Joumal of Management Studies 24:1 January 1987

0022-2380 J3.50

STRATEGY AND STRUCTURAL ADJUSTMENT

TO REGAIN FIT AND PERFORMANCE:
IN DEFENCE OF CONTINGENCY THEORY

LEX DONALDSON
Australian Graduate School oJ Management, University of New South Wales

ABSTRACT

Comparative, contingency approaches to organization structure have been

criticized as being inherently static. The present article argues that functionalist
theories and quantitative methods can explain structural change. This is exempli-
fied by a diachronic enquiry into strategy and structure. Several propositions
about organizational dynamics relating diversification, reorganization and
performance are supported. However, the notion of contingency adjustment to
structure to attain match as a frequent alternative to structural adjustment to
contingencies is not bome out. Neither of the two prevailing theories of structural
change, 'contingency determinism' nor 'strategic choice', is completely adequate
and a third formulation is advanced: that of'structural adjustment to regain fit'.
While structural-functional enquiry into organizations using comparative
quantitative methods has yielded information about structural statics, the contri-
bution to knowledge of dynamics seems more problematic. This article seeks to
record that structural-functionalism does inform the analysis of organizational
change and to show that quantitative contingency approaches can illuminate
change if the theory used in the analysis is formalized properly. This involves the
partial abandonment of both of the main prevailing theories of structural change:
contingency determinism and strategic choice. In their place this article offers
as a potentially more fruitful model the structural adaptation to regain fit formula-
tion. Within this the role of performance is shown to be important. The advantage
of this framework is demonstrated empirically by means of an examination of the
relationship between strategy and structure.

THEORIES OF CHANGE IN ORGANIZATIONAL STRUCTURE

There has been a criticism of structural-functionalism within sociology as being

inherently static and thus misleading as to societal and organizational change

Addrtss for reprints: Lex Donaldson, Aunralian Graduate School of Management, UniveraityofNew
South Wales, PO Box I, Kensington, NSW 2033, Australia.
 LEX DONALDSON

(Rex, 1961). However, theories of the structural-functional type posit a state

of equilibrium that is disturbed by an exogenous force which leads to dis-
equilibria, consequent ineffectiveness and restitution through the adoption of
a different structure. Such models are of developmental sequences. An example
of this at the societal level is the evolutionary theory of Parsons (1966).
Similarly, contingency theories of organization structure (such as Blau, 1972;
Burns and Stalker, 1961; Chandler, 1962; Lawrence and Lorsch, 1967;
Woodward, 1965) have come under considerable attack in recent years. The
idea that the contingencies, either intra-organizational context (e.g. size
or technology) or the environment(e.,g. rate of technologicsil change), of the
organization give rise to a set of pressures to which the structure must in the
long run adapt, has been challenged {Schreyogg, 1980; Silverman, 1970;
for a more extended discussion of the attack on organization theory and rebuttal,
see Donaldson 1985a). Moreover, longitudinal studies in the comparative,
quantitative literature in which changes in structural and contingency variables
are examined, tend to conclude that there is lack of a ready connection
between certain contingencies and structure (Dewar and Hage, 1978; Dyas
and Thanheiser. 1976; Inkson et al., 1970; Meyer, 1979; Suzuki, 1980),
However, in several of these the approach has been to look for a change in
the structural variable in terms of a previous change in the contingency variable.
For example, a change in the bureaucratic structure is predicted from a change
in size (Dewar and Hage, 1978; Dyas and Thanheiser, 1976; for further details
see Donaldson, 1979a). This draws on a model that contingency leads to
structure, i.e. contingency determinism. Child (1972) criticizes such contingency
determinism as the simplest type of theoretical construction to be derived from
the associations of contingencies and structure. Contingency determinism posits
that a change in the contingency variable produces a change in the structural
variable directly and fairly immediately (figure 1). However, this theory, though
used in empirical enquiries, is at odds with structural-functionalism.

Contingency • Structure .

