Contingency Theory and Entrepreneurship

Contingency theory proposes that an organization’s performance is determined by the fit between its resources, structure and strategies on one hand, and the external environmental conditions on the other hand (e.g., political, economic, social, technological).

A core concept in contingency theory is fit. Fitness is viewed as a match between the organization's characteristics and the characteristics of the environments around them.

At the heart of the theory is the assumption of equifinality, that is, that there are many different ways to achieve performance and that the right way depends upon the conditions in the environment of the firm in question (Lawrence and Lorsch, 1967). This also implies that a one-size-fits-all approach to strategy is doomed to fail.

For example, when a firm’s technological environment is characterized by rapid change or turbulence, then a firm may perform better with a more organic structure (flatter hierarchy, less formal control, etc…), whereas when a firm’s technological environment is stable, then a more mechanistic structure (top down, centralized, formal) may be better (Miller and Toulouse, 1986).

Entrepreneurship researchers have found support for contingency theory in new ventures too. For instance, Chowdhury (2011) finds that new ventures dealing with complex customer environments should avoid high levels of formalization as compared with those facing simpler customer environments. Similarly, Wiklund and Shepard (2005) demonstrated that CEOs with an entrepreneurial orientation lead firms to greater success in dynamic environments with low capital availability.

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Lawrence, P. R., and Lorsch, J. W. (1967). Differentiation and integration in complex organizations. Administrative science quarterly, 1-47.

Wiklund, J., and Shepherd, D. (2005). Entrepreneurial orientation and small business performance: a configurational approach. Journal of business venturing, 20(1), 71-91.

Miller, D., and Toulouse, J. M. (1986). Chief executive personality and corporate strategy and structure in small firms. Management science, 32(11), 1389-1409.

Chowdhury, Sanjib. "The moderating effects of customer driven complexity on the structure and growth relationship in young firms." Journal of Business Venturing 26, no. 3 (2011): 306-320.