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LEX DONALDSON
Australian Graduate School of Management, University of New South Wales
ABSTRACT
Addressfor reprinfs: Lex Donaldson, Australian Graduate School of Management, University of New
South Wales, PO Box 1 , Kensington, NSW 2033, Australia.
2 LEX DONALDSON
-
used in empirical enquiries, is at odds with structural-functionalism.
Contingency Structure.
7r If
Contingency environment
illiberal
AL
Choice by
dominant w - Performance
coalition
Values of Structure
dominant
coalition
1 Performance 1J
Contingency Determinism
The idea of contingency determinism implies that change in structure in one
time period is the result of changes in strategy, the contingency variable, in
an earlier time period. Here this can be formalized to state:
(1) Increase in degree of diversification in the first period will lead to increases
in degree of decentralization of structure in the second period.
(2) Organizations which are in mismatch at the start of the period are more
likely to change their structure during that period than are those which
are in match at the start.
Further, this shift in structure does constitute adjustment, being towards fit.
Organizations which change only their structure in a decade are likely to move
from mismatch to match. More specifically:
Strategic Choice
Of organizations which move from mismatch to match in a decade, some adjust
only their structure, some only their contingency and some both jointly during
the decade. The hypothesis from the strategic choice model is that:
(4) Of the organizations which move from mismatch to match over a decade,
as many adjust only their contingency as adjust only their structure.
METHODS
1
business business businesses businesses
I
Functional
I C
i i i
Functional with ~
subsidiaries C i I
Product
divisional C C C
Holding
company i
Companies with sales deriving from one product are appropriately organized
functionally. Since up to 5 per cent of the sales in a single business may come
from a secondary product line, which may be unrelated to the core, this minor
degree of diversity suggests that a functional with subsidiaries structure also
would be appropriate for some companies classified as single business. The
larger proportionate size of secondary activities, up to 30 per cent of sales, in
a Dominant business makes either a functional with subsidiaries or product
divisional form appropriate. The larger size of the secondary activities in
the dominant as compared with the single category means that the chance
of their containing a line which is unrelated to the core is increased; hence
the appropriateness of a product divisional structure is increased. Again, a larger
size of secondary activities will tend to increase the number of subsidiaries
existing within a functional with subsidiaries structure. In this type of structure
STRATEGY AND STRUCTURAL ADJUSTMENT 9
Despite these anomalies and small-scale variations across the national studies,
there is a high degree of consistency in the findings cross-nationally and
temporally. The results are based on combining data from the five countries
for 14 main analyses. Disaggregating for each country and the two decades,
there are (14 x 5 x 2 = ) 140 analyses. The pattern revealed in the aggregate
holds within each country and decade in 137 of the disaggregated statistics
(table I). In each of the three exceptions, the result arises from only a single
organization and hence reflects small numbers. Thus the aggregate patterns
reflect relationships which hold generally across the five countries and the two
decades. Thus combining data is legitimate, and gives the advantage of larger
numbers for statistical analysis, which yield more robust findings.
For the contingency determinism proposition, the requirement for testing
is data on the same organization over two successive time periods, e.g. 1949-59
and 1959-69. This information is available only for the USA (Rumelt, 1974).
Accordingly, the number of organizations used in these analyses will be smaller
and restricted in national origin. Similarly, for investigating performance, data
is available only for the USA, so these analyses are likewise restricted.
In the analysis of fit and performance, performance is measured for a time
period after the period over which fit is measured. In this way the effect of
fit on performance is studied. The causal inference is clear in that fit occurs
bejiion performance, and performance is in the period immediately subsequent to
the fit period. In the performance analysis, an organization is categorized as
being in fit if it is in that state both in 1959 and 1969, and similarly for misfit.
This provides an estimate of chronic fit and misfit in order to maximize the
treatment effect of organization design so that any such effect may be revealed.
The period chosen for the measurement of performance was 1969-71.
Performance is indexed here by five measures of the rate of growth in financial
variables over the years 1969-71. The five variables were: growth in sales,
growth in profit, growth in the ratio of profit to sales, growth in the ratio of profit
to invested capital, and growth in earnings per share. In all cases the growth
measure was calculated by taking the incremental growth over the two years
and dividing by the initial level. For example, sales growth was calculated as:
RESULTS
Contingency Determinism
For the USA only, hypothesis 1 was tested by examining those companies
which diversified or not during the period 1949-59 and seeing whether, or not,
each of those organizations changed its structure towards greater decentralization
in the following 10 years (1959-69). Of the non-diversifying companies
(n = 132), the percentage which changed their structures was 34. The percentage
which diversified and changed structure was 25 ( n = 48). Thus the proportion
of structure changes was less among those which diversified than IS the
proportion of those which had not diversified. Thus hypothesis 1, based on
contingency determinism, was not supported. These results hold also when
controlling for the possibility of shorter time-lags and under variations in method
(Donaldson, 1984). Contingency determinism does not predict structural
change.
