organization must relate"  . The work of other researchers including Paul Lawrence, Jay Lorsch, and James D. Thompson complements this statement. They are more interested in the impact of contingency factors on organizational structure. Their structural contingency theory was the dominant paradigm of organizational structural theories for most of the 1970s. A major empirical test was furnished by Johannes M Pennings who examined the interaction between environmental uncertainty, organization structure and various aspects of performance.
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