Survival and growth outcomes for young firms
Research Paper Title:
“A knowledge-based view of managing dependence on a key customer: survival and growth outcomes for young firms”
Authors:
Helena Yli-Renko (Marshall School of Business, USC)
Lien Denoo (Department of Management, Tilburg University)
Ramkumar Janakiraman, Darla Moore School of Business, University of South Carolina
Background:
Young firms in B2B markets often experience a high level of dependence on a key customer. Yet, the firm-level outcomes of such dependence are poorly understood, with extant research pointing to significant risks and likely negative effects on survival and growth. The limited resources and typically highly imbalanced key customer relationships of these firms make it difficult to deploy strategies such as safeguarding investments, symmetrical dependence, acquisitions, or corporate political actions. The questions thus remain: how dangerous is dependence on a key customer for a young firm, and what can the firm do to manage such dependence? In this article, the researchers seek to understand the implications of key customer dependence for the survival and growth of the firm—two critical performance outcomes that do not necessarily co-vary for young firms.
Methodology:
Sample: Young, technology-based firms in business-to-business markets in the UK
Sample Size: 180
Analytical Approach: Statistical analysis including a two-stage Heckman regression model
Hypotheses:
The higher the dependence of a young firm on a key customer, the lower will be the firm's chances of survival.
The higher the dependence of a young firm on a key customer, the lower will be the firm's customer portfolio growth.
a) The higher the level of congenital knowledge stemming from TMT industry experience, the lower will be the negative effect of key customer dependence on firm survival.
b) The higher the level of congenital knowledge stemming from TMT industry experience, the lower will be the negative effect of key customer dependence on the firm's customer portfolio growth.
a) The more experiential knowledge the firm has accumulated, the lower will be the negative effect of key customer dependence on survival.
b) The more experiential knowledge the firm has accumulated, the lower will be the negative effect of key customer dependence on the firm's customer portfolio growth.
a) The higher the interorganizational learning facilitated by the relationship quality of a young firm's key customer relationship, the lower will be the negative effect of key customer dependence on firm survival.
b) The higher the interorganizational learning facilitated by the relationship quality of a young firm's key customer relationship, the lower will be the negative effect of key customer dependence on the firm's customer portfolio growth.
Results:
The study found a significant negative impact of key customer dependence on firm survival, thus providing empirical evidence of a firm-level effect that has not been quantitatively examined in prior research.
Furthermore, the study found that experiential learning mitigates this negative effect, indicating that dependence is particularly hazardous for the youngest, least experienced, firms. At the earliest stages of its lifecycle, a firm will be at its most vulnerable to the downsides and risks of dependence on a key customer. The firm's early-stage capabilities will provide limited ability to deal with shocks or coercive actions in the relationship.
Contrary to their hypothesis, the researches found that dependence has a positive effect on customer portfolio growth, indicating that if a firm survives despite a high level of dependence, it may be able to leverage the key customer relationship to acquire other customers. These positive effects might stem from, e.g., increased innovation, sales cost efficiency, and reputation.
They further found that this positive growth effect is stronger for less experienced firms. It is also amplified by congenital knowledge—the more industry experience the young firm's top management team has, the better able it will be to realize positive growth outcomes from the key customer relationship.
Interorganizational learning has a negative moderating effect on the dependence-growth relationship, indicating that high relationship quality in the key customer relationship may serve to “tie down” the firm, hampering its ability to acquire other customers.
Conclusion:
The results contribute a more dynamic and nuanced, knowledge-based view of young firms' customer relationships, shedding light on differential survival and growth outcomes through the early years and adolescence. The results suggest that dependence on a key customer is risky for a young firm's survival, particularly at the earliest stages, but that surviving firms may be able to extract value from their dependence and achieve higher customer portfolio growth. This research contributes to RDT by developing new theory that integrates dependence with organizational learning, uncovering novel, knowledge-based contingencies affecting the outcomes of dependence. The researcher’s findings make theoretical and empirical contributions to research at the intersection of entrepreneurship and marketing and provide guidance for entrepreneurs and marketing managers building customer portfolios in young firms.
