Customer resource dependency, technological innovation, and the paradox of dominant firm failure

Business history reveals a pattern of dominant firm failure during periods of significant environmental change. This study posits that a firm's largest and most powerful customers constitute the strongest force driving this phenomenon. During periods of environmental discontinuity, a dominant firm's largest and most powerful customers will use their power as resource providers to externally control a dominant firm's innovation practice and internal resource allocation policies. Through this external control, dominant firms are left unable to adapt to the changing technological environment and, when the new technology takes hold in the market, dominant firms are left struggling for survival in the context of a declining market and distracted customer base. Three literature streams are explored in this analysis, including (1) innovation theory, (2) technological evolution theory, and (3) resource dependence theory. To examine this proposition, this study enlists an ex post facto analysis of the United States Department of Defense's 53 most dominant technology contractors for the five-year period 1990-1994. Three hypotheses are tested. The results suggest a significant relationship between customer resource dependence and competitive decline among dominant firms during periods of environmental discontinuity. Recommendations for future research are provided.