resource-dependence-theory

What is Resource Dependence Theory? Resource Dependence Theory In A Nutshell

Resource dependence theory was first introduced in the 1970s in a publication entitled The External Control of Organizations: A Resource Dependence Perspective. Resource dependence theory (RDT) is the study of the impact of resource acquisition on the behavior of an organization. In the publication, authors Jeffrey Pfeffer and Gerald R. Salancik argue that resources are key to organizational success. However, an organization does not always have control over the resources it needs and must devise strategies that sustain access.

Understanding resource dependence theory

Resource dependence theory notes that those who control critical resources have power, and power influences behavior. Similarly, the behavior of an organization with a dependence on these critical resources is also influenced. 

Resource dependencies can relate to raw materials, labor, and capital to name a few.

Foundational assumptions of resource dependence theory

RDT is based on three core assumptions:

  1. Organizations contain internal and external actors that influence and control resources and by extension, behavior. For example, how abundant are the resources? How much competition is there? How easy are the resources to acquire? Is there a more cost-effective acquisition method?
  2. The environment contains valued resources essential to the continued operation of the organization. Uncertainty develops around resource acquisition for those who do not control access.
  3. Organizations work toward two core objectives. They must seek to minimize dependence on critical resources from other organizations. They must also increase the dependence that other organizations have on them for resources. Achieving either of these two objectives has benefits for the power level of the organization

Factors that determine organizational dependence

Pfeffer and Salancik also identified three factors that determine the degree of dependence of one organization on another:

  • The importance of the resource – defined as the extent to which the organization relies on a resource for its continued viability. Such resources are valuable in that their removal from business operations would cause rapid and serious harm.
  • The extent of discretion over the use or allocation of the resource by the controlling company.
  • The availability of alternative resources or the concentration of resource control. How many companies control the majority of the resources?

Based on these factors, the business can minimize resource uncertainty by tweaking processes, relationships, and structures. Identifying substitute resources or establishing a supply from multiple sources are effective ways to reduce dependency.

If a business has the necessary capital, resource dependency can also be addressed by mergers or acquisitions. In this instance, each entity develops resource interdependence – which is a more favorable scenario when compared to complete dependence on either side.

Key takeaways:

  • Resource dependence theory describes the impact of resource acquisition on the behavior of a company.
  • Resource dependence theory argues that organizations with the most access to critical resources exert power and influence over those with less access.
  • Resource dependence occurs when an organization has little control over a resource it deems crucial to daily operations. Dependence can be reduced by identifying multiple resource suppliers and adjusting internal processes and structures.

Key Highlights about Resource Dependence Theory:

  • Introduction and Founders: Resource dependence theory (RDT) was first introduced in the 1970s through the publication “The External Control of Organizations: A Resource Dependence Perspective.” The authors of this publication, Jeffrey Pfeffer and Gerald R. Salancik, presented the theory as a way to study how resource acquisition influences organizational behavior.
  • Core Concept: At its core, resource dependence theory examines how organizations’ behavior is shaped by their dependence on acquiring necessary resources. Resources include various elements such as raw materials, labor, and capital. Organizations often need to access these resources from external sources.
  • Resource Control and Power: The theory asserts that those who control essential resources possess power, and this power significantly impacts their behavior. Furthermore, organizations that depend on these resources are also influenced by their need to secure them.
  • Assumptions: Resource dependence theory is built on three foundational assumptions:
    1. Organizations comprise internal and external actors who control and influence resources and behavior.
    2. Organizations depend on valuable resources in their environment for their continued operation.
    3. Organizations aim to reduce their dependence on critical resources from other entities while increasing others’ dependence on them.
  • Factors Determining Dependence: Pfeffer and Salancik identified three key factors that determine the degree of dependence of one organization on another:
    1. Importance of the resource: How essential is the resource for the organization’s survival and operations?
    2. Discretion over resource use: How much control does the controlling organization have over the resource’s allocation?
    3. Availability of alternatives: Are there alternative resource sources, or is resource control concentrated among a few entities?
  • Strategies to Address Dependence: Organizations can take several strategies to address resource dependence and reduce uncertainty:
    • Tweaking processes, relationships, and structures to increase resource control.
    • Identifying substitute resources to diversify resource acquisition.
    • Establishing relationships with multiple suppliers to avoid reliance on a single source.
    • Mergers or acquisitions to develop resource interdependence with other entities.
  • Benefits of Reducing Dependence: By reducing dependence on critical resources, organizations can enhance their power and negotiation position. Simultaneously, increasing others’ dependence on their resources can also enhance their influence.

Connected Business Concepts

Barbell Strategy

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A Barbell strategy consists of making sure that 90% of your capital is safe, and using the remaining 10%, or on risky investments. Applied to business strategy, this means having a binary approach. On the one hand, extremely conservative. On the other, extremely aggressive, thus creating a potent mix.

Technological Modeling

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Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.

Heuristics

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As highlighted by German psychologist Gerd Gigerenzer in the paper “Heuristic Decision Making,” the term heuristic is of Greek origin, meaning “serving to find out or discover.” More precisely, a heuristic is a fast and accurate way to make decisions in the real world, which is driven by uncertainty.

Bounded Rationality

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Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.

Second-Order Thinking

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Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.

Lateral Thinking

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Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.

Moonshot Thinking

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Moonshot thinking is an approach to innovation, and it can be applied to business or any other discipline where you target at least 10X goals. That shifts the mindset, and it empowers a team of people to look for unconventional solutions, thus starting from first principles, by leveraging on fast-paced experimentation.

Biases

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The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.

Dunning-Kruger Effect

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The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.

Occam’s Razor

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Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.

Mandela Effect

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The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.

Crowding-Out Effect

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The crowding-out effect occurs when public sector spending reduces spending in the private sector.

Bandwagon Effect

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The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What is marketing can be associated with social proof.

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