Resource Dependency Theory

While resource dependency theory (RDT) was originally developed to provide an alternative perspective to economic theories of mergers and board interlocks, it can also provide insight into precisely the type of inter-organizational relations that have played such a large role in the recent corporate scandals of the 21st century (Scott & Davis, 2007). RDT suggests that in order to survive, organizations must seek out and maintain resources that can only be obtained from other firms; therefore, the main driver of interfirm relationships is to allow an organization to gain the resources it requires from its broader environment to achieve a competitive advantage (Pfeffer & Salancik, 1978). As noted by Glasberg and Schwartz (1983:314), “since needed resources are controlled by other large (managerially directed) firms, resource dependency leads to complex structural relationships among firms.” The underlying tenets of RDT are best explained by Pfeffer, who describes the foundations of RDT in the following way:

1) The fundamental units for understanding intercorporate relations and society are organizations; 2) These organizations are not autonomous, but rather are constrained by a network of interdependencies with other organizations; 3) Interdependence, when coupled with uncertainty about what the actions will be of those with which the organization is interdependent, leads to a situation in which the survival and continued

success are uncertain; therefore 4) Organizations take actions to manage external interdependencies, although such actions are inevitably never completely successful and produce new patterns of dependence and interdependence; and 5) These patterns of dependence produce interorganizational as well as intraorganizational power, where such power has some effect on organizational behaviour. (Pfeffer, 1987:26)

Fundamentally, there are three conditions the RDT framework considers when explaining an organization’s relationship with the external environment. First, organizations take their external environment into account when determining their actions. Second, organizations have at their disposal various strategies they can use to respond to the environment and these strategies differ across organizations. Finally, power – not efficiency as in transaction cost economics or rationality as in economics – helps to explain what actions an organization may take in order to respond to the environment (Scott & Davis, 2007).

Historically, much of RDT has been used to explain how organizations use mergers and acquisitions (M&As) as a way to reduce uncertainty. However, its applicability began to diminish as M&As lost favour in the 1990s as corporations started to divest themselves of these horizontally attached units. The M&A activity was also reversed with respect to vertical integration as firms began to outsource all but a few core functions. In addition, by the late 1990s the incidence of board interlocks had greatly decreased (Scott & Davis, 2007). As recognized by Scott and Davis (2007:243) “changes in economic times and regulatory regimes, in short lead to changes in the repertoires that organizations used to manage their interdependence.”

RDT, however, has been experiencing a resurgence with several recent studies enriching the discussion around this theory by applying it in new, innovative ways. Casciaro and

Piskorski (2005) introduced the concept of differential power imbalances between organizations that are co-operating with each other, examining the level of their mutual dependence to assess how an organization deals with trying to absorb resources that are providing a constraint and hence uncertainty in the organization’s operations. Katila, Rosenberger and Eisenhardt (2008) looked at the competitive aspects of the interfirm interaction including the potential for resource misappropriation between firms. Ozcan and Eisenhardt (2009) used RDT to theorize that the interrelationship of organizations can be socially constructed and multilateral, especially in a networked industry. These research directions move the field forward by addressing the reduction in environmental uncertainty through a diminution in the dependence that RDT asserts organizations strive for.

RDT has been criticized for being unable to explain how organizational competencies are developed, and for its seeming inability to adequately answer whether variables such as transaction costs, learning and legitimacy factor into an organization’s decisions to pursue actions to reduce uncertainty in the environment (Barringer & Harrison, 2000). In addition, the avoidance of uncertainty through a decrease in resource dependency was questioned by Gulati and Sytch (2007) who demonstrated that uncertainty could be reduced through joint dependence between firms.

RDT then has seen the subject matter of its initial uses wane only to have researchers in the last few years use the theory to look at different phenomena such as manufacturers performance in procurement relationships (Gulati & Sytch, 2007), alliance network structure (Bae & Gargiulo, 2004), alliance portfolios (Ozcan & Eisenhardt, 2009), and corporate investment in entrepreneurial partnerships (Katila et al., 2008). The theory,

while it has some limitations, has proven to be adaptable and relevant in today’s technology, alliance rich, networked world.

3.2.1 Resource Dependency Theory and Cartels

Cartels and the illegal activities they undertake (particularly price fixing) fit very well within the purview of RDT. In their original conceptualization of RDT, Pfeffer and Salancik (1978) suggested that mergers and acquisitions and alliances would allow an organization to reduce environmental uncertainty through encapsulating, procuring or utilizing resources that would not have been otherwise available (Burgers, Hill, & Kim, 1993). This same logic can be extended to other inter-organizational arrangements including cartels. In fact, Pfeffer and Salancik (1978:179) considered cartels, calling them “overt attempts to organize a set of interdependent organizations, represent[ing] coalitions of organizations with typically at least normative sanctions applied to members who deviate from the proscribed cartel practices.” Unfortunately, while the actions taken by organizations involved in M&As are often a matter of public record, those undertaken by cartels, namely illegal price fixing, are hidden from the view of the regulatory authorities, the public and often the large majority of the employees at the cartel firms themselves. The collusion between firms takes place at the highest levels of the organization, and this coordination is not publicly visible. Indeed, it is “the relative invisibility of behavior, the reliance on ambiguous effects for determining whether or not behavior has occurred, and the historical precedents of economic theory which argued that cartel activity has the single goal of maximizing joint income, [that] have all served to impede the progress of understanding cartel and coalition behaviour” (Pfeffer & Salancik, 1978:181). Thus, while cartels may be an important form of interorganizational

behaviour that reduces the dependency of an organization on others and hence reduces uncertainty, it has seldom been studied.