Corporate Linkages and Organizational Environment: A Test of the Resource Dependence Model

Brian Boyd

4^th November 2024

Niceson Sunil

Strategic Management Journal (1990)

ABOUT THE AUTHOR

Focus

• Examines the role of corporate boards in managing environmental uncertainty.

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• Models Tested:
• Management Control
• Resource Dependence

• Management Control Model : Views boards as 'rubber stamps' with little impact on strategy.

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• Resource Dependence Model : Boards actively secure resources and manage uncertainty.

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• Hypothesis: Board composition varies based on environmental factors to secure resources.

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Difference

Resource dependence theory (RDT)�How the external resources of an organization affect the behavior of the organization

https://en.wikipedia.org/wiki/Resource_dependence_theory

Key Hypotheses

1. Munificence (Resource abundance)�Negatively related to board size and interlocks

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• Dynamism (Volatility)�Positively related to board size and interlocks

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• Complexity (Competition)�Has nonlinear effect on board size and interlocks

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• Firm Size�Correlates positively with board size and interlocks

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• Board Size�Correlates positively with the number of interlocks

**Interlocks => relationships with directors of other companies

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Dess and Beard's (1984) model of environment : to measure resource scarcity, volatility, and complexity

Methodology

• Sample: 147 U.S.-based public firms across nine industries

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• Measures:

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• Munificence: 5-year (1979-84) industry growth rate
• Dynamism: Variability in growth rates
• Complexity: Herfindahl Index for market share concentration

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• Analysis:

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Structural Equation Modeling (LISREL) to test relationships

LISREL Models – In general

*** This content is outside of the paper. This is through a Google Search and Chatgpt. Any errors are self.

• LISREL (Linear Structural Relations) is a software program developed to conduct Structural Equation Modeling (SEM)

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• Multivariate statistical technique used to analyze complex relationships between observed and latent variables

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• Allow researchers to model and test relationships between variables in ways that account for both measurement error and indirect effects.

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• Key Components of LISREL Models (SEM):

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• Observed Variables: Those directly measured in a study (X, Y)

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• Latent Variables: Unobserved constructs inferred from observed variables

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• Error Terms:
• Measurement Error : For observed variables
• Disturbance Terms: For latent variables

LISREL Models – In general

*** This content is outside of the paper. This is through a Google Search and Chatgpt. Any errors are self.

LISREL Model - Results

Findings

• Munificence:

Fewer interlocks in resource-scarce environments; larger boards in abundance

• Dynamism:

Increased board size in volatile environments

• Complexity:

Nonlinear effect on board size; larger boards in monopoly and competitive environments

• Firm Size

Positively correlate with interlocks

• Board Size

Positively correlate with interlocks

High-Performing Firms Analysis

• High-performing firms respond more aggressively to environmental pressures:

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• They:
• Increase interlocks under resource scarcity
• Reduce board size in competitive markets

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• Highlights the adaptability of successful firms in managing uncertainty

Conclusion

• Resource Dependence Theory effectively explains board composition under environmental demands
• High-performing firms are adaptable to resource scarcity and competitive pressures

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• Practical Implication:
• Strategic board composition can enhance firm performance, especially in uncertain environments.

Critique and Limitations

• Constrained in several ways by the nature of the sample
• Study focuses on industry variation, but a longitudinal analysis of one industry may offer insights
• Addition of more industry groups

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• Suggestions for Future Research:
• Examining board adjustments in specific high-uncertainty industries over time
• Expanding industry diversity to test generalizability

INVITATION TO DISCUSSION

What are the practical implications of the Resource Dependence Model for board composition in modern firms?

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It suggests that boards should be strategically composed to secure necessary resources and manage environmental uncertainty, particularly through interlocks with other firms.

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How might high-performing firms’ response to environmental uncertainty differ from that of average firms?

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High-performing firms tend to adjust more aggressively, increasing interlocks in resource-scarce environments and strategically reducing board size in highly competitive settings.

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In what ways could longitudinal data strengthen the findings of this study?

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Tracking board adaptations over time within the same industry would allow for observing how firms dynamically adjust their boards in response to fluctuating environmental uncertainties, providing stronger causal insights.

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What are some limitations of using board size and interlocks as measures of environmental linkage, how might they be addressed?

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These measures may not capture all forms of external linkage; future research could consider additional indicators like strategic alliances or partnerships that also serve to manage environmental dependence.

THANK YOU