The external control of organizations A resource dependence perspective

Sponsoring Editor: John Greenman Project Editor: Renee E. Beach Designer: Howard Leiderman Production Supervisor: Stefania T. Taflinska Compositor: American Book-St&ford Press, Inc. Printer and Binder: The Maple Press Company Art Studio: Vantage Art, Inc. THE EXTERNAL CONTROL OF ORGANIZATIONS A Resource Dependence Perspective Copyright 0 1978 by Jeffrey Pfeffer and Gerald R. Salancik All rights reserved. Printed in the United States of America. No part of this book may be used or reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews. For information address Harper & Row, Publishers, Inc., 10 East 53rd Street, New York, N.Y. 10022. Library of Congress Cataloging in Publication Data Pfeffer, Jeffrey. The external control of organizations. Includes index. 1 . Indus t ry-Soc ia l aspec t s . 2 . In te r - organizational relations. I. Salancik, Gerald R., jo in t au thor . I I . T i t l e . HD60.P46 658.4’08 77-13907 ISBN O-06-045193-9 The theme of this book, and the underlying premise of the external perspective on organizations, is that organizational activities and out- comes are accounted for by the context in which the organization is embedded. While some empirical attention has been paid to the effects of environment on organizational structures, and there has been some theoretical emphasis on the importance of environment, there are remarkably few studies of interorganizational influence activities. This is especially remarkable since many organizations have as their primary function and purpose the control and alteration of the activi- ties of other organizations. Wiley and Zald (1968) have examined the operation of two regional college and university accrediting organiza- tions; Zald and Hair (1972) have written of the various external con- trols on hospitals. But these two case studies are rare. The number of organizations attempting to control other organiza- tions is large. There are, first, all the various accrediting organizations, such as those operating to accredit educational organizations, hospi- 39 40 The External Control of Organizations tals, and social service agencies. There are regulatory bodies that func- tion to control at least some of the activities of the organizations they regulate. Regulatory bodies include those established by law and those established by the agreement of the organizations themselves, such as the NCAA, established by university athletic departments to regulate the conduct of interscholastic sports. Various advocate and interest groups, such as the Sierra Club, Common Cause, and others of narrower interests and shorter duration, operate to attempt to affect the decisions and activities of business and government organizations. In addition to organizations that explicitly and openly seek to control other organizations, interorganizational influence attempts are frequent among organizations interacting for other purposes. Thus, banks may attempt to control the dividend policies of firms to which they lend money. In this chapter, we will present the basic theory we propose to explain the operation of interorganizational influence, or social control processes. Although we will also present some relevant empirical evi- dence, it should be clear that many aspects of these ideas have yet to be empirically examined. Thus, the material is presented as a way of organizing thinking and understanding of the process of interorganiza- tional influence. INTERDEPENDENCE Interdependence is the reason why nothing comes out quite the way one wants it to. Any event that depends on more than a single causal agent is an outcome based en interdependent agents. Interpendence is the reason you cannot find the word in the American Heritage Dic- tionary-an outcome which depends both on your obtaining the dictionary and looking up the word and on the publishers’ having in- cluded the word in the volume. In social systems and social interac- tions, 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. Interdependence characterizes the relationship be- tween the agents creating an outcome, not the outcome itself. A seller is interdependent with a buyer because the outcome of concluding a sale depends on the activities contributed by each. A seller is also interdependent with another seller if each is negotiating with the same buyer for a sale. There are various ways of categorizing interdependence. One way Social Control of Organizations 41 is to distinguish between outcome interdependence and behavior in- terdependence. These two forms of interdependence are themselves independent, meaning that they can occur either alone or together. In a situation of outcome interdependence, the outcomes achieved by A are interdependent with, or jointly determined with, the outcome achieved by B. Consider a market of a given size in which there are two participants; the quantity sold is determined by the price charged; and the profits earned by the participants are determined by the amount sold, the price charged, and the quantity produced. In such a situation, the two participants, A and B, are in a situation of outcome interdependence. While each independently may make price and quantity decisions, the outcome-profit-will be a function of both the participant’s own decisions and those of his or her competitor. In the case of behavior interdependence, the activities are themselves depen- dent on the actions of another social actor, Organizing a poker game is an example of behavioral interdependence, In order for one person to play poker, it is necessary that he or she convince others to participate in the game, which involves having them at a certain place at a certain specified time. If the others do not cooperate, then the person cannot engage in the activity of playing poker. A further distinction can be made between kinds of outcome in- terdependence by whether the participants are in a competitive or symbiotic relationship. In a competitive relationship, the outcome achieved by one can only be higher if the outcome achieved by the other is lower. In the terminology of game theory, this is a fixed sum, or zero sum, game. In a situation of symbiotic interdependence, the output of one is input for the other. It is possible for both to be better off or worse off simultaneously. Many efforts have been made to define competitive and symbiotic relationships (e.g., Hawley, 1950). In terms of human ecology, competitive relationships exist when the actors each require