Agency theory in a formal sense originated in the early 1970s, but the concepts behind it have a long and varied history. Among the influences are property-rights theories, organization economics, contract law, and political philosophy, including the works of Locke and Hobbes. Some noteworthy scholars involved in agency theory’s formative period in the 1970s included Armen Alchian, Harold Demsetz, Michael Jensen, William Meckling, and S.A. Ross.

Configurations are typically represented as typologies which are derived conceptually, or taxonomies which are derived empirically. One of the most well-known typologies in strategic research is the Miles and Snow typology of strategic types in organisations, distinguishing between defenders, analyzers, prospectors and reactors. Although no formal methodology exists for generating a typology, Miller (1996) identifies some features which are characteristic of good typologies:

• They should be based on a solid theoretical foundation;
• Distinctions and relationships should be of conceptual importance;
• Resulting types should facilitate empirical progress by invoking contrasts;
• Variables used to describe each type should be shown to cohere thematically;
• Implications should be important conceptually or in an evolutionary way.

Taxonomies are typically derived from more quantitative data, using multivariate analysis of multiple dimensions such as strategies, processes and structures. Miller (1996) however cites a lack of theoretical significance as a major criticism against taxonomies.

Ultimately any classification scheme should generate insight or support prediction (Miller, 1996). One way to gauge the value of a set of configurations is to see whether any theoretical or practical distinctions emerge, and whether the findings are valid and reliable.

Miller (1996) also suggests a third approach, with the focus not on typologies or taxonomies, but on configuration as a quality or property that varies among organisations. In this approach configuration is the “degree to which an organisation’s elements are orchestrated and connected by a single theme” (Miller, 1996). The number of elements in an organisation driven by one theme can be an important indicator of the degree of configuration, with more comprehensive configurations comprising of a greater range of elements.

Indicators of a high level of configuration are centered around focussing on a common theme through goals, actions, concensus, structure, processes, culture, leadership, incentives and information systems. Miller (1996) explains that competitive advantage may reside in the coordinating theme and “integrative mechanisms that ensure complementarity among the various aspects of a firm”.

“Configurations revisited” provides good insight into a theoretical approach that seems to have stalled during the past decade. I have identified a number of opportunities for applying this approach in my research, and will definitely be exploring it more rigorously in future.

Powell and DiMaggio (1991) define an emerging perspective in organization theory and sociology, which they term the ‘new institutionalism’, as rejecting the rational-actor models of classical economics. Instead, it seeks cognitive and cultural explanations of social and organizational phenomena by considering the properties of supra-individual units of analysis that cannot be reduced to aggregations or direct consequences of individuals’ attributes or motives.

Scott (1995) indicates that, in order to survive, organisations must conform to the rules and belief systems prevailing in the environment (DiMaggio and Powell, 1983; Meyer and Rowan, 1977), because institutional isomorphism, both structural and procedural, will earn the organisation legitimacy (Dacin, 1997; Deephouse, 1996; Suchman, 1995). Multinational corporations (MNCs) operating in different countries with varying institutional environments will face diverse pressures. Some of those pressures in host and home institutional environments are testified to exert fundamental influences on competitive strategy (Martinsons, 1993; Porter, 1990) and human resource management (HRM) practices (Rosenzweig and Singh, 1991; Zaheer, 1995).

There is substantial evidence that firms in different types of economies react differently to similar challenges (Knetter, 1989). Social, economic, and political factors constitute an institutional structure of a particular environment which provides firms with advantages for engaging in specific types of activities there. Businesses tend to perform more efficiently if they receive the institutional support.

Martinsons (1998) developed a theory of institutional deficiencies (TIDE) suggesting that relationship-based commerce will prevail where rule-based markets can not flourish due to institutional deficiences. Martinsons (2008) extends TIDE to show how the development of relationship-based e-commerce in China has resulted from that country’s lack of trustworthy and enforceable set of rules for doing business. His theory suggests that factors such as personal connections (guanxi in China, blat in Russia, etc.), informal information, and blurred business-government relations (which also encourage corruption) will constrain the transition from the physical marketplace to online marketspaces.

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.

Fred Fiedler‘s contingency model focused on individual leadership.

W. 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”. Other researchers including Paul Lawrence, Jay Lorsch, and James D. Thompson were complementing to this statement and were 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.

Contingency theory is an outgrowth of systems design. Jay Galbraith (1973) states that in contingency theory:
* there is no one best way to organize
* any way of organizing is not equally effective

These run counter to the optimizing notions of many rational theorists. Scott adds that in contingency theory “the best way to organize depends on the nature of the environment to which the organization relates”

“Contingency theory is guided by the general orienting hypothesis that organizations whose internal features best match the demands of their environments will acheive the best adaptation” (Scott p. 89). The termed was coined by Lawrence and Lorsch in 1967 who argued that the amount of uncertainty and rate of change in an environment impacts the development of internal features in organizations.