14 LEX DONALDSON
which were significantly different (at p<.OOO2, one tail). Hence mismatched
organizations are more likely to move back towards match.
In order to make SARFIT results so far presented more meaningful in
conventional strategy leads to structure terms, the findings may be expressed
from the perspective of diversification. Combining across the five countries
and both decades, there were 296 strategy changes during either ten year period
(with or without an accompanying shift in structure), of which 265 were
diversification, a proportion of 90 per cent. For corporations which moved from
mismatch to match in a decade by changing their structure (with or without
an accompanying change in strategy), there were 234 cases, of which 233, over
99 per cent, involved adoption of the divisional form. Companies change
strategy predominantly by diversifying, this produces disequilibria which is
resolved by a structural adjustment which overwhelmingly is by divisionaliza-
tion. Thus these results corroborate that strategy leads to structure, but point
up the crucial intermediary stage of mismatch.
Strategic Choice
What of the idea that there are two routes back towards fit and that organiza-
tions may adjust contingency to structure as well as structure to contingency
(hypothesis 4)? Of those moving from mismatch to match, during either decade,
202 changed their structure only and 13 changed their strategy only (there were
61 organizations which changed both). Thus the ratio of structure-only adjusters
to contingency-only adjusters was 15 to 1 . The proportions of structure-only
adjusters and contingency-only adjusters are 73 per cent and 4.7 per cent,
respectively, which are significantly different from each other (at p<.OOO2, one
tail). The 61 cases where both strategy and structure were changed during the
same decade to regain fit, indicate some latitude for choice, in that by altering
the contingency a structure may have become fitting which would not othewise
have done so. Yet, equally, the move to fit in these cases did require a change
in structure, so in a more general way does involve structural adjustment. These
61 firms constitute perhaps an intermediary position between purely structural
and purely contingency routes to match. They cannot be used to support the
thesis that re-engineering the contingencies allows structural change to be
avoided. Thus contingency adjustment, in the absence of structural adjustment,
was not a frequently occurring mode of attaining fit. Hypothesis 4 was not
supported.
There is evidence here of a process whereby organizations diversify and thus
move out of fit, then adjust their structure and attain a new match.
Table 11. Results of multiple regressions of performance on fit controlling for effects of
strategy, industry and diversifying (n = 93)
Notes: For each performance indicator, results are from regressicns in which strategy (diversification
in both 1959 and 1969) and industry (science based versus non-science based) controlled
by inclusion. Diversifying has been controlled by excluding any corporations which diveisified
between 1959 and 1969.
significant at (p<.1) as was growth in profit on invested capital (at fi.06). Thus
there is evidence of an association between fit and the ability to generate profit
from sales and capital subsequently. Hypothesis 5 was confirmed. Fit causes
higher performance and misfit causes lower performance. This supports those
who have argued that fit affects performance (Chandler, 1962; Child, 1972;
Donaldson, 1982a; Galbraith and Nathanson, 1978; Schreyogg, 1980).
Environmental Illiberality
Theorists have suggested that environment adversity may hasten structural
adjustment, wheras exogenously created slack may allow mismatch to continue
unchecked (Chandler, 1962; Child, 1972; Williamson, 1970) (hypothesis 6).
There is support for this here. Among those organizations which are diversified,
begin the decade in misfit and do not diversify further in the decade, a com-
parison was made between those that retain an inappropriate functional
structure with those which adjust their structure by divisionalizing. By
examining financial performance at the start of the decade, in 1959, some
assessment may be made of whether these firms were operating in muni-
ficient or in competitive environments. In this way the proposition may be tested
that necessary structural adjustment is more likely to occur in competitive than
in munificent environments. This was done by regressing whether or not the
corporation divisionalized between 1959 and 1969 on financial performance
18 LEX DONALDSON
in 1959. Five financial indicators were measured (sales, profit, profit on sales,
profit on invested capital and earnings per share). The analysis was restricted
to corporations which did not diversify further during the decade (TI = 26).
