Customer Concentration, Cost Structure, and Performance

Abstract

We examine how suppliers’ relationship-specific cost structure decisions affect future performance. We argue that suppliers can avoid risk by choosing more flexible cost structures (less fixed-to-variable costs) or commit resources by choosing more rigid cost structures (more fixed-to-variable costs). Analyzing cost data from a sample of manufacturing firms, we document that suppliers with greater customer concentration make relationship-specific investments with less flexible cost structures. Our primary findings suggest that suppliers making relationship-specific investments with more flexible cost structures outperform those with more rigid ones. We also find that, while suppliers’ competitive environment has no effect on the relative profitability of their relationship-specific cost structure decisions, suppliers in more competitive industries make less flexible relationship-specific investments, further exacerbating the risk associated with higher customer concentration. Our results suggest that a risk avoidance strategy outperforms a commitment strategy in the context of relationship-specific cost structure decisions.

Keywords: customer concentration, cost structure, cost elasticity, industry competition

JEL Classification: M41, L25