Contingency Theory: Why There Is No "Best" Way to Manage

If you ask a Contingency Theorist how to run a company, they will give you the most annoying answer in business: "It depends."

Contingency Theory proposes that an organization's success is not determined by following a specific script, but by how well its internal resources, structure, and strategies align with the external environment. This includes political, economic, social, and technological conditions.

The Concept of "Strategic Fit"

Central to this theory is the concept of Fit. This refers to the degree to which the organization's characteristics match the turbulence of the environment.

A good fit leads to profit; a poor fit leads to failure. This implies a crucial lesson for founders: There is no one-size-fits-all strategy for organizational design. What works for Google will destroy a local utility company, and vice versa.

Equifinality: Organic vs. Mechanistic

At the heart of the theory is the assumption of Equifinality: the idea that there are many different ways to achieve performance, provided they match the environment (Lawrence and Lorsch, 1967).

[Image of mechanistic vs organic organizational structure]

Depending on the stability of the market, firms generally fall into two structural categories:

Mechanistic Structure: Best for stable environments. Features a rigid, hierarchical structure, top-down control, and high formalization. (e.g., McDonald's or a Utility Company).
Organic Structure: Best for dynamic/turbulent environments. Features a flatter hierarchy, decentralized decision-making, and high flexibility. (e.g., A Pre-Seed Tech Startup).

Application to Entrepreneurship

Entrepreneurship researchers have found strong support for Contingency Theory in new ventures.

For instance, Chowdhury (2011) found that new ventures dealing with complex, fast-changing customer environments should avoid high levels of formalization (rules/red tape). In these environments, rigid rules suffocate the speed needed to adapt.

Similarly, Covin and Slevin (1989) argue that an aggressive "Entrepreneurial Orientation" (high risk-taking and proactiveness) is most effective in hostile environments. However, in benign or stable markets, that same aggression is often a waste of resources. In a stable market, efficiency wins; in a hostile market, innovation wins.