A knowledge-based view of managing dependence on a key customer: Survival and growth outcomes for young firms

Abstract

Young firms in business-to-business markets often experience a high level of dependence on a key customer, but what are the firm-level effects of such dependence on survival and growth? And what can entrepreneurs do to manage such dependence? Many of the mechanisms suggested by resource dependence studies (such as safeguarding investments, symmetrical dependence, or acquisitions) are not available for young firms with limited resources. In this article, we develop a knowledge-based framework to examine how young firms can utilize congenital, experiential, and interorganizational learning to manage the effects of dependence on firm survival and growth. We test our hypotheses in a sample of young technology-based firms in the UK. First, we find a significant negative effect of key customer dependence on firm survival. Further, we find that experiential knowledge (accumulated as the firm ages) mitigates this negative effect, indicating that dependence is particularly hazardous for the youngest firms. Surprisingly, contrary to our hypothesis, we find that, for surviving firms, dependence has a positive effect on customer portfolio growth, and that this effect is stronger for less experienced, i.e., younger, firms. The effect is also amplified by congenital learning from the top management team's industry experience. Finally, interorganizational learning (facilitated by the relationship quality of the key customer relationship) has a negative moderating effect on the dependence-growth relationship. This indicates an impeding effect on the young firm's ability to acquire other customers. Taken together, our results contribute a more dynamic and nuanced view of young firms' customer relationships, shedding light on two distinct performance outcomes, firm survival and firm growth.