Strategy Typology and Cost Structure: A Textual Analysis Approach

Abstract

In this study, we follow the strategy typology proposed by Treacy and Wiersema (1995) and develop a textual measure of firms’ generic strategy along three dimensions: product leadership, customer intimacy, and operational excellence. Product-leadership firms emphasize innovation and confront high congestion risk caused by rapid growth. We hypothesize that these firms adopt a more rigid cost structure with higher fixed and lower variable costs to promote innovation and reduce congestion risk. Consistent with our prediction, we find that product-leadership firms exhibit higher cost rigidity than customer-intimacy and operational-excellence firms. This finding is robust to using a difference-in-difference approach based on a quasi-natural shock caused by the adoption of the Inevitable Disclosure Doctrine. Furthermore, we find that the effects of the three strategies on cost structure are intensified by R&D investment, customer concentration, and asset utilization, respectively. Collectively, our findings suggest that organizational strategy has a significant impact on firms’ resource commitments and capacity choices.

Keywords: Product-leadership strategy, customer-intimacy strategy, operational-excellent strategy, textual analysis, cost structure, cost rigidity

JEL Classification: L21, L22, M40, M41