A contingency theory is an organizational theory that claims that there is no best way to organize a corporation, to lead a company, or to make decisions. Instead, the optimal course of action is contingent (dependent) upon the internal and external situation. A contingent leader effectively applies their own style of leadership to the right situation.
The contingency approach to leadership was influenced by two earlier research programs endeavoring to pinpoint effective leadership behavior. During the 1950s, researchers at Ohio State University administered extensive questionnaires measuring a range of possible leader behaviors in various organizational contexts. Although multiple sets of leadership behaviors were originally identified based on these questionnaires, two types of behaviors proved to be especially typical of effective leaders: (1) consideration leader behaviors that include building good rapport and interpersonal relationships and showing support and concern for subordinates and (2) initiating structure leader behaviors that provided structure (e.g., role assignment, planning, scheduling) to ensure task completion and goal attainment.
About the same time, investigators from the University of Michigan's Survey Research Center conducted interviews and distributed questionnaires in organizations and collected measures of group productivity to assess effective leadership behaviors. The leadership behavior categories that emerged from the University of Chicago were similar to the consideration and initiating structure behaviors identified by the Ohio State studies. The University of Michigan investigators, however, termed these leadership behaviors relation-oriented behavior and task-oriented behavior. This line of research was later extended by Robert Blake and Jane Mouton in 1964 to suggest that effective leaders score high on both these behaviors.
They suggested that previous theories such as Weber's bureaucracy and Taylor's scientific management had failed because they neglected that management style and organizational structure were influenced by various aspects of the environment: the contingency factors. There could not be "one best way" for leadership or organization.
Historically, contingency theory has sought to formulate broad generalizations about the formal structures that are typically associated with or best fit the use of different technologies. The perspective originated with the work of Joan Woodward (1958), who argued that technologies directly determine differences in such organizational attributes as span of control, centralization of authority, and the formalization of rules and procedures. Some important categories of business that can benefit from contingency theory include:
Fred Fiedler's contingency model focused on a contingency model of leadership in organizations. This model contains the relationship between leadership style and the favorable-ness of the situation. Situational favorable-ness was described by Fiedler in terms of three empirically derived dimensions:
Situations are favorable to the leader if all three of these dimensions are high.
William Richard Scott describes contingency theory in the following manner: "The best way to organize depends on the nature of the environment to which the organization must relate". The work of other researchers including Paul Lawrence, Jay Lorsch, and James D. Thompson complements this statement. They are more interested in the impact of contingency factors on organizational structure. Their structural contingency theory was the dominant paradigm of organizational structural theories for most of the 1970s. A major empirical test was furnished by Johannes M Pennings who examined the interaction between environmental uncertainty, organization structure and various aspects of performance. Pennings carried out an empirical study on a sample of retail brokerage offices in which aspects of their market environment such as competitiveness, change and munificence, versus organizational arrangements such as decision making templates, power distribution were juxtaposed for possible implications for performance. While structural attributes of offices strongly impacted performance, the evidence for "contingency" was less pronounced.
It can be concluded that there is 'no one best way' or approach in management or doing things, different situation calls for different approach to handle, manage, and solve the arising issue concerned. Management and organization is an 'Open system', which embrace anomalies or challenges every now and then, which requires 'adaptable' and 'situational' solution in order to overcome or solve the problem or issue concerned. Other situational or contingency factors are 'changes in customer demand for goods and services, change in government policy or law, change in environment or climate change, and so forth.