1. Contingency dctcrminiBm

In contradistinction to contingency determinism, the model postulated by

structural-functionalism is of a more elongated set of processes which take longer
to occur: a shift in the contingency variables leads to disequilibrium, this
produces a decline in effectiveness that creates pressure for change, which causes
structural adaption producing a new structure and restoring effectiveness (Child,
1972). Thus the theoretical inference from structural-functionalism is not
contingency determinism but structural adjustment to regain fit (SARFIT).
Both models contain the notion that the ultimate cause of structural change
is a change in the contingency variable. Hence both see structural reorganization
 l
STRATEGY AND STRUCTURAL ADJUSTMENT 3
as contingency driven. However, under SARFIT the need for structural change
arises from the substandard performance which comes from the mismatch of
structure and contingency {i.e. the misfit between the new value of the contin-
gency variable and the old structure) rather than just from the change in the
value of the contingency variable. SARFIT is a refinement of the contingency
idea which provides a more accurate model of the structural-functional logic
with which to guide the examination of comparative, quantitative, longitudinal
data. Where a SARFIT type of model is validated, this provides evidence for
structural-functional theories which stress the importance of contingencies for
structure By contrast, failure to confirm a contingency determinist formulation
is not a disconfirmation of either contingency theories or structural-
functionalism.
The uncertainties over the status of contingency analysis introduced by earlier
comparative longitudinal, quantitative enquiries may be seen as stemming,
at least in part, from neglect of the full implications of structural-functionalism.
The SARFIT formulation aims to redress this imbalance by offering a more
adequate articulation of the theoretical basis of the contingency perspective on
change in organizational structure.
There is at present, however, a theoretical alternative to SARFIT. In rejecting
contingency determinism, Child (1972) offers the strategic choice model. This
is considerably more complex than either contingency determinism or SARFIT.
Strategic choice, like SARFIT, contains the notion that misfit creates low
performance, leading to a pressure for change to restore match between
structure and contingencies (figure 2). However, in the strategic choice formula-
tion, match can be restored by adjustment of structure to fit the new contingency
(as in SARFIT), or by adjustment of the contingency to the structure. Thus
an elite may retain a preferred structure and regain match by manipulation
of the contingency. This is one of the ways in which choice arises for the rulers
of the organization, the dominant coalition, and hence the determinism posited

If
Contingency environment
illiberal

Choice by
dominant Fit Performance
coalition

Values of '' Structure

dominant
coalition

Figure 2. Elements of the strategic choice explanation of structural change

4 LEX DONALDSON
by many contingency writers (Blau, 1972; Lawrence and Lorsch, 1967;
Woodward, 1965) and inherent also in the SARFIT model, may be avoided
in reality. The strategic choice thesis goes on to introduce a number of other
factors, including the values, perceptions and political influence of organiza-
tional actors which further elaborate the explanatory model and that add to
the theme of choice in organizational change. A full discussion of strategic choice
is beyond the scope of this article, and a wider consideration may appear
elsewhere (for a critique of the general theoretical logic see Donaldson, 1985a).
In this article the focus will be narrowed to the difference between the SARFIT
and strategic choice models over the route from mismatch to match. Do
organizations in disequilibria regain fit by structural adjustment, or do they
with equal ease do so by adjustment of contingency to structure? If the latter
route is as open to elites as the former, and can be chosen with roughly equal
cost, then one would expect to see that on average these routes are chosen with
equal frequency. If the adjustment of contingency to structure is not used with
a simitar frequency, then this raises questions about the viability of this route,
about the validity of the idea of this choice, and about the empirical relevance
of the theoretical proposition.
Thus the purpose of this article is to present the SARFIT model of structural
change in organizations and to examine the relative validity of this rather than
contingency determinist or strategic choice formulations. The article seeks lo
show the greater accuracy of the SARFIT perspective, and its power to reveal
patterns in organizational dynamics by teasing out the role of match and
performance.

