Structural power, corporate strategy, and performance

Abstract Research Summary We develop a structural theory of power to explain how an organization is indirectly influenced by others through intermediaries. Our theory 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 disadvantage of an organization relative to all partners negatively influences its performance. Using an extensive 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 acquisitions. In addition to considering powerful exchange partners as acquisition targets, firms can seek to exercise indirect influence over them through others. Acquiring other partners or non‐partners that have control over powerful buyers and suppliers is often feasible and effective in dealing with those organizations and improving the firm's financial position. Our analysis of a very large sample of American businesses over a decade not only provides clear evidence that supports our theory but also highlights the substantial competitive advantages enjoyed by firms that exercise indirect sources of influence over major exchange partners.