Performance shortfalls and strategic responses: The role of customer dynamics in value creation and appropriation

Organizations facing unfavorable performance feedback often engage in problemistic search. However, prior research has primarily focused on value creation, paying limited attention to value appropriation as a strategic response. We address this gap by examining how firms respond to different types of performance shortfalls across both value creation and value appropriation. We propose that historical performance shortfalls are processed through a diagnostic mechanism that primarily triggers value creation. In contrast, peer performance shortfalls are processed through an external attributional mechanism that primarily triggers value appropriation. Using panel data from 2,523 Chinese manufacturing firms covering 18,998 firm-year observations, we find strong support for these arguments. Extending previous studies that have predominantly focused on internal push forces, we further investigate how customer dynamics, as an external pull force, influence firms’ strategic responses to performance shortfalls. Our findings show that customer concentration dampens, whereas customer stability strengthens these relationships.