What Capable Managers Can Change—and What They Cannot

For a supplier exposed to a few major customers, managerial ability matters because the relationship is not managed on autopilot. This chapter examines whether better resource deployment, customer selection, and dependence management can weaken the negative performance effect of concentration. The evidence supports a qualified answer: higher measured ability is associated with a less damaging concentration relationship, but the measure is a firm-level proxy and the underlying dependence remains.

That distinction is important after the life-cycle evidence. A supplier should not have to wait for time to reveal whether a major-customer investment will work. Management influences what is committed, which customers are chosen, how efficiently the supplier operates, and how much flexibility remains if demand changes. Yet management cannot make a fixed cost variable or create bargaining power where the supplier has no alternatives. Capability changes the conversion process; it does not repeal its constraints.

What the ability measure is actually measuring

The Frontiers study examines 19,953 firm-year observations for Chinese A-share companies listed on the Shanghai and Shenzhen exchanges from 2010 to 2019. It measures customer concentration as the ratio of sales to the top five customers divided by the supplier’s annual sales. Corporate performance is measured primarily with return on equity, with return on assets used as an additional measure in robustness tests.

Managerial ability is not observed as a direct personality trait or an interview score. The study uses a two-step method developed by Demerjian and colleagues. First, data-envelopment analysis estimates how efficiently firms transform inputs into sales relative to industry and year peers. The inputs include operating costs, fixed assets, R&D, goodwill, selling and administrative expense, and intangible assets. Second, the study adjusts that efficiency for observable firm characteristics such as size, market share, free cash flow, age, diversification, and internationalization. The remaining efficiency is used as a proxy for managerial ability.

This construction has a useful interpretation. It asks how much resource-deployment efficiency is left after accounting for factors that belong to the firm rather than to management. It does not answer every question about the person making decisions. It does not directly measure negotiation skill, judgment under pressure, trustworthiness, or the ability to build a relationship with a particular customer. A high residual may reflect several capabilities that are difficult to separate in archival data.

That limitation is not a reason to discard the measure. It is a reason to state the claim accurately. The study tests whether firms that appear better at converting resources into revenue are better able to manage concentrated customers. It does not prove that one identifiable managerial personality causes a given contract outcome. The distinction matters because “ability” can sound more complete than the evidence allows.

The proxy also works comparatively rather than absolutely. A firm can appear more efficient than its industry-year peers without being efficient in every activity or prepared for every customer shock. The adjustment for size, market share, age, and other firm characteristics improves the comparison, but it does not reveal which decision produced the residual. The result is best used to identify a pattern of resource-deployment capability, then connected to the concrete mechanisms the study tests: asset utilization, customer choice, and dependence in investment.

This matters for a supplier deciding whether to accept a large account. A high score should not be read as permission to make an irreversible commitment. A lower score should not be read as proof that the supplier cannot serve a major customer.