THE SARFIT MODEL

The SARFIT model is shown in figure 3. A change in the contingency variable

(such as size or degree of product diversification) leads to a misfit between the
existing structure and the new value of the contingency variable. While the
concept of match between a contingency and a structured variable is highly
general, what constitutes match is specific to any particular pair of contingency
and structural variables (e.g. size and specialization, or product diversification

Change in 4-
Slruclural adjusimenl
contingency

Environment
illiberality

Performance

Figure 3. Structural adjustment to regain fu: general model

 STRATEGY AND STRUCTURAL ADJUSTMENT 5

and divisionalization). Similarly, the rationale for this match, the explanation
of why a particular situation requires a particular structure, is specific to
that pair of contingency-structure variables and is a theory such as is found
in Lawrence and Lorsch (1967) or Blau (1972). Thus SARFIT is a higher level
theory of change in the structure of organizations which subsumes lower
level theories about particular contingency-structure matches. Mismatch
produces a range of dysfunctional behaviours in the organizational system.
These include slow and poor quality decision-making, miscommunication,
demotivation and so on. These in turn lead to low economic performance
such as loss of opportunities to gain new sales, low profitability, low returns
to shareholders and the like. Low performance places pressures on the organiza-
tion and causes the rulers, the dominant coalition, to reorganize. Such critically
low performance occurs more readily in situations where business conditions
are sufficiently stringent to prevent the company having slack resources which
can be used to absorb suboptimal performance without the necessity for change
in structure. Child (1972) has termed this environmental illiberality, and
this includes factors such as the degree of competitiveness (Wilhamson, 1970).
Thus environmental illiberality plays the role of a moderator variable: low
performance leads to structural change only if the environment is illiberal.
When the structural adjustment has been made and match restored performance
rises.
The concept of match will now be examined by considering what constitutes
fu between corporate strategy and structure.

STRATEGY AND STRUCTURE

In order to enquire empirically into the dynamics of change in organizational

structure, attention will be directed towards one branch of contingency research
- the relationship between strategy and structure. There are several dimensions
to each of corporate strategy and structure. The focus here will be on just one
aspect of achieved strategy, the degree of product diversification, and on one
aspect of structure, the repxirting relationships at the highest levels. The associa-
tion between degree of product diversification and divisionalization has been
replicated across eight advanced industrial countries (Australia, Canada,
France, Italy, Japan, United Kingdom, United States and West Germany)
(Channon, 1973; Chenhall, 1979; Dyas and Thanheiser, 1976; Khandwalla,
1977; Pavan, 1976; Rumelt, 1974; Suzuki, 1980) and there is evidence that
the relationship generalizes from industrial to service corporations and from
large to small organizations (Channon, 1978; Grinyer and Yasai-Ardekani,
1981), Moreover, this has been stimulated by one of the earlier statements of
the contingency fit idea based on the historical studies of Chandler (1962), and
has been the subject of on-going theorizing about match (Channon, 1973;
Galbraith and Nathanson, 1978; Rumelt, 1974).
6 LEX DONALDSON
THE MATCH OF STRATEGY AND STRUCTURE

Chandler (1962) finds that as companies move from being undiversified to

being diversified in their product range so they move from the functional
to the product divisional form. Similarly, the shift from single to diverse
geographic areas leads to a move from functional structure to geographic
divisions, ceteris paribus (Egelhoff, 1982). Here the focus will be on product
diversification only, which will simplify the theoretical and empirical discussion
(for a model dealing with the complexities of interactions between multiple
contingencies and their implications for organization design, see Donaldson,
1985a).
The product divisional form features relative autonomy of the divisions,
viz. the corporate office which places more emphasis on control by comparison
of profitability across divisions and time (Chandler, 1962; Channon, 1973;
Mintzberg, 1979; Rumelt, 1974). Thus the divisional is a more decentralized
form than the functional (Chandler, 1962;Channon, 1973;DyasandThaiiheiser,
1976; Rumelt, 1974), and this has been proved empirically (Chenhall, 1979;
Grinyer and Yasai-Ardekani, 1981), though there remain variations in the
degree of decentralization within divisionalized corporations (Allen, 1978;
Lorsch and Allen, 1973). The increased complexity of decision-making arising
from greater product diversity strains the inform at ion-processing and expertise
of the corporate top office (EgelhofT, 1982). Delegation of decision-making
to lower levels under the divisional system allows decisions to be taken nearer
to the product market, thus enabling decisions to be taken more quickly and
by those more specialized and expert in the sector, and hence improving the
quality (Dill, 1958). Moreover, decentralization unburdens the top ofiice of
certain information- and decision-processing tasks, relieving the excessive load
which arises in situations where a functional structure is retained to manage
diverse products. The organizational crossover point at which co-ordination
occurs between the activities of designing, manufacturing and marketing for
each product is at the level of the top corporate officer under a functional system.
Divisionalization lowers this organizational crossover point to the head of each
division, thus enhancing co-ordination (Chandler, 1962). Divisionalization
involves the duplication of certain activities and skills in each division, thus
there are added costs. The functional form is simpler, cheaper and offers benefits
of unified control, and it is therefore superior under conditions of homogenous
product offerings.
For these reasons match between strategy and structure is constituted by
the functional form for low product diversification and the product divisional
form for high product diversification. A more detailed operationalization of
match is given below in the 'Methods' section.
 STRATEGY AND STRUCTURAL ADJUSTMENT 7

