Do Major Customers Help or Hurt Innovation? The Effects of Customer-Base Concentration on Innovation Volume and Radicalness

Abstract

We extend the prior operations management literature on innovation by providing large-sample empirical evidence of the differential effects of customer-base concentration on two distinct outcomes of innovation: volume and radicalness. We predict a positive association between customer-base concentration and innovation volume and a negative association between customer-base concentration and innovation radicalness. Using a sample of 16,014 firm-year observations in business-to-business industries between 1976 and 2010, we find results consistent with our predictions. Furthermore, we predict and find that a firm's product market competition and financial resource constraints moderate the relation between customer-base concentration and innovation volume (radicalness). While prior operations management research on innovation primarily focuses on the dynamics of customers across high- versus low-end markets, we extend this literature by demonstrating that customer-base concentration influences the nature of innovation regardless of market type and providing a better understanding of how market structures drive innovation outcomes. Firms with high customer-base concentration can use the insights from our study to allocate resources more effectively across incremental and radical innovations with the objective of ensuring their long-term survival and development.