identical resources for survival. Symbiotic relationships involve one actor’s using the by-products of the other, or in other words, using different resources. Interdependencies are not necessarily symmetric or balanced. They can be asymmetric. Moreover, interdependence existing between two social actors need not be either competitive or symbiotic-fre- quently, relationships contain both forms of interdependence simul- taneously. For instance, a conglomerate firm may sell the product of one of its divisions to another firm, thereby existing in a symbiotic relationship, and at the same time, be in competition with that other firm in the sale of the product of a different division. Interdependence is important to an organization because of the impact it has on the ability of the organization to achieve its desired outcomes. Consider the following illustration: 42 The External Control of Organizations In a small town in Maine there is one seller of a perishable product and one buyer. The buyer requires 100 units of product every two days, with the probability of his needing the 100 units on any given day being .5. The supplier has a .9 probability of having 100 units of the product on hand on any given day. The probability of the buyer, buyer A, being able to obtain what he wants is .9 and results from his dependence on the supplier. One day a new buyer, buyer B, comes into town. Buyer B also needs 100 widgets on average every two days, with demand varying randomly. Buyer A’s probability of now getting what he wants is a function of his getting to the supplier either on a different day or, if on the same day as B, on the probability of getting there before B. The probability of A now getting what he wants is reduced to .675. This added uncertainty is troublesome to A, so he decides to find an alternate source of supply for the product. Meanwhile, the first supplier notes that his sales have fallen from the time when both A and B bought from him. When A and B were both in the market, there was only a .25 chance of not selling the product that day, but with only B in the market, there was a .5 chance of not selling the product. The supplier, therefore, decides to cut down on the amount of product he carries, so if B does not come in, he will not be out so much inventory. This, in turn, reduces the likelihood of a B getting what he wants. Eventually, it is likely that the buyer and supplier will work out some arrangement to coordinate their behaviors so that neither faces as much uncertainty. In short, to cope with the interdependence of outcomes, the two will probably decide to make their behaviors more inter- dependent. This simple illustration demonstrates a number of important points about the consequences of interdependence for analyzing orga- nizational behavior. First, we can see that interdependence varies with the availability of resources relative to the demands for them. When there is a large amount of resources relative to the demand, interde- pendence between actors who need the same resource is reduced. Second, interdependence characterizes individuals transacting in the same environment, with the connection being through the flow of transactions. We can also see that interdependence can create prob- lems of uncertainty or unpredictability for the organization. This un- certainty, which is typically troublesome to organizations, derives from the lack of coordination of activities among social units. Organizations facing uncertainty attempt to cope with it on occasion by restructuring their exchange relationships. The solution to one organization’s un- certainties-for instance, finding a new supplier-can create new un- certainties for other organizations. Most importantly, the example illustrates how organizations, to solve their problems of uncertainty regarding outcomes, are likely to be led to increase their interde- pendence with respect to behavior, that is, to interstructure their Social Control of Organizations 43 behaviors in ways predictable for each. The typical solution to prob- lems of interdependence and uncertainty involves increasing coordina- tion, which ‘means increasing the mutual control over each others’ activities, or, in other words, increasing the behavioral interdepen- dence of the social actors. Interdependence is a consequence of the open-systems nature of organizations-the fact that organizations must transact with elements of the environment in order to obtain the resources necessary for sur- vival. It might be noted that interdependence has been increased with the increasing specialization and division of labor among organiza- tional entities. In the days of the pioneers on the American frontier when a family grew and made most of the things it required, the interdependence between the family and the various organizations it dealt with was less than for a family in the present, where there are specialized organizations providing a variety of goods and services, as well as organizations that purchase labor. To the extent that social organizations are self-contained, there is less interdependence between them. The amount of interdependence existing between organizations is not a given, but can change over time as organizations become more or less self-contained. Organizations engage in exchanges and transactions with other groups or -‘organizations. The exchanges may involve monetary or physical resources, information, or social legitimacy. Because organizations are not self-contained or self-sufficient, the environment must be relied upon to provide support. For continuing to provide what the organiza- tion needs, the external groups or organizations may demand certain actions from the organization in return. It is the fact of the organiza- tion’s dependence on the environment that makes the external con- straint and control of organizational behavior both possible and almost inevitable. Organizations could not survive if they were not responsive to the demands from their environments. But, we have noted that demands often conflict and that response to the demands of one group con- strains the organization in its future actions, including responding to the demands of others. This suggests that organizations cannot survive by responding completely to every environmental demand. The inter- esting issue then becomes the extent to which organizations can and should respond to various environmental demands, or the conditions under which one social unit is able to obtain compliance with its 44 The External