HYPOTHESES

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.

Structural Adjustment to Regain Fit

By contrast, the notion of contingency fit as the underlying cause means that
structural change is triggered by mismatch:

(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:

(3) A higher proportion of organizations which change only their structure

in a period move from mismatch to match than vice versa.

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.

Structural Adjustment to Regain Fit

The intervening factor between mismatch and reorganization is a decline in
performance. Organizations which are in mismatch at the start of a period and
operate in an illiberal environment will have low performance which will lead
to an adjustment of structure (rather than of contingency) over the period. The
hypotheses are:

(5) Fit is a cause of performance.

(6) Environmental illiberality moderates the misfit-structural adjustment

relationship, in that misfit is more likely to lead to structural adjustment
in an illiberal environment (i.^. low performance).
8 LEX DONALDSON
METHODS

To examine these hypotheses empirically, operational definitions are needed

of match and mismatch. There are four main categories of structure constituting
a series of increasingly decentralized forms: functional, functional with sub-
sidiaries, product divisional and holding company (for definitions see Rumelt,
1974). The theoretical discussion suggests that certain combinations of diversi-
fication and structure constitute match and others mismatch. The 16 possible
combinations of strategy and structure yield six congruent and ten incongruent
cells (see figure 4).

Single Dominant Related Unrelated

business business businesses businesses

Functional c (• i

Functional with
subsidiaries c c I i

Product c
divisional 1 c C

Holding i I i 1
company

C = congruent = matched = fit

I = incongruent = mismatched = misfit

Figure 4. Congruent and incongruent combinations of strategy and structure

Companies with sales deriving from one product are appropriately organized
functionally. Since up to 5 percent 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 second2iry 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

the chief executive is occupied in interfunctional co-ordination of, and operational

decision-making in, the parent company which is organized functionally.
Equally, as the number of subsidiaries which he or she also has to supervise
increases, so the limits on span of effective control will soon be reached. Thus
divisionalization frees the chief executive from the need to be interfunctional
co-ordinator of the parent company, which will become a division under a
general manager, and resolves the problem of span of control.
With less than 70 per cent of sales coming from a single product, the divisional
structure is required in the 'related businesses' case to provide the necessary
degree of autonomy for diverse product lines. Finally, for less than 70 per cent
of sales coming from a related group of products, the 'unrelated business', the
product division form will be needed to provide decentralization. All other
combinations are incongruent and constitute mismatch. For instance, a con-
glomerate, unrelated corporation, with several diverse businesses would be
inappropriately structured as functional. The task of providing interfunctional
co-ordination for numerous unrelated product market activities, each requiring
distinct knowledge and expertise, would overload central management and
prevent effective delegation, leading to suboptimal decision-making.
Empirical evidence supporting this model is presented in the subsection of
'Results' below which examines the relationship of fit and performance.
The contingency fit propositions need data from the start of a time period on
changes during that period. Such material on the strategy and structure is
available for five countries (France, Japan, United Kingdom, United States and
West Germany) for the commmencement and duration of two decades: the 1950s
and 1960s (Channon, 1973; Dyas and Thanheiser, 1976; Rumelt, 1974; Suzuki,
1980). Pooling yields a large number of data points with which to test such
propositions. This involves combining data from five different countries.
The studies concerned used standard definitions for the variables considered
here. However, as regards structure, in the Japanese and UK studies the
functional with subsidiaries classification is not used (Channon, 1973; Suzuki,
1980). Also, with the exception of the USA, the studies do not distinguish
between types of multidivisional structures in the information drawn upon here.
Thus the coding 'mtiltidivisional structures' is used as a proxy for product
divisional structure for those countries (France, Japan, UK and West Germany).
This will introduce some degree of inaccuracy into the calculations. However,
it is noticeable that, where the distinction between product and geographic types
of divisional structure is drawn, in the French, Japanese, UK and US studies,
the proportion of all multidivisional structures of the geographic type is small
(Channon, 1973; Dyas and Thanheiser, 1976; Rumelt, 1974; Suzuki, 1980).
Thus the effect of these inclusions is likely to be limited.
Again, in the French, UK and West Germany studies, those companies which
are subsidiaries of multinational corporations have coded as their structure
that of their parent company. This will introduce an element of error into the
analysis, but again the proportion so affected is small, about one-fifth.
10 LEX DONALDSON

