The contingency theory is an extension of the systems theory of organisation. The basic idea of the contingency theory is that there is no particular managerial action or organisational design that is appropriate for all situations. Rather the design and managerial action depends on the situation. It is contingent on the situation and circumstances. Therefore, contingency theory is also known as situational theory.
Like the systems approach contingency theory considers organisation as a system consisting of sub- systems. Both the theories emphasise maintenance and adaptation activities for the survival and growth of the system. They deal with patterns of relationships and interdependence among the elements of the system. However, there are important differences between the two theories. As against the internal dynamics of the systems theory, contingency theory focuses on external determinants of organisation structure and behaviour. While the systems theory lays down universal principles for application in all situations, the prescription of the contingency theory is that “it all depends.”
Contingency theory fills an important lacuna of systems theory by spelling out the relationship between organisation and its external environment. It provides a more explicit understanding of relationship among various environmental variables. It is action-oriented and directed towards the application of the system concepts. Therefore, It provides something more useful to the practising managers in a turbulent environment. The contingency theory emphasises the multivariate nature of organisations and attempts to understand how organisations operate under varying conditions in specific circumstances. Contingency views are ultimately directed towards suggesting organisational designs and managerial actions most appropriate for specific situations. The theory suggests that the suitable organisation design depends upon environmental variables like size, technology, people, etc.