Are client ties pre‐entry resources? Performance implications of client tie diversification

Abstract

Abstract Research Summary This study investigates client tie diversification, where firms enter markets with existing clients. Recognizing the theoretical basis for both positive and negative performance implications, the paper adopts a question‐driven approach and discovers a strong negative correlation between client tie diversification and firm performance. Using data from the US federal lobbying industry during the creation of the Homeland Security issue market post‐9/11, I find that lobbying firms entering the new market with existing clients underperform compared to other firms. This underperformance is associated with over‐embeddedness with clients and agency costs from dispersed client tie ownership among lobbyists. These findings challenge the notion that client ties are readily fungible and highlight relational and agency‐related complexities that can lead firms to pursue value‐destroying diversification. Managerial Summary Do firms perform better when they diversify into new markets with their existing clients, or by pursuing new opportunities independently? This study found that firms that enter new markets alongside their current clients often underperform compared to those that do not. While it might seem beneficial to leverage existing client relationships, this approach can push firms into areas where they lack capabilities, create inefficiencies, and complicate relationships with other clients, leading to weaker performance. Managers should be cautious about letting client needs drive diversification decisions. Prioritizing current clients may offer short‐term gains but can limit the firm's ability to explore new markets and achieve long‐term growth. Strategic choices should balance client requests with the firm's own strengths and future prospects.