There is a Price to Growing Up: How the Principle of Exclusivity Shapes High-status Firms' Revenue Growth Strategies

Abstract

This dissertation provides a framework to understand the relationship between firm status and revenue growth. High-status firms are motivated to protect their status position, yet doing so requires them to maintain exclusivity in affiliations, otherwise known as the principle of exclusivity. While prior status literature suggests that this relational constraint can limit growth opportunities and thus implies a negative status-growth relationship, empirical evidence shows that high-status firms often expand their business faster than low-status rivals, making it difficult to reconcile this observation within the conventional status framework. I address this challenge by systematically examining different growth strategies and their impact on maintaining status, with the guiding principle that high-status firms will pursue options that helps them grow revenue and maintain status, while avoiding options less effective in achieving either revenue growth or status maintenance. In the context of two types of revenue growth, increasing product prices and increasing sales volume, I argue that high-status firms are more likely to raise prices than low-status firms because they can leverage their price-inelastic elite consumers and status-based legitimacy to better justify price increases and grow revenue. Additionally, price increases help high-status firms maintain exclusive affiliations with elite consumers and high-status producers, thus reinforcing their status position. On the other hand, I argue that high-status firms are less likely to increase sales volume than low-status firms. This is because, with their primary focus on a narrow pool of elite consumers, it may be inherently difficult for high-status firms to expand sales volume. Moreover, even if they manage to increase sales, doing so would risk diluting their exclusivity and compromising their status, making such growth option less appealing to high-status firms. Regarding the two directions of revenue growth, consumer base expansion and horizontal scope expansion, I argue that high-status firms are less likely than low-status firms to expand consumer base while more likely to expand horizontal scope. First, I argue that high-status firms are unlikely to expand their consumer base because their operations are centered around elite consumers and thus, are less appealing to non-elite consumers. Moreover, broadening the consumer base would dilute exclusivity and undermine their status, further constraining high-status firms from growing in the direction. On the other hand, I argue that expanding horizontal scope, such as expanding into different markets and regions, enables high-status firms to grow revenue without compromising exclusivity or status. Specifically, horizontal scope expansion helps high-status firms: 1) enhance their status by increasing professional purity and advancing the knowledge frontier, 2) boost revenue from elite consumers by offering a one-stop service, and 3) reach a greater number of elite consumers. Given these benefits for maintaining status and growing revenue within a narrow elite pool, I argue that high-status firms are thus more likely to pursue horizontal scope expansion than low-status firms. Analyzing U.S. law firms from 2012 to 2022, I find that high-status law firms are more likely than low-status firms to increase profit margins and diversify legal engagements across different practice areas and legal jurisdictions. On the other hand, I show that high-status law firms are less likely than low-status rivals to increase litigation volume or acquire new clients. These results, together, suggest that high-status firms are not constrained in overall growth, but in the types and directions of growth they can pursue.