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12 LEX DONALDSON
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 fmdings.
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
before 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.
Perfom:iance is indexed here by five measures of the rate of growth in nnancial
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:

growth in sales - sales in 1971-sales in 1969

sales in 1969

The advantage of such growth measure is that, by examining performance

relative to a baseline year, differences in company performance due to numerous
exogenous factors such as market dominance, product, technology etc. are
controlled. The focus is on change in performance over a period and how that
varies systematically in relation to organization design. The five measures
between them cover a variety of salient aspects of financial performance, sales
growth, the ability to yield profits on sales and on capital and returns to share-
holders. The data were taken from the Fortune 500 for the years 1969 and 1971.
 STRATEGY AND STRUCTURAL ADJUSTMENT 13

Discussions of company performance emphasize the effect of both strategy

and industry on financial indicators. In particular, degree of diversification
and the distinction between science and non-science based industries are
important (Rumelt, 1974). Diversification (net of industry effects) has a negative
linear relation to performance (Rumelt, 1982) and organization design effects
can be confounded with science versus non-science industry effects (Rumelt,
1974). In order to isolate the impact of fit on performance from these possible
contaminating variables, analyses will be presented controlling for both degree
of diversification (both in 1959 and 1969) and for membership of science versus
non-science based industries. In order to replicate this latter distinction as made
by Rumelt (1974), his explanation and examples of industry codings were drawn
upon and followed as closely as possible. Since the published data (Rumelt,
1974) do not give codings of science versus non-science, the exact degree of
replication of his original distinction was not known. However, the number
of companies classified into each specific industry corresponds closely to the
original study (Rumelt, 1974).
Another variable which was associated with performance was diversifying,
that is moving from a lesser to a more diversified category during a decade.
Even in multiple regressions in which fit, strategy and industry had been
entered, diversifying was associated with both growth in sales and in profits.
This reflects the superior resources needed to diversify and the additions to
sales and profits through adding companies by acquisition. In order to remove
this confound, firms diversifying between 1959 and 1969 were excluded from
the regressions of performance on fit.
Overall, the methodology for ascertaining the effects of performance studies
major aspects of financial outcomes, provides controls for exogenous confound-
ing variables and establishes the causal ordering of fit on performance.

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, 19B4). Contingency determinism does not predict structural
change.
14 LEX DONALDSON

