New research shows that companies risk stifling R&D innovation if they put all of their eggs in one basket and just focus on a few big clients
Focusing only on a small number of big clients stifles research and development (R&D) innovation in comparison to having a wider spread of small clients, according to new research by Durham University Business School. The researchers – led by Professor of Marketing Xinming He – say that this is because the company has less freedom to make decisions and faces higher risks in its operations when it is heavily reliant on a small number of big-paying clients.
The researchers wanted to examine the impact of customer concentration on a firm’s R&D investment, in order to see if the most innovate firms were also those with the widest customer base. To do so, they used a large sample of A-share listed firms in Chinese stock markets between 2008-2017 – amounting to 14,203 firm-year observations. The data looked at each companies top five clients, as well as data on each companies R&D efforts across that time period.
Interestingly, the researchers found that companies who focused heavily on a small number of big clients were much less likely to invest in R&D innovation, than those companies who had a wider spread of clients. The reason, the researchers state, is that companies with a small number of big clients have less freedom as they are bound to the wants and needs of exclusive clients, and face higher risks if these clients leave.
Beware the safe comfortable space
The researchers also found that there are a number of external factors that also influence the amount of R&D innovation that these big-client focused firms invest in. Intense competition and weak intellectual property (IP) protection, along with internal issues like short-term thinking by management, all amplify the negative effect on R&D investment.
“Having a small number of trusty big clients who like your products or services and are willing to pay big for them, feels like a safe and comfortable space for companies. They don’t have precarious clients and there’s likely not a push to go the extra mile,” says Professor Xinming He.
“However, a safe and comfortable space is not the right environment to innovate, and investing in R&D is crucial for firms if they want to gain a competitive advantage. By having a wider number of customers, companies feel pressure to innovate further, which ultimately is a positive for the company.”
For business leaders, this research underlines the need to diversify the customer portfolio as a priority so that the company isn’t overly dependent on a few key clients. Companies should also focus on fostering a culture that values long-term innovation, even in challenging environments.
About the research
Xinming He, Professor of Marketing at Durham University Business School worked alongside his co-authors, Dr Shan Zhao (Nankai University), Dr Baichao Ma (Jiangsu University of Science and Technology) and Professor Wenming Zuo (South China University of Technology).