Theoretical formulation may be utilized as a technique of the inquiry process under the following conditions: (1) identification of appropriate uses such as in explaining existing generalizations as a basis for asking questions that might not otherwise have been raised; (2) provision of the current state of development of a particular line of research, paying particular attention to the empirical generalizations that have been advanced; (3) presentation of a theoretical formulation which seems relevant to the interpretation and extension of the empirical generalizations of concern; and (4) relating the theoretical formulation and the generalizations in such a way that the latter are satisfactorily explained by the former. The formulation presented in this paper explains both why organizations vary in degrees of internal differentiation, and why those variations are related systematically to variations in environmental complexity and stability. It also explains why high levels of differentiation and integration are associated with high levels of effectiveness under conditions of environmental complexity and instability. (RL)