Structural Adjustment to Regain Fit

The contingency fit hypotheses state that changes in structure during the decade
are caused by mismatch at the commencement ofthe period. More specifically,
hypothesis 2 states that organizations which are mismatched at the start ofthe
decade arc more likely to make structure-only change than are those which
are in match. For the first decade, the 1950s, and combining five countries
(France, Japan, UK, USA and West Germany) there were 332 corporations
which began the period mismatched, of which 29 per cent changed only their
structure during those ten years. By contrast there were 286 firms which were
initially matched and just 8 per cent ofthese changed only their structure during
the 1950s. This difference was statistically significant (/<.0002 on a one tailed
test). Likewise for the second decade, 52 per cent (fi = 253) ofthe initially
mismatched made this change, as compared with only 10 per cent {n = 333)
of the matched (significant at /r<.0002, one tail). Across the five countries,
combining both decades, 39 per cent of mismatched organizations changed
their structure only, whereas just 9 per cent of matched companies did so.
Hypothesis 2 was supported. It is whether an organization is matched or
mismatched at the start of a decade that explains structural change in the
ensuing period, rather than changes in degree of diversification during the
previous decade. Thus the contingency fit model offers an explanation where
the contingency determinist one does not.
Going further, one may enquire whether the mismatched organizations tend
to move towards match (hypothesis 3). Combining across the five countries
and two decades, ofthe 280 companies which changed only their structure,
72 per cent moved from mismatch to match, whereas only 5 per cent moved
from being congruent to being incongruent (the difference is statistically signifi-
cant at ^ . 0 0 0 2 , one tail). Thus firms which change only their structure are
overwhelmingly adjusting their structure to attain fit. Hypothesis 3 was
confirmed. By contrast, of those 150 organizations which changed only their
strategy in the decade, i,e, they became more diversified, 9 per cent moved
from mismatch to match, while 30 per cent moved from match to mismatch
(difference is statistically significant at/K.0002, one tail). Thus the companies
which just change their strategy are moving out of congruency. Examining
the 87 organizations which moved from match to mismatch during either
decade, 15 changed their structure only, 45 their strategy only and 27 both
strategy and structure. Thus 83 per cent which moved out of fit changed their
strategy with or without a shift in structure. Putting these findings together,
it can be seen that changes in just the contingency tend to lead the organization
out of fit and this is regained through a subsequent adjustment to structure.
One may enquire whether firms in mismatch are equally likely to move
towards other mismatched states as towards match. Ofthe 342 corporations
which were mismatched at the beginning of either decade, and moved during
the ensuing ten years, 276 moved into match whereas 66 moved but remained
in mismatch. These were proportions of 81 per cent and 19 per cent respectively
 STRATEGY AND STRUCTURAL ADJUSTMENT 15

which were significantly different (at ^ . 0 0 0 2 , 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 ofthe 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 significanUy different from each other (at J(J<.0002, 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 (he
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.

Time Lags in Structural Adjustment

To gauge the length of time involved in this sequence, discussion will return
to the US data, where it is possible to follow an organization through the two
decades. Ten ofthe 43 corporations which had been mismatched in 1959 had
been matched in 1949, but had become incongruent as a result of diversifying
 16 LEX DONALDSON

between 1949 and 1959. Thirty-three of the 43 corporations which were

mismatched in 1959 had been in this state in 1949. This may have arisen from
diversification in the 1940s or earlier. Thus structural changes in the 1960s
for many organizations have their origins in strategic moves in the 1940s at
the earliest. Dyas and Thanheiser (1976, p. 73) also found lengthy time lags
in structural adjustment to strategic change in their analysis of West German
companies. The whole cycle of diversification-misfit-structural adjustment-
fit takes a considerable period of time and frequently spans decades.
Thus the direct cause of structural change is misfit, and firms tend to move
into this as a result of diversifying. The ultimate cause of structural reorganiza-
tion is change in strategy, but there is a substantial time lag before structural
adjustments are made.

Structural Fit and Performance

Turning to the issue of performance (hypotheses 5 and 6), further elements
of the SARFIT model find some support here.
Congruent combinations of structure and degree of diversification are held
to lead to higher performance (hypothesis 5). The idea of such a performance
consequence is implicit in the foregoing coding of each structure-strategy
classification as either match or mismatch. The financial performance over the
ten years of firms which are in a matched category in 1969, is compared with
that for those which are in misfit at both the start and the end of this time
period. This gives an indication of the consequence of chronic match as con-
trasted with chronic mismatch. The causal impact of fit on performance was
ascertained by examining the relationship between fit over a period 1959-69
with performance over the period 1969-71, that is over a subsequent period.
The effect of fit on performance was examined by means of five multiple
regression analyses, one for each of the five performance indicators. In each
case the performance indicator {e.g. sales growth) was the dependent variable
and fit an independent variable. In order to exclude any confounding effects
of strategy and industry, these factors were included as variables in the multiple
regression, in the form of degree of diversification in both 1959 and 1969, and
the binary distinction of science based versus non-science based industry.
Diversifying corporations were excluded from the analysis in order to control
this confounding variable. The results are given in table II.
The standardized slope coefficients and the level of statistical significance
of the multiple regression of performance on fit controlling for exogenous
variables is given in columns 1 and 2 respectively (table II). Since the direction
of the hypothesis {i.e. fit has greater performance than misfit) was specified
a priori, a single tail test of statistical significance was appropriate. All five
fmanciEil variables showed positive slopes, i.e. fit was associated with greater
performance. However, for sales growth, profit growth and e.p.s. growth, the
associations were not statistically significant {p - 0.1). For the two other perform-
ance indicators the associations were significant: growth in profit on sales was
 STRATEGY AND STRUCTURAL ADJUSTMENT 17

