Resource dependency theory and entrepreneurship
Resource Dependency Theory: Who Holds the Power?
No business is an island. According to Resource Dependency Theory (RDT), the key to understanding a company's behavior is looking at who it relies on for survival.
Proposed by Jeffrey Pfeffer and Gerald R. Salancik (1978), this theory views organizations not as autonomous structures, but as entities constrained by a web of dependencies. The core assumption is simple: Whoever controls the most vital resources holds the power.
The Power Dynamic
Success and survival are uncertain because power relations constantly change. If Company A relies entirely on Company B for a critical component, Company B has leverage. They can raise prices, squeeze margins, or cut off supply entirely.
Therefore, the primary role of a manager is to reduce these dependencies and increase their own power over others.
[Image of principal agent theory diagram]Strategic Maneuvers: Reducing Dependence
Managers take strategic actions to minimize environmental dependence. Common tactics include:
- Mergers & Acquisitions: Buying a supplier to secure the supply chain.
- Vertical Integration: Doing it yourself. For example, Netflix vertically integrated into content creation (Netflix Originals) to reduce its dependence on aggressive movie studios who controlled the licensing prices.
- Board Interlocks: Inviting powerful people (bankers, politicians) to sit on the board to secure access to capital or influence.
Application to Entrepreneurship: "Swimming with Sharks"
For startups, RDT serves as a warning. New ventures are naturally resource-poor and must often partner with large incumbents to survive. Katila et al. (2008) famously describe this as "Swimming with Sharks."
Startups must ensure they are not too dependent on any one outside actor who might exploit them. To survive these dangerous partnerships, new ventures use specific defense mechanisms:
- Joint Ventures: Giving the large partner equity. If the incumbent owns a piece of the startup, they are less likely to crush it, as it would hurt their own investment.
- Formal Contracts: Strict legal protections regarding IP and revenue sharing.
- Embeddedness: Developing close social ties. Yli-Renko et al. (2001) note that strong social relationships create "reputation effects." If the shark bites the startup, the shark looks bad to the rest of the ecosystem.
Video: Resource Dependency Theory Explained
References
Katila, R., Rosenberger, J. D., & Eisenhardt, K. M. (2008). Swimming with sharks: Technology ventures, defense mechanisms and corporate relationships. Administrative Science Quarterly, 53(2), 295-332.
Pfeffer, J., & Salancik, G. R. (2003). The External Control of Organizations: A Resource Dependence Perspective. Stanford University Press.
Yli-Renko, H., Sapienza, H. J., & Hay, M. (2001). The role of contractual governance flexibility in realizing the outcomes of key customer relationships. Journal of Business Venturing, 16(6), 529-555.