Different subunits within an organization may confront different external demands. “To cope with these various environments, organization create specialized subunits with differing structural features” (Scott p. 89) — for example, differing levels of formalization, centralized vs decentralized, planning time horizon. “The more varied the types of enviroments confronted by an organization, the more differentiated its structure needs to be” (p. 89).

Furthermore, the more differentiated the more difficult it will be to coordinate the activities of the subunits and more resources need to be applied for coordination.

Lawrence and Lorsch’s classic 1967 study, especially the six companies in the plastics industry, highlight their argument that in complex environments the organization developed separate departments to confront these differing environmental segments. But these separate departments created coordination problems. Therefore, the extent that the companies could differentiate to the level required by the environment AND at the same time integrate these different departments into collective action determined the organization’s success rate.

The inter-departmental conflict inherant in such differentiation is often caused by mutual task dependence, task-related assymmetries, conflicting performance criteria, dependence on common resources, communication obstacles, and ambiguity of goals as well as organizational differentiation (from Scott p. 270). While the rational perspective sees these conflicts as disruptive and best resolved, and natural perspective notes that conflicts are part of the negotiation process between coaliations and their conflicting interests and have an important (and possibly beneficial) effect on the organizational goals of the company.

Galbraith’s view is similar to systems design in that it stresses information flows but adds that as uncertainty increases the amount of information required for decision making also increases. “Various structural arrangements, such as rules, hierarchy, and decentralization are mechanisms determining the information-processing capacity of the system” (Scott p. 90).

Integrating Rational and Natural System Perspectives Through Contingency Theory
Lawrence and Lorsch (1967) argue that if the open system perspective is taken, rational and natural perspectives identify different organizational types which vary because they have adapted to different types of environments. Unlike Etzioni’s structural view which sees the two perspectives as two sides of the same coin, Lawrence and Lorsch see them as different organizations entirely.

The more homogeneous and stable the environment, the more formalized and hierarchical the form. Their view is ecological — those organizations that can best adapt to the environment will survive. They see the rational system coming first because environments were initially stable and are becoming increasingly more volatile.

1. if some people prefer to work under direction and are prepared to pay for the privilege (but this is unlikely);

2. if some people prefer to direct others and are prepared to pay for this (but generally people are paid more to direct others);

3. if purchasers prefer goods produced by firms. Instead, for Coase the main reason to establish a firm is to avoid some of the transaction costs of using the price mechanism.

These include discovering relevant prices (which can be reduced but not eliminated by purchasing this information through specialists), as well as the costs of negotiating and writing enforceable contracts for each transaction (which can be large if there is uncertainty). Moreover, contracts in an uncertain world will necessarily be incomplete and have to be frequently re-negotiated. The costs of haggling about division of surplus, particularly if there is asymmetric information and asset specificity, may be considerable. If a firm operated internally under the market system, many contracts would be required (for instance, even for procuring a pen or delivering a presentation).

In contrast, a real firm has very few (though much more complex) contracts, such as defining a manager’s power of direction over employees, in exchange for which the employee is paid. These kinds of contracts are drawn up in situations of uncertainty, in particular for relationships which last long periods of time. Such a situation runs counter to neo-classical economic theory. The neo-classical market is instantaneous, forbidding the development of extended agent-principal (employee-manager) relationships, of planning, and of trust. Coase concludes that “a firm is likely therefore to emerge in those cases where a very short-term contract would be unsatisfactory,” and that “it seems improbable that a firm would emerge without the existence of uncertainty.” He notes that government measures relating to the market (sales taxes, rationing, price controls) tend to increase the size of firms, since firms internally would not be subject to such transaction costs.

Thus, Coase defines the firm as “the system of relationships which comes into existence when the direction of resources is dependent on the entrepreneur.” We can therefore think of a firm as getting larger or smaller based on whether the entrepreneur organises more or fewer transactions. The question then arises of what determines the size of the firm; why does the entrepreneur organise the transactions he does, why no more or less? Since the reason for the firm’s being is to have lower costs than the market, the upper limit on the firm’s size is set by costs rising to the point where internalising an additional transaction equals the cost of making that transaction in the market. (At the lower limit, the firm’s costs exceed the market’s costs, and it does not come into existence.) In practice, diminishing returns to management contribute most to raising the costs of organising a large firm, particularly in large firms with many different plants and differing internal transactions (such as a conglomerate), or if the relevant prices change frequently. Coase concludes by saying that the size of the firm is dependent on the costs of using the price mechanism, and on the costs of organisation of other entrepreneurs. These two factors together determining how many products a firm produces and how much of each.