Academic journal article Journal of Managerial Issues

What Is the Relationship between Organizational Slack and Innovation? *

Academic journal article Journal of Managerial Issues

What Is the Relationship between Organizational Slack and Innovation? *

Article excerpt

Innovation is generally viewed as critical to the competitive health of organizations, industries, and nations. As such, how, why, when, and which organizations innovate has been a subject of interest in such diverse literatures as economics, business strategy, R&D management, organizational psychology, and finance. One important aspect of innovation writings concerns the nature of organizational resources needed to support it. We can think of resources in terms of people, equipment, technology, information, special relationships, and even unique items such as patents or reputations. However, financial resources are probably the most necessary, if not sufficient, element in ensuring the translation of creative ideas into new processes, products or services. This is because innovation requires investments that go beyond those needed to address immediate operational needs, and because financial resources are a primary means for acquiring and supporting the people, equipment, technology and infrastructure involved in innovation. For example, Griliches (1990), in his survey, noted that the relationship between R&D spending and innovation has been repeatedly demonstrated.

Organizational slack is one possible source of funding for innovation. It consists of resources available to the firm above-and-beyond those necessary to meet immediate business requirements, fund ongoing programs, or meet explicit objectives (Cyert and March, 1963; March and Simon, 1958). Although, as will be discussed later, there are various definitions of slack (Bourgeois, 1981), all of them reflect the notion of excess resources that both cushion the organization from environmental changes and represent an opportunity for discretionary allocations, such as to innovation activities. According to Rosner (1968), slack allows firms to purchase innovation, absorb failure, bear the cost of developing and implementing innovations, and explore ideas in advance of" an actual need. As an illustration, Lee and Grewal (2004) showed that slack was related to retailers' adoption of the Internet as a communication channel.

However, this "cushion," which can enhance the competitive position of the firm and be a source of funding for innovation activities, may also be viewed as an impediment to organizational performance in general and to innovation activities in particular. At the organizational level, some have argued that slack reflects inefficiencies in organizations (e.g., Thompson, 1967; Yasai-Ardekani, 1986)--witness the emphasis on consolidation, streamlining, downsizing, and other efficiency-driven initiatives of the last 20 years--and that poor internal control systems in public corporations contribute to inefficiencies in deploying such resources (Jensen, 1993). At the innovation level, it has been proposed that slack gives rise to reduced discipline in the management of projects, thereby impairing innovation outcomes (Nohria and Gulati, 1996).

Thus, slack has been viewed as both creating funding opportunities for innovation, and as encouraging wasteful, undisciplined spending that hurts innovation outcomes. Trying to reconcile these positions, Bourgeois (1981) postulated a curvilinear relationship between slack and organizational "success" in general, while Nohria and Gulati (1996) and Geiger and Cashen (2002) extended the argument to the slack-innovation relationship in particular and offered empirical evidence to support such a relationship. These researchers suggest that too little slack may inhibit experimentation leading to innovation, while too much slack may lead to diminishing returns, or accelerating diminishing returns, as a consequence of undisciplined spending and improper oversight of innovation projects.

The purpose of this study is to further explore and extend previous research on the nature of the relationship between organizational slack and innovation in several important ways. First, this study addresses some of the methodological limitations of the oft-cited Nohria and Gulati (1996) study, thereby testing the robustness and generalizability of their findings. …

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