Customer Concentration, Cost Structure, and Performance

42 Pages Posted: 19 Aug 2014 Last revised: 14 Apr 2017

See all articles by Hsihui Chang

Hsihui Chang

Drexel University

Curtis M. Hall

Drexel University - Bennett S. LeBow College of Business

Michael Paz

Cornell University - School of Hotel Administration

Date Written: April 7, 2017

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

Suggested Citation

Chang, Hsihui and Hall, Curtis M. and Paz, Michael, Customer Concentration, Cost Structure, and Performance (April 7, 2017). AAA 2015 Management Accounting Section (MAS) Meeting, Available at SSRN: https://ssrn.com/abstract=2482777 or http://dx.doi.org/10.2139/ssrn.2482777

Hsihui Chang

Drexel University ( email )

3141 Chestnut St
Philadelphia, PA 19104
United States

Curtis M. Hall (Contact Author)

Drexel University - Bennett S. LeBow College of Business ( email )

Philadelphia, PA 19104
United States

Michael Paz

Cornell University - School of Hotel Administration ( email )

435B Statler Hall
Ithaca, NY 14853-6902
United States

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