Managers Controlling Organizations Successfully: A Perspective of Resource Dependency Theory
Organizations having fundamental resources and skills have competitive advantage, however, their inadequacy in supplying and sustaining the required resources often results in establishing relationships with other organizations to meet their needs (Barney, 1991). Moreover, they need to monitor threats and opportunities continuously created by the market dynamics. Hence, they tend to increase the coordination level and control process to manage their resources. To maintain such control, they tend to decrease uncertainties and purposefully maintain strategic partnerships, with formal and semi-formal links which may increase their financial and operational performance. They are resource dependent and hence shall seek ways to reduce such uncertainties in the environment (Zehir et al., 2019). This is the major crux of the Resource Dependency Theory. It emphasizes that organizations need to manage their dependence on their inputs as the resources are scarce and one who can manage it successfully can have organizational effectiveness and gain competitive advantage in the long run. This essay evaluates the importance of Resource Dependency Theory (RDT) as an organizational theory and how it helps in interacting with other organizations. It examines that if a manager uses the theory in the organisation, he can easily control the competitive landscape and gain competitive advantage over other firms.
External pressures limit the choices of organizations
As organizations are a member of the external environment and are interconnected with each other, to survive in the market place they shall be responsive to the external demand. This model is based on the basic premise that resources are scarce, organizations have social relations and networks with a pattern of inter-organizational dependence and constraints and hence organizations shall manage in such a way that their overall effectiveness is not hindered (Hillman et al., 2009).
According to Pfeffer and Salancik (1978), the ability to acquire and maintain resources is the key to organizational survival. These resources can be physical, monetary, information or social legitimacy. But to acquire and maintain such resources is rather difficult as environmental conditions are scarce and uncertain (Froelich, 1999). The theory assumes that organizations are not autonomous entities, there exists environment constraints as they need them for resources. Social context matters and organizations try to enhance their autonomy and pursue interests. The concept of power is central here as control over vital resources become necessary and organizations actions both internally and externally are based on that (Davis and Cobb, 2009). Managers try to reduce others’ power over them and attempt to increase theirs over others.
Hillman et al. (2009), further highlights that managers can act to reduce such uncertainties and dependence. The degree of dependence on these resources is determined by the concentration and importance of the resources provided. An organisation is considered highly dependent if it relies on relatively few sources and hence a logical step is necessary to manage this dependence (Wassenaar, 2014). Organizations that successfully manage these dependencies are not never completely successful as they create new patterns of dependence. This pattern produces intra-organizational as well as inter-organizational power which in turn have effect on organizational behavior (Hillman et al., 2009). Collaborating with organizations having similar dependencies can be effective as it helps in reducing uncertainty and enables access to critical resources (Pfeffer and Salancik, 1978). Joint ventures, vertical/horizontal mergers and inter-organizational relationships can be seen as these collaborations. This is because it reduces competition by absorbing competitor, helps in diversifying operations thereby reducing dependency and manage interdependence with purchasers of output or sources of inputs by absorbing them (Pfeffer and Salancik, 1978). Additionally, board of directors, political actions and executive succession are other methods to reduce dependences.
RDT Approach:
RDT is a scientific approach which helps in understanding organizational behavior. It explains and manages the organization’s dependence on resources owned by others mainly suppliers, competitors, shareholders, public authorities, unions and other stakeholders. The dependence on important and critical resources influences the actions and decision of the organisation. The continuous scanning of the environment helps in adopting strategic responses so that resources are better managed and acquired. For instance, organizations have resource dependences in their products and services. They outsource related strategies to get optimum quality so that they can focus and maintain core-competence capabilities of the firm (Yilmaz, 2014).
However, some scholars have criticised the theory as well. According to them, the theories have not been tested empirically. For instance, some scholars doubt the usefulness of the theory and suggest a reformulation. They feel ambiguities regarding constrained absorption. Organizational motivation to manage dependency of external environment does not essentially correspond with its ability to do so (Delke, 2015). Moreover, within the RDT perceptions are often confounded with predictions. Power imbalance might become an obstacle to constrained absorption. Further, viewing organizations as the political systems and not economic or technical system has been criticized by scholars (Nienhüser, 2008). Although some of them feel that it has not been tested empirically, most of them have accepted it and many available literature confirms the assumptions, propositions and hypotheses of RDT. Moreover, some of the hypotheses has been tested and the theory has been improved and extended and it hard to disagree with the basic notion of the theory (Delke, 2015).
Dimensions like efficiency, effectiveness and quality determine the performance for a profit organisation. Equity becomes the criteria in the modern non-profit organizations and they concerned with their major stakeholders’ desire, complaints and dissatisfaction. The organizational performance with respect to RDT comprise organizational efficiency and effectiveness (Seo, 2011). Where organizational efficiency focuses on internal management of the organisation, organizational effectiveness is conceptualized by the relationship between the external factors and organizations. Pfeffer and Salancki (2003) highlight that the effectiveness is concerned with the best way the organisation is meeting demands of the different stakeholders, groups and organizations with their activities. The ability to acquire resources and internal efficiency using the inputs of the organisation are important for its effectiveness and performance. Managers with the help of this theory can better manage their resources and dependence, thereby having organizational effectiveness and competitive advantage in the long run.
As highlighted above, the importance of inter-organizational power plays a key role and its role in strategies and structure has been argued before. However, Davis and Cobb (2009) state that the theory provides a basic piece of advice to the top managers that they shall choose the least-constraining device so that relations with exchange partners could be governed. This would thereby allow in minimizing uncertainty and dependence and maximizing autonomy. A standard practice in manufacturing is to find and maintain alternatives if dependence comes from relying on a single supplier. Another potential source of advantage can be growing large in and of itself such that the chances of failure minimizes. Large size organizations have even power to call on government for reinforcement (Hillman et al., 2009).