Table II. Results of multiple regressions of pcrfonnancc on fit controllin;; for ejects of
strategy, industry and diversifying {n-93)

Dependent variable Independent variable

performance Jit
Standardized
slope
coefficient p (one tail)

Growth in sales 0.05 n.s.

Growth in profit 0,04 n.S.

Growth in profit on sales 0,13 <.l

Growth in profit on 0,16 <0.06

invested capital

Growth in earnings 0,04 n.s,

per share

Notes: For each performance indicator, results are from regressions in which strategy (diversification
in both 1959 and 1969) and industry (science based versus non-science based) controlled
by inclusion. Diversifying has been contrc^ed by excluding any corporations which diversified
between 1959 and I%9,

Since the direction of the fit of strategy-structure on performance is specified in advance,

a one tail test of statistical significance is appropriate,

significant at (p<i. 1) as was growth in profit on invested capital (at p<,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 (Chiindler, 1962; Child, 1972;
Donaldson, 1982a; Galbraith and Nathanson, 1978; Schreyogg, 1980).

Environmental IlUberality
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 (n = 26).
The results of the five multiple regressions are given in table III, The negative
associations for sales, profit and earnings per share in 1959 with divisionalizing
were (at/K0.06 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 (r= -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-* structtiral
adjustment-* fit-* higher performance.

DISCUSSION

Contingency determinism does not seem to explain structural change in matters

of diversification and divisionalization over this time period. There is no support

Table IIL Results of multiple regressions of divisionalizing on performance in 1959 (n - 26)'

Independent variable Dependent variable

Performance in 1959 Divisionalizing
Standardized
slope
coefficients p {one tail)

Sales -0.36 <0,04

Profit -0.31 <0,06

Profit on sales 0.16 n.a.

Profit on invested capital 0.24 n.s.

Earnings per share -0,54 <0,005

Notes: ' Corporations which diversified between 1959 and 1969 have been excluded,
Divisionalizing is defmed as moving from a functional to a multidivisional structure
between 1959 and 1969.
 STRATEGY AND STRUCTURAL ADJUSTMENT 19

here for the idea that structurzil change is am 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 structurtd 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 Divisionalization

Environmental
illiberatitv

Performance

Key: - • causal conneciions specified by model

empirical associations in this data set exogenous to causal model

Figure 5, Structural adjustment to regain fit: strategy-structure specific model

Table IV. Some characteristics of three contingency theories of change in

organizational structure

AspKi Thtoty

Contingency SARFIT SlraUgu

determinism choice

Ultimate cause Contingencies Contingencies Contingencies and

of structure preferences of
dominant coalition"
Immediate cause of Change in Misfit of structure Misfit and preferences of
structural change contingencies to contingencies dominant coalition
Effect of misfit on na. Yes Yes
structural adjustment
to regain fit moder-
ated by environmental
illiberality
Response to No concept Structure Structure
pressure to of fit adjusted to adjusted to
regain fit contingencies contingencies or
contingencies
adjusted
to structure

Degree of Nil Limited Considerable

choice by dominant
coalition

Noter ' Dominant coalition is the group with power over the organization (see Child, 1972).

position taken here is also broadly in accord with Aldrich (1979) and Hage
(1980) who both argue that the situation constrains the discretion of senior organiza-
tional management, and that consequently there is less freedom to choose struc-
ture than Child (1972) implies.
 STRATEGY AND STRUCTURAL ADJUSTMENT 21

