Organizational slack, firm performance, and the role of industry

Abstract

Organizational research has increasingly focused on why managers accumulate, maintain, and deploy certain types of resources as method to achieve company success. Early work in the area suggested that organizational slack directly impacts firm performance (Bourgeois, 1981 ; Bourgeois and Singh, 1983). However, for more than two decades the related research has presented conflicting views about how slack specifically impacts firm performance. Empirical research has proposed organizational slack buffers the firm from rapid changes in its external (Bansal, 2003; Thompson, 1967), enhances the firm's capacity to adjust to shifts in consumer demand (Pfeffer and Salancik, 1986), and leads to operational inefficiency (Singh, 1986). Interestingly, after the publication of more than 65 studies examining whether slack impacts firm performance, the relationship between those constructs remains in dispute. This study answers the call to conduct additional research on the slack-performance relationship issued by Daniel, Lohrke, Fornaciari and Turner's (2004) meta-analysis by examining the role of industry on the slack-performance relationship. This is an important topic for empirical examination for two reasons. First, recent research has explored macroeconomic conditions (Latham and Braun, 2008) and the role of innovation (Herold et al., 2006) on the slack-performance relationship while suggesting that industry factors may play an important role in how slack is employed among direct competitors (Ferrier and Lee, 2002). Second, the business strategy literature has suggested that managerial decisions on the deployment of key organizational resources is linked to firm performance when also considering the industry in which the firm competes (Porter, 1985). The study begins by briefly reviewing the theoretical issues defining organizational slack, firm performance and industry factors, and presenting research hypotheses. A presentation of the methodology employed and results found follow. Finally, findings, limitations, and implications for management practitioners and organizational researchers are presented. THEORETICAL ISSUES The relationship between organizational slack and firm performance is powerful concept that underlies several managerial theories. The resource-based view (RBV), wherein the uniqueness of certain resources held by the firm as the basis for successful competition, has focused attention on which resources enhance firm competitiveness. That is, some RBV theorists argue key organizational resources that are not easily replicated by competitors will result in firm success (Wernerfelt, 1984, 1995), while others suggest the processes employed by the firm directly impact firm performance (Teece, 2007; Wu, 2007). Thus, according to the RBV the treatment of organizational resources within the context of the firm's competitive realm will have an impact on performance. There have been studies examining parts but none assessing the slack-performance relationship and the role of the industry in single model. For example, Carpano, Rahman, Roth, and Michel (2006) examined resource use within specific industry to assess the success of certain competitive firm activities. Dreyer and Gronhaug (2004) conducted longitudinal study focusing on firm flexibility and found that balancing certain categories of slack is necessary for firms to cope with the challenges and opportunities afforded by differing competitive environments. They suggested low levels of slack may hinder the firm from reacting to new opportunity while high levels of slack may result in inefficiency. Organizational Slack Bourgeois defined organizational slack as a cushion of actual or potential resources which allow an organization to adapt successfully to internal pressures for adjustment or to external pressures for change in policy, as well as to initiate changes in strategy with respect to external environment (1981: 30). …

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