Resource Dependence Theory
Organizations are dependent on their environment Opens in new window for the resources they need to survive and grow.
According to resource dependency theory, the goal of an organization is to minimize its dependence on other organizations for the supply of scarce resources. In order to achieve this, an organization must:
- Exert influence over other organizations so that it can obtain resources.
- It must respond to the needs and demands of the other organizations.
The strength of one organization’s dependence on another for a particular resource is a function of two factors:
- How vital the resource is for the organizational survival.
- The extent to which other resource is controlled by other organizations.
To manage their resource dependence and control their access to scarce resources, organizations develop various strategies.
They attempt to increase their ability to influence on other organizations and find ways of increasing their influence over their environment.
To reduce uncertainty, an organization needs to devise inter-organizational strategies to manage the resource interdependencies in its specific and general environment.
Managing these interdependencies allows an organization to protect and enlarge its domain.
Managing Interdependencies in Specific Environment
In the specific environment Opens in new window, an organization Opens in new window needs to manage its relationship with suppliers, unions, and customer interest groups. In specific environment, the basic types of interdependencies that cause uncertainty are:
In this type of interdependencies, the outputs of one organization are inputs for another organization. There are symbiotic interdependencies between an organization and its suppliers and distributors.
To manage symbiotic interdependencies, organizations have a range of strategies. These strategies are given below:
A. Good Reputation
Develop good reputation.
A good reputation is a state in which an organization is held in high regard and trusted by other parties to be fair and honest in its dealing with the outside organizations.
Reputation and trust are probably the most common linkage mechanism for managing symbiotic interdependencies.
Cooperation is a strategy that manages symbiotic interdependencies by neutralizing problematic forces in the specific environment. An organization can bring opponents over to its side by giving them a stake or claim on what it does and tries to satisfy their interest.
Under this strategy, forces such as customers, suppliers, or other important outside stakeholders are to be brought within the organization and made inside stakeholders. Under applicable practices, outsiders can be brought inside an organization but doing so through illegal means is not ethically sound to the image of an organization.
C. Strategic Alliances
A strategic alliance is an agreement that commits two or more companies to share their resources in order to develop a joint new business opportunities.
Strategic alliances are used as a mechanism for managing symbiotic and competitive interdependencies between organizations. The different types of strategic alliance are given below:
- Long-term contracts: The reason for long-term contracts is to reduce costs by sharing resources or by sharing the risk of resource and development. Contracts are the least formal type of alliance because no ties link the organizations apart from the agreement set forth in the contract.
- Networks: A network is a cluster of different organizations whose actions are coordinated by contracts and agreements rather than through a formal hierarchy of authority.
The goals of an organization in a network is to share its expertise and to help them become more efficient by reducing its costs or increasing quality. The alliance resulting from a network tie member organizations and there will be greater formal coordination of activities between organizations.
- Minority Ownership: A more formal alliance emerges when organizations buy a minority stake in each other. Minority ownership makes organizations extremely interdependent, and that interdependence forges stronger cooperative bonds.
- Joint Venture: A joint venture is a strategic alliance among two or more organizations that agree to jointly establish and share the ownership of a new business. The shared ownership of a joint venture reduces the problem of managing complex inter-organizational relationship that might arise if the basis of the strategic alliance were simply a long-term contract.
- Merger and Takeover: The most formal strategy for managing symbiotic and competitive resource interdependencies is to merge with or take over a supplier or distributor.
An organization that takes over another company normally incurs greater expense and faces the problems of managing the new business. An organization should resort to takeover only when it has a very great need to control the crucial resource or manage an important interdependency.
Organizations use informal and formal strategic alliances moving from the most informal (long-term contract) to the most formal (merger and takeover). The degree of formality increases as environmental uncertainty increases. The more formal an alliance, the stronger the link between allied organizations.
D. Managing Competitive Resource Interdependencies
Competition threatens the supply of scarce resources and increases the uncertainty of the specific environment.
Competitive interdependencies are interdependencies that exist among organizations that compete for scarce resource inputs and outputs.
Whenever an organization involves itself in an inter-organizational linkage, it must balance its need to reduce resource dependence against the loss in autonomy that will result from the linkage.
Organizations use a variety of techniques to directly manipulate the environment to reduce the uncertainty of their competitive interdependent activities.
