Resource dependence theory

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The procurement of external resources is an important tenet of both the strategic and tactical management of any company. Nevertheless, a theory of the consequences of this importance was not formalized until the 1970s, with the publication of The External Control of Organizations: A Resource Dependence Perspective (Pfeffer and Salancik 1978). Resource Dependence Theory (RDT) has implications regarding the optimal divisional structure of organizations, recruitment of board members and employees, production strategies, contract structure, external organizational links, and many other aspects of organizational strategy.

[edit] Overview of Resource Dependence Theory

The core argument of RDT is that,

• (a) organizations will respond to demands made by external actors or organizations upon whose resources they are heavily dependent
• (b) that organizations will try to minimize that dependence when possible (Pfeffer 1982).

Which of these roads a given organization will follow, and to what extent, depends on external circumstances. The conditions which determine this were thoroughly listed by Pfeffer and Salancik (1978), but the main issues are three: What is the cost of giving in to external demands, what are the costs of abandoning the use of the resource, and are the demands in conflict with other demands from actors on whose resources the focal organization is dependent on?

Both propositions (a) and (b) have been supported by a considerable amount of empirical evidence, such as on the structure of corporate boards, financial analyses by investment banks, and the varying response of large corporations to government pressures (Salancik 1979; Boyd 1990; Hayward and Boeker 1998).

According to Scott (2003), companies pursue a two-pronged approach to managing their resource dependence: buffering and bridging. Buffering strategies aim to increase a company’s tolerance of external resource shortage over a limited period of time. They can consist of various methods, such as improving classification of inputs, increasing stock levels, adjusting workflow to minimize variation in the input and output requirements, forecasting resource needs and adjusting the scale of production.

In contrast to buffering strategies, bridging strategies aim not to increase one’s own tolerance to resource shortage, but to reduce the chances of a resource shortage, by strengthening the links between the organization and its suppliers. Bridging can consist of using bargaining to gain information and improve understanding between companies, contracts (standard or hierarchical) to ensure compliance, co-optation – the incorporation of suppliers in the decision making (for example by the way of board interlocks), the foundation of a mutually owned organization in the form of a joint venture, completely merging the ownership of the two firms, trade associations where links are nurtured and information is exchanged, and the use of government connections to ensure the availability of supplies.

Resource Dependence Theory is one of many theories of Organizational studies regarding the behavior of organizations. In many ways, the predictions of Resource Dependence Theory are similar to those of Transaction cost economics, but it also shares some aspects with Institutional theory.

[edit] References

• Boyd, B. (1990). "Corporate Linkages and Organizational Environment: A Test of the Resource Dependence Model." Strategic Management Journal 11(6): 419-430.
• Hayward, M. L. A. and W. Boeker (1998). "Power and Conflicts of Interest in Professional Firms: Evidence from Investment Banking." Administrative Science Quarterly 43(1): 1-22.
• Pfeffer, J. (1982). Organizations and Organization Theory. Marshfield, MA, Pitman.
• Pfeffer, J. and G. R. Salancik (1978). The External Control of Organizations: A Resource Dependence Perspective. New York, NY, Harper and Row.
• Salancik, G. R. (1979). "Interorganizational Dependence and Responsiveness to Affirmative Action: The Case of Women and Defense Contractors." Academy of Management Journal 22(2): 375-394.
• Scott, W. R. (2003). Organizations: Rational, Natural and Open Systems (5th edition), Prentice Hall.