Another tactic to entail constraint is to co-ordinate with other organizations. Joining associations, business groups or forming an alliance or joint venture. Such alliances pursue joint objectives through sharing of resources or knowledge or coordination of activities like licensing and franchising agreements, joint research, investments, shared marketing manufacturing arrangements and so on (Davis and Cobb, 2009). Such alliance are common in vertical integration and industries with concentration where one sees greatest degree of manageable interdependence. Having such alliance would make the organisation stronger in terms of different resources and less competition. Moreover, joint marketing actions may lead better coverage and joint resource may lead to new products and services, thereby giving the organisation a competitive advantage (Klein and Pereira, 2016).
Yet another strategy to manage resource dependence is to co-opt it. This can be done by inviting a representative where the organisation has constraint to its governing board. For instance, executives of constraining suppliers, senator, cabinet minister, venture capitalist will help support them. In other words, the representative on the board will have a vested interest in the survival of the dependent organisation. Pfeffer and Nowak (1976) emphasizes that from the resource dependence perspective, board ties were the most empirically examined form of intercorporate relation. More outsiders especially with relevant experience in regulated industries are needed and such stakeholder directors are likely to improve corporate social performance (Pfeffer and Salancik, 1978). With them, the information in the form of counsel and advice comes and legitimacy is acquired, preferential access to resources come handy, and firm and environmental contingencies information are gathered. However, the board of directors shall ensure that the needs of the firm are matched by the resources provided by them. Board size becomes a hindrance sometimes, while board interlocks are a benefit as it provides a ‘resource-rich’ director. Hence, the number of directors shall not be the only factor to be taken care of, the type of director matters a lot. Therefore, managers shall propose such directors who are of help to the organisation which can further help the company to acquire what it wants (Hillman et al., 2009).
Managers can even use the theory and reduce the uncertainty by getting involved into the political actions. Through political mechanisms, organizations try to create an environment where they can alter the external economic environment and create one in their interest. For this, they may try to shape government regulations so that they get a more favorable one. However, firms heavily dependent on the government are likely to engage in such activities. Managers tend to move towards political activity because the regulatory dependency increases. However, this does not imply to every kind of organisation. Executive succession is yet another way to reduce resource dependence (Pfeffer and Salancik, 1978). The internal organizational misalignment of structures, policies, control and power can be dealt with replacing the CEO who is capable of coping such issues. The tenure of the leadership and firm performance is directly proportional to the executive succession. Replacing a CEO when a firm performs poorly tends to respond positively and in uncertain environment the executive tenure is shorter as compared in predictable and stable environment (Hillman et al., 2009). Large organisation are more likely to choose an insider. Also, those who had poor performance tend to choose from inside than those who have amid-range performance chose from outside. Choosing a new CEO from inside or outside the organisation is a complex process. Moreover, when resources are scarce, there role is much less ambiguous as compared to when they are abundant and hence, it might not contribute well to managing resources (Hillman et al., 2009).
The most constraining method of managing dependence is implement something within the boundary of the organisation, i.e. mergers and acquisitions. Mergers take three general forms: horizontal (buying competitors), vertical (buying buyers or suppliers), and conglomerate or diversifying mergers (buying organizations in a different domain). Where vertical integration helps in extending organizational control on the operations, horizontal integration provides dominance in relationships with increased organization’s power and reduced uncertainties from competition. Diversification on the other hand, decreases dependence on other dominant organizations Davis and Cobb, 2009). Many scholars saw mergers as the means of efficiency orientation as it reduced transaction costs, thus providing benefits to the consumer. However, it is a means to manage interdependence and provides litter benefit to the shareholders or consumers. It has been confirmed that mergers and acquisitions often reduce interdependency between sellers and buyers (Hillman et al., 2009). Finkelstein (1997) argues that mergers increase the organizational size and it leads to spread risks of larger investments, improved financial continuity, better market condition and better handling of larger risks. Thus, risks could be minimized and the firm may have better resources than before which could thereby result in better performance.
The essay clearly supports the original assertion of Pfeffer and Salancik (1978) that organizations are dependent upon the environment for its resources and therefore enact multiple strategies so that these contingencies are dealt with. The Resource Dependency Theory emphasizes that how managers can control such situations and use intra and inter organizational power to maintain organizational effectiveness and attain competitive advantage. The five actions that managers can take to manage and minimize environmental dependences include joint ventures and inter-organizational relationships, mergers and acquisitions, board of directors, executive succession and political action. The theory has been able to empirically validate all these areas and shows the reciprocal effect of uncertainty and interdependency on firm action. However, taking a more holistic view, it could be seen that the few areas of the theory have not been explored or tested as it should be.
The theory has successfully established itself in terms of general relationships between firms, its environment and the actions organisations tale to minimise these dependences. The areas of executive succession and political actions are less explored and do not seem to be exactly helpful in minimising the dependences in every case. However, underlying model is the accurate portrayal of inter-organizational relationships, joint ventures, mergers and acquisitions and boards of directors. Thus, managers can successfully use the above mentioned actions to minimise their dependence on the environment. Power is one of the central aspects of the theory and it is necessary that managers have this power to control such resources. They shall continuously make strategies and take actions in such a way that others’ power over them is reduced and they can increase their power on others.
References
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