Pfeffer and Salancik’s The External Control of Organizations (1978) core argument is that to understand what an organization does, grasping the context it operates in is essential. Organizations are not self-directed. They are other-directed.
The logic is that organizations need resources to survive. Those resources are controlled by others. That creates dependence. And dependence creates the possibility of external control.
Organizations do not sit still under that constraint. They merge, form joint ventures, co-opt outsiders onto their boards, diversify, grow, and lobby governments—all to manage and avoid dependence. Patterns of merger, joint venture, and board composition follow patterns of resource interdependence.
Probably the book’s most provocative claim is that managers matter less than commonly believed. Studies estimate administrators account for about 10 percent of the variance in organizational performance. The rest comes from industry, year, and stable organizational characteristics.
Effectiveness, on this view, is a sociopolitical question, not an economic factor. It is judged by those outside the organization, by whoever controls the resources the organization needs.
Most organizational theory treats organizations as self-directed, autonomous actors pursuing their own goals. Pfeffer and Salancik argue the opposite: organizations are other-directed, constantly struggling for autonomy and discretion, confronted with constraint and external control. To understand organizational behavior, you must understand the context of that behavior—the ecology of the organization.
Interdependence exists whenever one actor does not entirely control all of the conditions necessary for the achievement of an action or for obtaining the outcome desired from the action. Virtually all organizational outcomes are based on interdependent causes or agents. Organizations must transact with other elements in their environment to acquire needed resources, and this is true whether we are talking about public organizations, private organizations, small or large organizations, or organizations which are bureaucratic or organic.
The outcomes achieved by A are jointly determined with the outcome achieved by B. In a market of a given size, the profits earned by participants are determined by both their own decisions and those of competitors.
The activities are themselves dependent on the actions of another social actor. Organizing a poker game requires convincing others to participate at a certain place and time.
Organizational environments are not objective realities. They become known through a process of enactment in which perceptions, attention, and interpretation come to define the context for the organization. The question of what the environment is, is meaningless without regard to the focal organization which enacts it. Information systems, organizational structure, and the distribution of power within the organization all affect what aspects of the environment are attended to and how they are interpreted.
The dependence of one organization on another derives from three factors: the importance of the resource (the extent to which the organization requires it for continued operation and survival), the discretion over resource allocation and use possessed by the other organization, and the concentration of resource control (the extent to which the focal organization can substitute sources for the same resource). A resource that is not important cannot create dependence regardless of how concentrated control over it is. Regardless of how important the resource is, unless it is controlled by a relatively few organizations, the focal organization will not be particularly dependent on any of them.
The concentration of force to accomplish something is more likely to cause those in opposition to concentrate and coordinate their actions also. Galbraith (1967) spoke of this as countervailing power—the concentration of power in one sphere tends to set up forces that result in a countervailing, concentrated opposition. For the dependence between two organizations to provide one organization with power over the other, there must be asymmetry in the exchange relationship. If the exchange is not equally important to both organizations, the less dependent organization has a power advantage.
The Israeli managers study (Pfeffer, 1972) found that managers’ willingness to comply with government requests was correlated with their firms’ dependence on the government for sales. The affirmative action study (Salancik, 1976) found that defense contractors’ responsiveness to affirmative action pressures was a function of their dependence on the government—but only when they were not major suppliers of defense requirements.
Organizations attempt to avoid being controlled by restricting the flow of information, denying the legitimacy of demands, diversifying their dependencies, and manipulating information to increase their own legitimacy. At the same time, they seek stability and certainty in their resource exchanges. The organization confronts a dilemma: future adaptation requires discretion to modify actions, but the requirements for certainty and stability necessitate the development of interorganizational structures of coordinated behavior. The price for inclusion in any collective structure is the loss of discretion.
Pfeffer (1972) found that patterns of merger activity followed patterns of resource interdependence. Firms acquired other firms in industries with which they transacted. The correlations were high (.65 for sales interdependence, .62 for purchase interdependence).
Pfeffer and Nowak (1976) found that patterns of joint venture activity followed patterns of transactions interdependence. Joint ventures were more likely when concentration was intermediate—when uncertainty was highest.
Boards of directors are not primarily administrative bodies. They are mechanisms for cooping important external organizations with which the organization is interdependent. The size and composition of boards are related to the organization’s context. Hospitals more dependent on the local community selected directors who could raise funds and link the hospital to its environment. Hospitals that did not structure their boards consistent with their requirements for integration were less effective.
The environment affects organizational activities because it affects the distribution of control within the organization. The causal sequence is: (1) environmental context influences the distribution of power and control within the organization; (2) the distribution of power affects the tenure and selection of major organizational administrators; (3) organizational policies and structures are results of decisions affected by the distribution of power; and (4) administrators who control organizational activities affect those activities and resultant structures.
Following Crozier (1964), Thompson (1967), and Perrow (1970), the strategic contingencies theory argues that the most critical organizational function or the source of the most important organizational uncertainty determines power within the organization. Those subunits most able to cope with the organization’s critical problems acquire power. The three predictors of subunit power are: (1) the ability of the subunit to cope with organizational uncertainties; (2) the substitutability of the subunit’s capabilities; and (3) the pervasiveness or importance of the contingency to the organization.
Power can become institutionalized—established in relatively permanent structures and policies that favor one subunit’s influence. The effect is to extend a subunit’s power beyond its utility to the organization. Institutionalization is not absolute; persistent failure erodes it.
Organizations are only loosely coupled with their environments. The relationship between environments and organizations is important but indeterminate. Even if each causal link were as strong as a .8 correlation, the overall correlation would be only .51.
Managers serve three roles: symbolic (the manager is a symbol of the organization and its success or failure, a scapegoat), responsive (the manager is a processor and responder to the demands and constraints confronting the organization), and discretionary (the manager directs the organization toward more favorable environments and manages and establishes negotiated environments). All three roles are typically involved in the management of organizations.
If organizational actions are responses to their environments, then organizational behavior is determined through the design of organizational environments. The focus for attempts to change organizations should be the context of the organizations. Behavior is a consequence of the context confronting the organization. The design and change of organizational behavior can profitably be approached from the perspective of analyzing and designing the context to produce the desired activities.
Organizations attempt to manage or avoid uncertainty. Rather than accepting uncertainty as an unavoidable fate, organizations seek to create around themselves more stable and predictable environments. The net result is larger organizations operating in environments that are increasingly regulated and politically controlled.
Solving the uncertainty deriving from interdependence leads the organization to create an environment which makes it even more important to stabilize. The burdens of interdependence are shifted to the less organized and less powerful actors. The resulting environment is one of more tightly coordinated organizational action and greater concentrations of social power.
Resource dependence theory has become one of the most influential theories in organizational studies. It explains why organizations do what they do—why they merge, form joint ventures, coopt external interests, engage in political activity. It explains why managers matter less than commonly believed. It explains why effectiveness is a sociopolitical question, not an economic one. And it explains why the design of organizational environments is the most promising approach to organizational change.