The results of the five multiple regressions are given in table 111. The negative
associations for sales, profit and earnings per share in 1959 with divisionalizing
were (at p<0.06 or less) significant and conformed to theoretical expectations.
Profit on sales and profit on invested capital in 1959 were positively associated
with divisionalizing, but the associations were not statistically significant. The
correlation between low earnings per share and divisionalizing ( T = -0.54) is
particularly striking. These results suggest that it is the cumulative effect of
low sales and profit performance flowing through to low earnings which is
decisive for delivering the shock to the managerial system. They imply that
it is shareholder dislike of low earnings which may be the key process in
activating the superordinate formal authority of the board of directors to
intervene in the executive management. This helps to explain why the lags
and structural adjustment to strategy can be so long. Thus hypothesis 6 receives
support.
Both structural mismatch and environmental illiberality cause low perfor-
mance and thus jointly trigger structural adjustment. Thus the SARFIT model
is supported that posits diversification+ misfit+ lower performance+ structural
adjustment- fit+ higher performance.
DISCUSSION
Notes: aCorporations which diversified between 1959 and 1969 have been excluded.
Divisionalizing is defined as moving from a functional to a multidivisional structure
between 1959 and 1969.
STRATEGY AND STRUCTURAL ADJUSTMENT 19
here for the idea that structural change is an automatic response to a change
in the contingency variable. Contingency fit offers an explanation of these
organizational changes. Changes in the contingency variable lead to changes
in structure, but the actual process of occurrence is via the cycle specified by
the SARFIT model that changes in contingency produce mismatch and lower
performance which lead eventually to structural adjustment. Thus the present
enquiry vindicates those who have distinguished the long-run contingency fit
from the shorter-run contingency determinism models (Child, 1972; Donaldson,
1982a; Schreyogg, 1980). And it attests to the former as a more accurate
depiction of the actual causal processes. The elongated causal chain of misfit'
poor performance+ adjustment+ fit articulated by Child (1972) in the strategic
choice thesis is to a large degree corroborated. However, the path of adjustment
is less open than stated there.
The adjustment is overwhelmingly of structure to contingency, rather than
of contingency to structure. Few organizations adjust contingencies to structure.
Thus, as a generalization, the statement that organizations adjust structure
to contingencies is true sufficiently often for this to be a useful summary of
the main thrust. Contingencies were shown to be relatively fixed here, so that
once a company had diversified it needed to adjust its structure.
Thus the present enquiry rejects both contingency determinism and strategic
choice, and supports the structural adjustment to regain fit (SARFIT) model. The
prime mover is an initial change in the contingency variable which disequilibriates
the organization moving it out of fit into mismatch, and then the structure is
adjusted to attain a new fit (figure 5 ) . Structural change is a response to misfit
which in turn is driven by contingency change. However, not every change in the
contingency is predicated to produce organizational change. The key is shifts
which create lack of fit. Contingency change causes departures from equilibrium,
and this provides the pressure for structural accommodation. Thus equilibrium
analysis is vindicated in the study of organizational structure. A continuing role
for choice over matters of organization design may be present in that the dominant
coalition may still exercise a degree of selectivity in courses of action, most notably
in affecting the rate at which structural adjustment is made. A summary overview
of the differences between the three formulations of contingency theory (con-
tingency determinism, SARFIT and strategy choice) is provided in table IV.
By demonstrating that shifts in contingency lead to structural changes, the
model is broadly congruent with arguments which emphasize the inexorable
pressures of the situation (Lawrence and Lorsch, 1967; Schreyogg, 1982;
Woodward, 1965). The emphasis on contingencies as imperatives towards
structural accommodation is revealed as sound if understood as referring to long-
run tendencies in organizations. The model proposed here offers a coherent inter-
pretation of the traditional juxtaposition of arguments by contingency researchers
(Lawrence and Lorsch, 1967; Woodward, 1965) that managers need consciously
to attend to mismatches and adjust structure to contingency, and that structural
change is a response to a change in contingency (Schreyogg, 1980, 1982).
20 LEX DONALDSON
. ....
Diversifying Diversification Divisionalization
.
\
+
.'
\
Aspect Theory
Note: a Dominant coalition is the group with power over the organization (see Child, 1972).
The position taken here is also broadly in accord with Aidrich (1979) and Hage
(1980) who both argue that the situation constrains the discretion of senior organua-
tional management, and that consequently there is less freedom to choose struc-
ture than Child (1972) implies.
STRATEGY AND STRUCTURAL ADJUSTMENT 21
CONCLUSIONS
REFERENCES