Strategy Typology and Cost Structure: A Textual Analysis Approach

Abstract

This study investigates the impact of firms’ strategic positioning on cost structure. Using textual analysis based on 10-K filings, we capture business strategy along three dimensions: product leadership, customer intimacy, and operational excellence. Firms pursuing the product leadership strategy emphasize innovation and confront high congestion risk caused by rapid growth. We find that these firms display a more rigid cost structure by incurring higher strategic fixed investments in R&D and choosing higher committed capacity to reduce congestion risk. We also document that firms following the other two strategies on average exhibit a less rigid cost structure. This is possibly because customer-intimate firms tend to invest in specialized resources in small chunks and take on-demand inputs to tailor offerings, while operational-excellence firms may adopt real options and flexible models to achieve production efficiency and mitigate default risk. Our results are robust to using a difference-in-difference approach based on a quasinatural shock caused by the Inevitable Disclosure Doctrine adoption and a change analysis based on firms’ internal strategic shifts. Our findings suggest that organizational strategy has a significant impact on firms’ resource commitments and capacity choices.