Small changes on power dynamics can have a big impact on corporate strategies

New research from Daniel A. Levinthal (Wharton School, University of Pennsylvania) and Esade Assistant Professor Dong Nghi Pham explores how the power dynamics of organizations can both stifle and drive change. 

Expanding on the theories of organizational adaptation and organizational power, the authors have developed a computational model to study the impact of decision-making structures and the adaptive actions at corporate and subunit levels in organizations. 

The findings address an underdeveloped area in the literature on organizational learning, and expand on the foundational work of authors including James March, Jeffrey Pfeffer, Herbert Simon, Richard Cyert and, more recently, Giovanni Gavetti. 

The research can be seen in full in the journal Organization Science. 

Challenges of adaptation under goal conflicts

Although the seminal literature on organizational learning suggests that firms act as political systems, there has been surprisingly little discussion surrounding the impact of organizational politics on processes and strategy.  

Levinthal and Pham have explored the interplay behind these processes and outcomes using a computational model that takes into account the mutual adaptation between subunit and corporate strategies, as well as the political processes occurring at the corporate decision-making level. 

Despite its often-cited dark sides, political processes can lead to more dynamic decision-making

The initial steps in modelling organizational politics involve recognizing that different subunits or organizational actors may not share the same goals. Without conflicts of interest, politics would be deemed unnecessary.  

Second, politics imply some level of interdependence among subunits. This interdependence arises through a corporate strategy that influences resource allocation and performance metrics across all subunits within a firm. Without it, the organization could otherwise be decomposed into independent sub-organizations, each operating autonomously to pursue its own objectives.  

Given this interdependence, subunits must balance adapting to their local market niches with aligning to the overarching corporate strategy. At the corporate level, the firm must formulate a strategy that prioritizes the most profitable niches while considering compensatory trade-offs across all subunits. 

How would a corporation evolve and adapt, given this internal goal conflict and complex interdependence? By modeling various conditions with differing levels of environmental change and internal goal conflict, the authors have identified when and how a political process — in which self-interested subunits contest repeatedly to decide on corporate policy — might be more effective in promoting adaptation compared to a benign decision making process of a CEO considering the interests of all subunits within the firm. 

Modeling power and politics

The organization modeled is based on an M-form structure, which allows for a higher level of decentralization. The adaptation choices are reflected in changes in corporate strategy and the resulting decisions made by various subunits.  

The organizational tasks contain four key elements:  

• The niche size of the subunit, each of which differs in size to reflect the scale of the opportunities available. 
• Subunit policies, which reflect the decisions each unit needs to make regarding their own strategies. 
• Corporate policy, which influences the payoff available to each subunit. 
• Performance, which determines the key metrics of evaluation for each subunit. 

Within this structure, subunits adapt to the changes in the corporate strategy and their local niche requirements, which in turn influences subsequent corporate strategy. Subunits engage in a political process as they gain power via adaptation, and contest to advance the corporate strategy that aligns with their own interests, potentially at the expense of other subunits with conflicting interests.  

Politics and inertia

In a stable environment, politics coupled with the mutual adaptation between corporate and subunit strategy forms a source of inertia. First, a corporate strategy that aligns with the interests of the dominant coalition tends to reinforce its power, creating an entrenchment - "rich get richer" effect. As this dominant coalition grows stronger in power, it becomes more able to uphold the corporate strategy that benefits itself, further entrenching the existing strategic direction at the expenses of subunits with conflicting goals. 

Second, even organizational units that were not initially part of the dominant coalition adapt their policies to align with corporate strategy and, as a consequence, may come to support this status quo strategy. When subunits and coalitions with less power adapt to the corporate strategy even if the strategy isn’t in their own interest, it creates a competence trap in the organization. The longer these subunits operate within the rules set by the corporate strategy, the more proficient they become at navigating them, making strategic changes seem less necessary. As a result, the need for the organization to change was disguised by the adaptation of the subunits, who then came to view the existing strategy as more favorable.  

Politics and strategic changes

However, the environment and the underlining profitability of market niches might change, necessitates a strategic reorientation at corporate level. A political process—where corporate strategy is determined through contestation among self-interested subunits—can drive strategic change more speedily, since it is unencumbered by the bounded rationality of a benign CEO attempting to balance the collective interest. Environmental changes gradually reshape the power structure, as certain subunits gain power by operating in more profitable markets and eventually gain enough power to form a new dominant coalition. 

This gradual shift in power culminates in what appears to be a sudden strategic transformation—a punctuated equilibrium—where the newly dominant coalition, now in control, is free to redefine corporate strategy. Ultimately, in cases of low to moderate internal goal conflict, only a slight shift in the balance of power is needed to trigger significant organizational reorientation. However, if goal conflict is too high, the aforementioned entrenchment effect of power may be too strong for even political contestation to trigger adaptation. 

The bright side of politics

The overall results of the various adjustments, which are detailed in the published research, offer two main insights into the double-edged nature of politics. 

On the one hand, in a stable environment, politics serve to entrench the existing power structure and contribute to the inertia of corporate strategy. The higher the level of goal conflict, the larger the ‘power of power’ and the more dysfunctional politics will become.  

On the other hand, in a dynamic environment and under moderate goal conflict, politics helps unfreeze the alignment between corporate strategy and subunit interests, creating opportunities for a new dominant coalition to emerge, leading to substantial strategic reorientation. Surprisingly, this self-interested political contestation—focused solely on the interests of the dominant coalition—can prove to be a stronger adaptive force than a decision-making process that seeks to address the collective interests of all subunits.  

Despite its often-cited dark sides, political processes can lead to more dynamic decision-making, fostering competitive advantage and promoting flexibility in changing environments.