Control of Organizations demands. By understanding the conditions of the social control of organizations, we believe it is possible to understand how organiza- tions decide to comply with, or attempt to avoid, influence. The nature of control and influence in social processes has been explored in a variety of disciplines, including social psychology, politi- cal science, sociology, and economics. In the, study of interorganiza- tional influence, there have been some preliminary attempts to develop an adequate theory. Most of these theories assume that some form of interdependence is a necessary condition for exerting influence (e.g., Emerson, 1962; Jacobs, 1974; Blau, 1964). As Hawley wrote, “Dominance attaches to the unit that controls the conditions necessary to the functioning of the other units” (1950:221). We would concur that, in general, organizations will tend to be influenced by those who control the resources they require. But there are a number of other conditions which increase the likelihood of the influence being success- ful. Below is a list of the conditions which affect the extent to which an organization will comply with control attempts: 1. The focal organization is aware of the demands. 2. The focal organization obtains some resources from the social actor mak- ing the demands. 3. The resource is a critical or important part of the focal organization’s operation. 4. The social actor controls the allocation, access, or use of the resource; alternative sources for the resource are not available to the focal orga- nization. 5. The focal organization does not control the allocation, access, or use of other resources critical to the social actor’s operation and survival. 6. The actions or outputs of the focal organization are visible and can be assessed by the social actor to judge whether the actions comply with its demands. 7. The focal organization’s satisfaction of the social actor’s requests are not in conflict with the satisfaction of demands from other components of the environment with which it is interdependent. 8. The focal organization does not control the determination, formulation, or expression of the social actor’s demands. 9. The focal organization is capable of developing actions or outcomes that will satisfy the external demands. 10. The organization desires to survive. It is not necessary that all conditions be present for influence to be observed. We would argue, however, that as more of the conditions are met, the probability of external control becomes more and more likely. These conditions are not themselves unalterable givens in a situation. Social actors can and do attempt to affect the conditions in 44 The External Control of Organizations demands. By understanding the conditions of the social control of organizations, we believe it is possible to understand how organiza- tions decide to comply with, or attempt to avoid, influence. The nature of control and influence in social processes has been explored in a variety of disciplines, including social psychology, politi- cal science, sociology, and economics. In the study of interorganiza- tional influence, there have been some preliminary attempts to develop an adequate theory. Most of these theories assume that some form of interdependence is a necessary condition for exerting influence (e.g., Emerson, 1962; Jacobs, 1974; Blau, 1964). As Hawley wrote, “Dominance attaches to the unit that controls the conditions necessary to the functioning of the other units” (1950:221). We would concur that, in general, organizations will tend to be influenced by those who control the resources they require. But there are a number of other conditions which increase the likelihood of the influence being success- ful. Below is a list of the conditions which affect the extent to which an organization will comply with control attempts: 1. The focal organization is aware of the demands. 2. The focal organization obtains some resources from the social actor mak- ing the demands. 3. The resource is a critical or important part of the focal organization’s operation. 4. The social actor controls the allocation, access, or use of the resource; alternative sources for the resource are not available to the focal orga- nization. 5. The focal organization does not control the allocation, access, or use of other resources critical to the social actor’s operation and survival. 6. The actions or outputs of the focal organization are visible and can be assessed by the social actor to judge whether the actions comply with its demands. 7. The focal organization’s satisfaction of the social actor’s requests are not in conflict with the satisfaction of demands from other components of the environment with which it is interdependent, 8. The focal organization does not control the determination, formulation, or expression of the social actor’s demands. 9. The focal organization is capable of developing actions or outcomes that will satisfy the external demands. 10. The organization desires to survive. It is not necessary that all conditions be present for influence to be observed. We would argue, however, that as more of the conditions are met, the probability of external control becomes more and more likely. These conditions are not themselves unalterable givens in a situation. Social actors can and do attempt to affect the conditions in Social Control of Organizations 45 order to create greater likelihood of being able to exert control success- fully over other organizations. Attempts are made to obtain more con- trol over important resources, to obtain better access to information in order to assess the organization’s actions and outcomes, and to increase the importance of what the influencing organization supplies. Social control involves a process in which both the influencer and the fo- cal organization act to affect the conditions governing the influence process. These conditions have parallels in other discussions of interorgani- zational power. Thompson (1967:31) noted that “an organization is dependent on some element of its task environment 1) in proportion to the organization’s need for resources or performances which that ele- ment can provide, and 2) in inverse proportion to the ability of other elements to provide the same resources or performance.” Blau ( 1964: 119-125)) in specifying the conditions for independence, the converse of dependence, states that 1) strategic resources promote independence; 2) the fact that there are alternative sources from which a needed servi