Contingency Theory and Entrepreneurship
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).
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.
1. Contingency Theory and Effectuation Theory
Contingency Theory and Sarasvathy’s Effectuation Theory are fundamentally aligned on the rejection of "one best way." Effectuation can be viewed as the specific strategic contingency for high-uncertainty environments. Where traditional management (Causation) relies on prediction—a "mechanistic" approach suitable for stable markets—Effectuation provides the "organic" decision-making logic required when the future is unpredictable. Thus, Effectuation is not a universal law, but the optimal response to the specific environmental contingency of Knightian uncertainty.
2. Contingency Theory and Upper Echelons Theory
While Contingency Theory emphasizes the external environment, Upper Echelons Theory highlights the internal "human" contingency. The "strategic fit" demanded by Contingency Theory is not calculated by an algorithm but interpreted by the leadership team. Upper Echelons theory argues that this interpretation is filtered through the leaders' personal biases and backgrounds. Therefore, the organization’s ability to adapt to its environment is contingent upon the cognitive limitations and specific characteristics of its C-Suite.
3. Contingency Theory and X-Efficiency Theory
Leibenstein’s X-Efficiency Theory describes the waste that occurs when firms drift from their optimal potential. Contingency Theory diagnoses the cause of this drift: a misalignment between structure and environment. An "X-inefficient" firm is often a "mechanistic" organization trying to operate in a dynamic market (or vice versa). The inertia and bloat identified by Leibenstein are essentially symptoms of a firm failing to adapt its internal structure to the changing contingencies of the external market.
4. Contingency Theory and Competence Destruction Theory
The relationship between Contingency Theory and Competence Destruction Theory is one of survival. Competence Destruction describes a radical shift in the technological environment—a massive contingency that renders old structures obsolete. Incumbents often fail not because they are "bad" firms, but because their previously successful "mechanistic" structures cannot pivot fast enough to match the new reality. The startup advantage lies in its "organic" structure, which provides the flexibility to fit this new, destructive environmental context.
5. Contingency Theory and Cultural Theory
Cultural Theory posits that entrepreneurship is determined by societal values. Contingency Theory absorbs culture as a critical environmental variable. A management style that "fits" in a highly individualistic culture (like the US) may be a disastrous misalignment in a collectivist culture (like Japan). Therefore, the "correct" entrepreneurial strategy is contingent not just on market economics, but on the cultural "software of the mind" of the region where the firm operates.