The Importance of Slack for New Organizations Facing ‘Tough’ Environments

2011

Steve W Bradley Dean Shepherd Johan Wiklund

Strategy-based models centre on the management of unique and valuable resources to take advantage of specific market opportunities. Less examined in this approach are the roles of slack resources in the process of generating firm value – particularly for new firms in ‘tough’ environments where fewer opportunities are available. Using a cohort panel of 951 new manufacturing firms over nine years, our findings provide evidence for the importance of financial slack resources in understanding opportunity generation and also for reconciling theoretical arguments regarding the slack resource–performance link. We find that while financial slack does provide buffering capacity (in hostile and dynamic environments), and flexibility for experimentation (in munificent and dynamic environments) as suggested by prior theory, the most positive relationship between financial slack and performance for new firms was in low discretion environments (hostile and stable environments) – where firms need to develop their own opportunities. The implications of these findings for theory are discussed.

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