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Organisation is an entity in which people work together to accomplish a set of goals. Organisations have certain pattern of activities, that is, structures. There is no best way to structure an organisation, since the structure is always adapted to best serve the functions of the organisation. The optimal organisational structure is contingent upon both internal (such as strategy, size, and technology) and external situations (such as external environment) – this is referred to as ‘Contingency Theory’. Based on the academic articles as well as the empirical evidence provided, four contingency factors are covered to justify my position, including strategy, technology and innovation, environmental uncertainty, and size.
Firstly, strategy is an important contingency of organisational structure. One of the most important features of an organisation is the goal. Organisations utilise different strategies to accomplish their goals, and a variety of organisation structures are adopted to best serve the strategies since an appropriate structure is critical to the effective strategy implementation. In the early 1960s, Chandler developed the contingency model which research on the strategy-structure relationship within companies (Qiu & Donaldson 2010), he suggested that the optimal organisational structure is contingent on various factors, including the strategies (Pertusa-Ortega, Molina-Azorın & Claver-Cortes 2010). In the 1970s, the structural contingency model was extended to multinational corporations (MNCs) (Qiu & Donaldson 2010).
Based on the research since then, Qiu and Donaldson (2010) constructed the Cubic Contingency Model which incorporates the previous models to propose the structure-strategy fits for nine MNC structures. The nine structures fit for different levels of contingent strategies which mean that the design of the structure of an organisation is highly contingent on the organisation’s strategies. Since the organisation’s strategies are never stagnant and are always adapt to accomplish its goal, there can never be a best structure for an organisation.
Pertusa-Ortega, Molina-Azorın and Claver-Cortes (2010) approached the relationship between strategy and structure from a different angle – resource-based view (RBV). They argued that organisational structures should be considered as a resource for the development of strategies and a source of competitive advantage. Although this approach differs from Chandler’s, it reinforces the strong connection between strategy and structure — that organisational structure influences the competitive strategies. As competitive strategy is constantly adapted to the latest goals of the organisation, the structure needs to be varied accordingly, thus there is not a best structure.
Technologies and innovations are important to the organisational process of converting inputs into outputs, thus it is also an important contingency of the organisational structure. Firms adapt their structures to the technology or innovation activity they utilise. Leiponen and Helfat (2011) conducted studies to examine the relationship between the innovation activity and the organisational structure of a company, namely, R&D. They examined the two conflicting perspectives on the best structure (centralisation or decentralisation) under which R&D was able to achieve greater innovation output.
According to knowledge-based view, decentralisation is more effective for updating existing technology as well as acquiring new sources of knowledge. On the other hand, organisational economics argues that centralisation reduces the cost of communication and coordination, thus improves the innovation output. Leiponen and Helfat (2011) incorporated both literatures and concluded that decentralisation served imitative innovation better, whereas centralisation led to greater new-to-market innovation output. Leiponen and Helfat’s research effectively proves that the organisational structures are contingent on technology and innovation; since organisations’ technology and innovation activities differ by their degree of standardisation, there is no best way to structure an organisation.
Another contingent factor of organisational structures is the environment. “Contingency theory holds that individual organisations need to adapt to their internal and external environments in order to survive and thrive” (Qiu and Donaldson 2010, p. 81). Managerial discretion is highly dependent on the organisation’s environment and its level of uncertainty (Ferner et al. 2011). The uncertainty of environment requires high level of flexibility within an organisation. Ferner et al. (2011) examined the relationship between span of control and the organisation’s external and internal environment. Based on the empirical data collected, they made several observations. One of the observation stated that variables such as nationality (external environment) and product standardisation (internal environment) affect the degree of central control in multinational companies.
US ownership features with relative centralised control of HR in subsidiaries and standardisation of product tend to cause less subsidiary discretion. These studies reflect the close relationship between external and internal environment and the organisational structure. Furthermore, a research conducted by Nandakumar, Ghobadian and O’Regan (2010) indicated the relationships between the environmental dynamism and the business strategy as well as the organisational structure. They observed that highly dynamic environment favoured the cost-leadership strategy with organic structure whereas lower dynamism favoured the differentiation strategy with mechanistic structure. Thus the structure of an organisation is always adapted to the environment, and there is no best structure.
Moreover, the size is another contingency variable influencing the design of organisational structure. Organisations with smaller size tend to be more organic and flexible whereas those with large size have more bureaucracy involved (Bradshaw 2009); larger organisations usually have mechanistic structure with more specialisation, centralisation and departmentalisation. Bradshaw (2009) examined several contingency factors of non-profit organisational structure, including age, size, strategy, environmental stability and so on.
Based on the empirical data collected, the size along with organisational age is identified as factors to determine the organisation lifecycle (from founding to mature). Generally, the greater age means greater formalisation and the larger size means a more elaborate organisation structure. Thus, it can be concluded that the organisational structure is also contingent on the organisational size. As size varies according to the companies’ type and strategy, there is no best way to structure an organisation.
In conclusion, there is no best way to structure an organisation. The optimal organisational structure is contingent upon various factors including strategy, innovation, environment and size. Due to the variance among organisations in terms of these contingency factors, the structures of different organisations vary. Furthermore, the dynamic nature of the internal and external environment of organisations means that the structure of any organisation is always adapted to best serve its goals.
Bradshaw, P. 2009, ‘A Contingency Approach to Nonprofit Governance’, Nonprofit Management & Leadership, vol. 20, no. 1, pp. 61-81, viewed 18 March 2012, [EBSCO host / Business Source Premier].
Ferner, A., Tregaskis, O., Edwards, P., Edwards, T., Marginson, P., Adam, D., & Meyer, M. 2011, ‘HRM structures and subsidiary discretion in foreign multinationals in the UK’, International Journal of Human Resource Management, vol. 22, no. 3, pp. 483-509.
Leiponen, A., Helfat, C.E. 2011, ‘Location, decentralization, and knowledge sources for innovation’, Organization Science, vol. 22, no. 3, pp. 641-658.
Nandakumar, M.K., Ghobadian, A., O’Regan, N. 2010, ‘Business-level strategy and performance: The moderating effects of environment and structure’, Management Decision, vol. 48, no. 6, pp. 907- 939, viewed 18 March 2012, [ProQuest Central / Business Source Premier].
Pertusa-Ortega, E.M., Molina-Azorin, J.F.; Claver-Cortes, E. 2010, ‘Competitive strategy, structure and firm performance. A comparison of the resource-based view and the contingency approach’, Management Decision, vol. 48, no. 8, pp. 1282-1303.
Qiu, J. & Donaldson, L. 2010, ‘The Cubic Contingency Model: Towards a more comprehensive international strategy-structure model’, Journal of General Management, vol. 36, no. 1, pp. 81-100.