Why Age and Profitability Change the Answer
For a supplier tied to a few major customers, age and profitability change what the same concentration ratio means. This chapter follows the relationship across early exposure, survival, and possible maturity, while asking why studies that look only at profitable firms can make concentration appear safer than it is. The practical judgment is to treat “young,” “mature,” “profitable,” and “loss-making” as evidence conditions—not as universal labels that decide a supplier’s fate.
The distinction matters because a major customer can be useful before it is safe. Early investment may improve inventory or delivery while the supplier is still carrying high fixed costs and uncertain demand. A later profitable observation may show that the relationship survived long enough for those commitments to pay off. It does not show that the same result was available to every supplier at the beginning.
The sample changes when the supplier changes
The life-cycle study uses 49,760 supplier firm-year observations from U.S. public firms between 1977 and 2007. It compares the full sample with groups divided by operating profitability and firm age. In that study, a young firm is one aged seven years or less from its initial public offering; a mature firm is older than seven years. Those definitions are useful for the analysis, but they are not a universal theory of business maturity. A private company, a firm that has existed for years before listing, or a supplier in a different industry may pass through comparable economic states on a different timetable.
Age and profitability are also separate dimensions. A young firm can be profitable, and a mature firm can face losses. Treating them as the same variable would hide the very interaction the evidence is trying to reveal. Age is a rough indicator of accumulated operating history and survival time. Profitability indicates whether the current business is covering its operating commitments. Neither one directly measures the quality of the customer relationship.
The sign of the concentration relationship changes when the sample changes. In the full sample, customer concentration is negatively related to return on assets and return on equity, negatively related to asset turnover, and positively related to SG&A expenses. Among firms with positive operating margins, concentration is positively related to ROA, ROE, and profit margin and negatively related to SG&A. Among firms with negative operating margins, the relationships reverse: concentration is associated with weaker profitability and higher SG&A rather than the favorable cost pattern seen among profitable firms.
This is not a contradiction in arithmetic. It is a warning about conditioning on an outcome. If a supplier must survive an investment period before it can display the operating efficiencies of a mature relationship, a sample restricted to profitable firms can overrepresent suppliers that have already carried the exposure successfully. The restriction does not make the favorable association false. It makes it incomplete as a description of the path from initial commitment to observed success.
The selection effect is especially important for young suppliers. Younger firms tend to rely more heavily on major customers, have less elastic costs, face greater demand uncertainty, and experience higher distress risk in the evidence.