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Resource Dependency Theory
In 1624, English poet John Donne wrote, 'No man is an island.' In that poem, he describes how everyone is a part of something bigger, and that we all rely on each other. The same can be said for any organization, firm, or company that exists and operates today. One way this is demonstrated is through a company's reliance on another organization for the resources it needs to operate. The idea is referred to as resource dependency theory.
Resource dependency theory examines the relationship between organizations and the resources they need to operate. Resources can take many shapes or forms, including raw materials, workers, and even funding. If one company maintains the majority of a resource, then another company will become dependent on it in order to operate, creating a symbiotic relationship. Too much dependency creates uncertainty, which leaves organizations subject to risk of external control. External control may be imposed by the government or other organizations, and can have a significant effect on operations, such as funding or personnel policies. Managers strategize alternative business plans in order to lower this risk.
For example, let's say that ACME Security Systems is the technology security firm for a large media company, XYZ Multimedia. XYZ Multimedia is also the security firm's only client. In this scenario, the security firm is completely dependent on the media company as its sole source of revenue, and there are many risks associated with this type of business model. This relationship gives XYZ Multimedia complete leverage during service and fee negotiation. In order to lower this risk, the security firm will have to explore other clients to lower the level of dependence on one client.
The importance of this theory was documented during the 1970s, when authors Jeffrey Pfeffer and Gerald R. Salancik published The External Control of Organizations: A Resource Dependence Perspective, which discussed their study of where power and dependence originate, and how organizations may use their power and manage those that are dependent upon them. Managers are constantly seeking advantages to improve partnerships with other organizations in order to strengthen their own.
Some of the factors that influence resource dependence include the importance of resources, the abundance of resources, and the control of resources. When it comes to the importance of resources, an organization must ask itself how vital a resource is to its continual operations. Something is considered vital if when you remove it from the firm's operations, the business suffers greatly.
In terms of the abundance of a resource, an organization must ask itself it can acquire the resource easily and if the resource is scarce or hard to come by.
Finally, when it comes to who's in control, an organization should focus on whether or not the resource in question has been monopolized by a single manufacturer. If managers don't have any leverage, this would leave them in a poor position when it comes to price negotiation.
Two good examples of modern resource dependence include the United States' dependence on nickel and oil. Nickel makes up many items that we use everyday, such as belt buckles, coins, keys, paper clips, and razors. On a much larger scale, it's used in many defense system weapons. Consider the amount of nickel that's required to produce these products each year, and then consider that the United States' main source of nickel production within our borders comes only from Oregon.
This has created a scenario in which we're reliant on imports for about 40% of our nickel needs. One nation, China, controls nearly all of the world's minerals. We have learned that this level of resource dependence puts the United States in a tough trading position with China, as it controls a much-needed material, nickel.
Then compare nickel with oil, another resource that the United States is heavily dependent on that's controlled by a multi-national group. Economic uncertainty is lowered when there are more procurement options available, as opposed to a single entity that controls the resource that's not readily abundant.
'No man is an island', and no organization is so closed off from external factors that it never experiences any level of uncertainty or endures any level of risk. Resource dependency theory is constantly present in the competition for all resources that act as the lifeline to an organization. Jeffrey Pfeffer and Gerald R. Salancik tell us that the division of power between different organizations can be labeled as 'haves' and 'have nots.' Thus, managers are vying with competitors and suppliers for superiority in the global economic food chain, and that survival favors those that can control vital resources and maintain positive exchange relationships.
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