Business Growth in Knowledge-Based Services: How Relationalism Affects Demand Side Growth Opportunities

The current paper complements and extends traditional Penrosean theories of firm growth by examining how a (supplier) firm’s relational embeddedness with its portfolio of existing buyers affects its business growth. Our theorizing rests on the foundation that a firm’s business growth stems from its breadth (or volume) of opportunities for creating added value with buyers, which more fully realizes the Penrosean vision that firm growth can be explained by a dynamic interaction between productive resources and demand-side market opportunities. While relational embeddedness may give a supplier some dyadic advantages with focal buyers, we theorize that it may lead to a narrower set of future added value business opportunities with the (supplier) firm’s entire portfolio of buyers. In addition, we hypothesize that this negative effect on business growth is moderated by a set of relational and demand-side attributes. These hypotheses are tested on a panel dataset of patent law firms (suppliers) and their relationships with corporate clients (buyers). Consistent with our hypotheses, we find that greater relational embeddedness is associated with slower supplier business growth, which is alleviated when these firms have greater cross-servicing ability and receive more relational commitment from buyers, but exacerbated when suppliers hold more buyer-specific knowledge and when buyers undertake more (internal) concurrent sourcing. In turn, our research demonstrates how the attributes of a supplier’s relationships with its portfolio of buyers can impact access to new business opportunities, and thus opens up new directions for research on firm growth, demand-side strategy and buyer-supplier relationships.