Strategy Topology and Cost Structure: A Textual Analysis Approach

This study investigates how a firm's generic business strategy—specifically product leadership, customer intimacy, and operational excellence—influences its cost structure. While prior research has examined external determinants of cost structure like demand conditions and regulation, the role of internal strategic choices remains understudied. The authors hypothesize that these strategic orientations dictate how firms allocate fixed and variable resources.

The authors develop a novel textual measure of business strategy by analyzing Item 1 (Business) of 10-K filings for U.S. public firms from 1993 to 2019. Using a keyword-based approach and principal component analysis, they identify three latent strategy factors corresponding to the Treacy and Wiersema (1995) typology. They then regress the log change in operating costs on the log change in sales to estimate cost rigidity, testing how these strategy scores interact with sales fluctuations. The study also uses the adoption of the Inevitable Disclosure Doctrine (IDD) as a quasi-natural experiment to address potential endogeneity.

The results confirm that product-leadership firms exhibit significantly higher cost rigidity than those pursuing customer intimacy or operational excellence. This rigidity is driven by the need to commit to long-term, fixed investments in R&D and human capital to foster innovation and manage congestion risks. Conversely, firms focused on customer intimacy and operational excellence maintain more elastic cost structures to ensure flexibility and efficiency. These relationships are further intensified by factors such as R&D intensity, customer concentration, and asset utilization. Additionally, the authors find that product leaders exhibit greater cost stickiness, meaning they are slower to reduce costs when sales decline.

This paper provides a scalable, objective method for measuring business strategy using public disclosures, overcoming the limitations of survey-based or proprietary data. By linking strategic positioning to cost structure, the study offers new insights into how organizational strategy dictates resource allocation and capacity management, providing a framework for researchers to analyze firm behavior and performance across diverse industries.