Competitive interdependencies exist between an organization and its rivals. The more formal a strategy the more explicit the attempt to coordinate competitors’ activities. There are basically four different strategies to coordinate competitor’s activities and thereby reduce uncertainty. They are given below:
- Collusion and Cartels: A cartel is an association of firms that explicitly agree to coordinate their activities. A cartel or a syndicate (as it's sometimes called) is a federal form of business combination essentially as a selling agency acting on behalf of the member firms.
It is a voluntary agreement between, or association of, independent enterprises of similar type to secure the monopoly of the market. Individual members agree to sell their entire product to the cartel exclusively for a certain period.
Competitors in an industry can collude by establishing industry standards. Industry standard can function as rules for competitors. Organizations can always make more profit if they collectively coordinate their activities than if they can compete. Price fixing enables competitors to maintain artificially high process and prevent destructive price competition.
Cartels and collusion increase the stability and richness of an organization’s environment and reduce the complexity of relations among competitors. Collusion and cartels are illegal in India. UK and US customers lose because the prices are established on the higher side.
- Third-party Linkage Mechanism: Third-party linkage mechanism is a regulatory body that allows organizations to share information and regulate the way they compete.
Organizations that use a third-party linkage mechanism co-opt themselves and jointly receive the benefits of the coordination that they obtain from the third-party linkage mechanism. This mechanism reduces the fear that one organization may deceive or outwit another.
- Strategic Alliance: Strategic alliances can be used to manage not only symbiotic interdependencies, but competitive interdependencies as well. Competitors can cooperate and form a joint venture to develop common technology.
Organizations may use joint ventures to deter new entrants and harm existing competitors. The use of strategic alliances to manage competitive interdependencies is limited only by the imagination of rival companies.
- Merger and Amalgamation: Mergers and Amalgamation can improve a company’s competitive position by allowing the company to strengthen and enlarge its domain and increase its ability to produce a wider range of products to better serve more customers.
Merger is also called absorption of weaker units by a stronger unit. An existing stronger company, if empowered by its memorandum may take over the business of one or more existing weaker companies. Such merging or union is also called complete consolidation.
After the merger, all merging companies lose their individuality.
A merger is a form of consolidation where one of the companies already in existence absorbs all the rest of the enterprise, each of the various companies losing its identity as a business unit, although the plants themselves may continue to operate.
A new company is formed to take over the existing business of all the amalgamating companies. After the amalgamation, all the combining units are automatically liquidated.
Amalgamation takes place where two or more companies organize a new company with which to consolidate. They lose their separate existence.
As a means for developing big into bigger business, ordinary companies, form a larger united company.
Merger and Amalgamation differ only in the method of complete consolidation, but in both the approaches, the net result is identical namely the fusion or complete integration and the complete consolidation is naturally irrevocable or permanent.
Merger and Amalgamation movement always leads to the growth of huge monopoly concerns capable of exploiting the public as we have extreme concentration of wealth and power in a handful of business enterprises.
Organizations can use various linkage mechanisms to control symbiotic and competitive interdependencies. Whenever an organization involves itself in an inter-organizational linkage it must balance its need to reduce resource dependencies against the loss in autonomy and freedom of choice that will result from the linkages.
An organization aims to choose the inter-organizational strategy that offers the most reduction in uncertainty for the least loss of control.
A linkage is formal when two or more organizations agree to coordinate their interdependencies directly in order to reduce uncertainty. In an indirect or informal linkage, the members of the coordination are more likely to coordinate on the basis of an implicit or unspoken agreement.
The Resource Dependency Model within an Organization
Traditionally, organizations are divided into sub units that are given responsibility for different functions such as finance, human resources, marketing etc. The formal organization that gives various activities to these sub units are called departments.
The formal departments devoted to these various organizational activities often require the help from other departments. By this we mean that formal organizational departments may be both giving and receiving from other departments valued commodities such as personnel, equipment, information etc. These critical resources are necessary for the successful operation of organizations.
The resource-dependency model states that a sub unit’s (department) power is based on subunits control of those resources required by other subunits (departments).
Thus, all subunits may contribute to an organization, but the most powerful are those that contribute the most important resources. Controlling the resources of other departments need puts a subunit in a better position to bargain for the resources that it requires. The resource dependency model suggests that a key determinant of subunit power is the control of valued resources.