Structural power, corporate strategy, and performance

• Author: James D. Westphal,David H. Zhu
• Date: 01 March 2021
• Published date: 01 March 2021
• DOI: http://doi.org/10.1002/smj.3239

RESEARCH ARTICLE

Structural power, corporate strategy, and

performance

David H. Zhu

1

| James D. Westphal

2

1

Arizona State University, Tempe,

Arizona

2

University of Michigan, Ann Arbor,

Michigan

Correspondence

David H. Zhu, Arizona State University,

P.O. Box 874006, Tempe, AZ 85287-4006.

Email: david.zhu@asu.edu

Abstract

Research Summary: We develop a structural theory

of power to explain how an organization is indirectly

influenced by others through intermediaries. Our the-

ory begins by explaining why an organization can

improve its power position by acquiring partners that

have direct advantages over it. We then propose the

construct of indirect disadvantage to explain why an

organization is motivated to acquire other partners that

have advantages over its powerful partners. We further

predict that the organization is motivated to acquire

non-partners to gain two-step leverage over powerful

partners. Finally, we theorize that the total indirect dis-

advantage of an organization relative to all partners

negatively influences its performance. Using an exten-

sive dataset on American businesses (1997–2007), we

find strong support for our theory at both industry-

industry and firm-industry levels.

Managerial Summary: Powerful buyers and suppliers

are major influencers of the bottom line. This study

develops a new theory to explain how to deal with

them effectively, especially through mergers and acqui-

sitions. In addition to considering powerful exchange

partners as acquisition targets, firms can seek to exer-

cise indirect influence over them through others.

Acquiring other partners or non-partners that have

control over powerful buyers and suppliers is often fea-

sible and effective in dealing with those organizations

and improving the firm's financial position. Our analy-

sis of a very large sample of American businesses over

Received: 23 March 2018 Revised: 6 August 2020 Accepted: 8 September 2020 Published on: 27 September 2020

DOI: 10.1002/smj.3239

624 © 2020 Strategic Management Society Strat Mgmt J. 2021;42:624–651.wileyonlinelibrary.com/journal/smj

a decade not only provides clear evidence that supports

our theory but also highlights the substantial competi-

tive advantages enjoyed by firms that exercise indirect

sources of influence over major exchange partners.

KEYWORDS

direct and indirect power advantages, mergers and acquisitions,

resource dependence, superior performance and competitive

advantage, two-step leverage

1|INTRODUCTION

Power has long been a central construct in organization theory and research. Organizational

power is typically theorized to be a property of the direct resource exchange relationship

between two organizations; an organization is powerful relative to its exchange partner to the

extent that the exchange partner depends on it for critical resources and has few alternatives to

choose from (Blau, 1964; Casciaro & Piskorski, 2005; Emerson, 1962; Finkelstein, 1997; Gulati &

Sytch, 2007; Katila, Rosenberger, & Eisenhardt, 2008; Molm, 1990; Xia & Li, 2013). Because

organizations are open systems that depend on the external environment for critical resources,

an organization's power relative to resource exchange partners plays a critical role in influenc-

ing major corporate strategies and performance outcomes (Burt, 1992; Finkelstein, 1997;

Pfeffer & Salancik, 1978; Porter, 2008). Research shows that organizations seek to improve their

power position relative to exchange partners through various types of major corporate deci-

sions, including acquisitions (Casciaro & Piskorski, 2005; Finkelstein, 1997; Rogan &

Greve, 2014), alliances and joint ventures (Ahuja, Polidoro, & Mitchell, 2009), interlocking

directorships (Burt, 1983; Westphal, Boivie, & Chng, 2006), and executive successions (see

review by Hillman, Withers, & Collins, 2009). In addition, organizations that more effectively

manage external power and resource dependence relations tend to survive longer and enjoy

superior performance (see reviews by Davis & Cobb, 2010; Wry, Cobb, & Aldrich, 2013).

Despite the central role of power in organization theory and research, it has been conceptu-

alized predominantly as a property of direct resource dependence relationships (Casciaro &

Piskorski, 2005; Emerson, 1962; Finkelstein, 1997; Gulati & Sytch, 2007; Katila et al., 2008;

Pfeffer & Salancik, 1978). Because direct relationships are known to be embedded in a network

of relationships and indirect ties generally have major impacts on the effects of direct ties

(Cook & Emerson, 1978; Molm, 1990; Yamaguchi, 1996), the focus on direct dependence rela-

tionships and the relative neglect of indirect or structural power may have left a substantial def-

icit in our understanding of the sources of interorganizational power. In addition, focusing

mainly on direct dependence relationships has led to a major criticism of resource dependence

theory: Its core recommendation to manage dependence relationships by acquiring directly

advantaged partners can be difficult to implement (Casciaro & Piskorski, 2005; Gargiulo, 1993).

Because corporate strategies are influenced by motivations to increase power, by neglecting

indirect dependence and power, extant research may have missed relatively feasible strategies

for managing interorganizational dependencies. By extension, without fully considering struc-

tural sources of power, we will also have an incomplete understanding of the sources of vari-

ance in organizational performance.

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