By including performance in the present analysis, this makes good the

criticism advanced by Child (1984, p. 227) of a working paper report of
preliminary findings from this enquiry. Again, contrary to related critical
comments by Child (1984, p. 227), the fact that organizations may persist for
many years with suboptimal structures, especially if the environment is munifi-
cent, is not an argument against there being deleterious consequence to
mismatches of contingency and structure. Further, absence of corporate failure
as a result of misfit (Child, 1984, p. 227) does not make contingency theory
less relevant. Managers are interested in attaining higher levels of performance,
not just in the survival of the corporation.
The foregoing demonstrates that strategy leads to structure. However, it has
been suggested that structure leads to strategy (Hall and Saias, 1980). In
particular, an argument is that divisionalized structure is more likely to lead
to subsequent diversification than are functionally organized companies
(Rumelt, 1974; Scott 1971). In a companion article (Donaldson, 1982b), this
proposition is tested longitudinally and not supported and the underlying
theoretical logic is subjected to critique. Thus strategy leads to structure, but
structure does not lead to strategy.
Strategy has been treated here as the contingency factor affecting division-
alization. However, another theory states that the divisional form occurs as
a response to the problems of large size (Williamson, 1970). Cross-sectional
studies have found support for this idea (Grinyer and Yasai-Ardekani, 1981;
Crinyer etal., 1980; Khandwalla, 1977; Steer and Cable, 1978). Some scholars
have advanced the notion that there is an additive effect of size and strategy
upon divisionalization (Grinyer zmd Yasai-Ardekani, 1981; Khandwalla, 1977).
Again, an interactive model of the determination of divisionalization by size
and strategy jointly has been suggested (Grinyer, 1982). Donjildson (1982c)
questioned some of the evidence for size-divisionalization in a critical review
of the cross-sectional studies, and also offered synchronic evidence that strategy
is the key influence on structure rather than size. Grinyer (1982) challenged
aspects of the review and study (for a reply see Donaldson, 1986b). In an effort
to assess more closely the causal role of size, Donaldson (1983) performed
diachronic studies to see whether attaining a larger size triggered the move
from the functional to the divisional form. The results failed to support the
notion of a size effect on divisionalization. Similarly, a diachronic test did not
confirm the idea of an interactive effect of size and strategy on divisionalization
(Donaldson, 1986a). The cause of divisionalization lies more certainly with
strategy than with size. However, arguments about the role of size in division-
eJization are contingency ideas and thus are compatible with the SARFIT
general framework. The relative importance of strategy and size as contingencies
of divisionalization is only a point of detail within the overall case for contingency
which has been advanced here.
This article has given emphasis to diversification as a cause of divisionaliza-
tion. In an earlier article in tht Journal of Management Studies, the contribution of
22 LEX DONALDSON

the life-cycles ofthe products to the determination of divisionalization is argued

(Donaldson, 1985b; see also Donaldson, 1979b). A full explanation of divisional-
ization and the form it takes requires consideration of several contingencies
concurrently (for a model see Donaldson, 1985a). The present empirical exercise
is not intended to be exhaustive.
The analysis here has addressed general questions ofthe explanation of change
in organization structure, This has been prosecuted by reference to strategy
(diversification) and a high-level aspect of structure (whether functionally or divi-
sionally organized) for certain countries over particular time periods. The further
generality ofthese findings regarding diversification and organization needs to
be ascertained empirically. It also remains to be seen whether the SARFIT model
holds for other relationships between contingencies and structure such as
uncertainty-organicism (Burns and Stalker, 1961) or size-bureaucratization
(Blau, 1972; Pugh and Hickson, 1976). These are tasks for future research.

CONCLUSIONS

Three theories of organizational change can be distinguished: contingency

determinism, strategic choice and structural adjustment to regain fit. The results
of an analysis of changes in strategy and structure in several advanced industrial
countries over the decades ofthe 1950s and 1960s suggest that the latter is the
more accurate picture of the causal dynamics. There is a cycle of change in
strategy leading to mismatch and low performance, then structural adjustment
to a new match. There are relatively few cases where adjustment comes about
by the alteration ofthe contingency to fit the structure. Neither contingency deter-
minism nor strategic choice adequately model the changes. Analysis indicates
that, when comparative, quantitative studies are made across time, and
functionalist theory is specified via a set of equilibrium states and a research
model which includes performance, then the contingency approach is powerful
in explaining structural change.

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