Resources and resourcefulness The role of slack and the environment on entrepreneurial outcomes
RESOURCES AND RESOURCEFULNESS: THE ROLE OF SLACK AND THE
ENVIRONMENT ON ENTREPRENEURIAL OUTCOMES
Steven W. Bradley
Submitted to the Faculty of the University Graduate School
in Partial Fulfillment of the Requirements
for the Degree Doctor of Philosophy
in the Kelley School of Business
Indiana University
July, 2007
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3297077
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ACCEPTANCE
Accepted by the Graduate Faculty, Indiana University, in partial fulfillment of the requirements of the Degree of Doctor of Philosophy in Entrepreneurship.
______________________________
Dr. Dean A. Shepherd, Chairperson
______________________________
Dr. Jeffrey G. Covin
Doctoral Committee
July 19, 2007 ______________________________
Dr. Donald F. Kuratko
______________________________
Dr. Johan Wiklund
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? Steven W. Bradley 2007
All rights reserved
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ACKNOWLEDGEMENTS
Entrepreneurship is about opportunities. Some believe opportunities can be searched for while others suggest they can only be discovered. I increasingly find that
opportunities are a gift that is given. For the opportunity to pursue this dissertation at a wonderful institution like Indiana University, I am extremely grateful.
I would first like to thank my family for their encouragement during this process. My wife Christy has been a patient co-laborer and deserves much credit for my ability to complete this program. While she only knows this dissertation is about “slack,” she has given me far more of it than I deserve. My children, Hudson, Caroline, Preston, and
Catherine have also been a source of joy away from campus and remind me why life is so
rich.
I would like to thank my father, Dr. Walter Bradley, who inspired me to take up this endeavor. As a faculty member, he has not only had significant contributions in his
fields of interest, but has impacted countless lives of other faculty and students in a
personal way and truly embodies what the university should be. I am always challenged by the way he makes the most of every day. Thanks also to my mother, Ann Bradley, for being a life-long “cheerleader” and seeing my successes way more than my failures. Special thanks also go out to: my in-laws, Jerry and Patty Davidson, for many visits to Indiana and making us feel that we were never far from home; David and Sharon Perry for making a special trek up to visit us; and my life-long friend, Paul Schultz, for staying in close touch even though I was out of the Republic of Texas.
This dissertation would not have been possible without the professional guidance and support of my committee. I would first like to thank Dean Shepherd, my advisor and
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the chairman of this dissertation, for the work he has put into developing me as a scholar. Dean arrived at Indiana University at such an opportune time, was flexible enough to
allow me to pursue my interests, and made it possible through access to data and introductions to valuable colleagues and coauthors. I have appreciated the perfect balance he provided between the many encouraging “well dones” and “no worries” and the sometimes necessary “kick in the pants.” I have also learned by his example of balance in productive scholarship and a vibrant family life that gives me hope that you can have both in this field. I hope I can be the type of mentor and friend to future
scholars that Dean has been to me. I also thank Jeff Covin who saw potential in me as an
applicant and guided me through my first year in the program. Jeff’s character and careful scholarship represent why this department is both special and highly respected. I appreciate Don Kuratko being on this committee and providing valuable input despite a myriad of other responsibilities. His ability to successfully connect to both the academic and business community have brought a lot of value and visibility to IU in very short time. Thanks also to Johan Wiklund for being on this committee from a distance. I would not have been able to complete this dissertation without his help providing data, statistical advice, and enlightening recommendations for each of the studies in this work. I am thankful to have made a new friend through Dean and look forward to future work with a colleague who often sees entrepreneurship through a similar lens.
A special thanks also goes to Phil Podsakoff and Scott MacKenzie for the strong research methods training (a hidden gem of this program), to Frank Acito for helping me to enjoy statistics (though not SAS programming – go Stata), to Janet Near, Ross Peterson-Veach, and Eric Metzler for teaching me how to teach, and to David Rubenstein
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for the late night shouts of encouragement (and the occasional pizza). Thanks to the entire faculty and staff of Kelly Business School and my PhD colleagues who have helped me through this process and made it enjoyable. Again, this has been such a great opportunity. The Bible says, ‘Every good and perfect gift is from above, coming down from the Father of Light…’ Hopefully, my life and this work can in some small way reflect back to His glory.
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ABSTRACT
New firms need discretionary resources to survive, grow, and improve performance. On the other hand, recent research indicates that there may be diminishing benefits to higher levels of discretionary resources. In this dissertation, I build from contrasting theoretical viewpoints of managerial discretion to address gaps in our understanding of the context and processes by which slack resources impact organizational outcomes. Specifically, I ask: What environmental combinations
necessitate greater slack resources for performance? If new organizations do not have
available slack, how do they overcome resource constraints and environmental changes to survive? How do entrepreneurial behaviors mediate the relationship between slack and firm growth?
Using panel samples and multiple cohorts of over 1000 Swedish-based ventures analyzed between 1994 and 2006, this dissertation underscored the benefits and possible
trade-offs between organizational resources and the resourceful actions of organizations.
In the first study, I examine the moderating effect of environments on the slack-performance relationship. While prior theory would assign higher utility to slack where it provides buffering capacity or flexibility, my arguments and results indicate slack is most valuable in resource poor environments where firms must create their own opportunities. In the second study, I examine the extent to which organizational autonomy affects initial survival chances and adaptation to environmental jolts. I found evidence that that surviving independent organizations benefit from early competitive pressures and develop greater capabilities in the use of limited available resources to reduce mortality rates during an environmental jolt as compared to subsidiary organizations. In the third
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study, I investigate entrepreneurial management behaviors as mediators between slack resources and firm growth. The results indicate that while slack resources benefit firm growth, they are substitutes rather than complements to entrepreneurial management behaviors in dynamic environments. Taken together, these studies demonstrate that entrepreneurial outcomes are a complex function of environments, resources, and behaviors.
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TABLE OF CONTENTS
ACKNOWLEDGEMENTS...........................................................................................IV
ABSTRACT...................................................................................................................VII LIST OF TABLES........................................................................................................XII LIST OF FIGURES.....................................................................................................XIII CHAPTER 1: INTRODUCTION (1)
Resources and Environments – Study 1 (7)
Resources and Adaptation – Study 2 (11)
Resources and Behaviors – Study 3 (13)
General Contribution (16)
Structure of the Dissertation (16)
CHAPTER 2: RESOURCES AND ENVIRONMENTS - STUDY 1 (18)
Introduction.................................................................................................................................................18 Theory..........................................................................................................................................................18 Environmental Munificence Moderating the Slack- Performance Relationship ......................................19 Environmental Dynamism Moderating the Slack- Performance Relationship .........................................21 A Configuration of Dynamism, Munificence and Slack in Explaining New Firm Performance ...............22 Methods........................................................................................................................................................26 Sample ......................................................................................................................................................26 Dependent Variable ..................................................................................................................................28 Independent Variables ..............................................................................................................................28 Control Variables .....................................................................................................................................30 Analysis ....................................................................................................................................................31 Results..........................................................................................................................................................32 Discussion.....................................................................................................................................................37 Limitations and Additional Future Research Opportunities .....................................................................42 Conclusion. (44)
CHAPTER 3: RESOURCES AND ADAPTATION - STUDY 2 (45)
Introduction (45)
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Theory..........................................................................................................................................................45 Organizational Autonomy and Founding Conditions ...............................................................................47 Organizational Autonomy and Environmental Jolts .................................................................................50 Methods........................................................................................................................................................54 Sample ......................................................................................................................................................54 Variables .. (55)
Dependent variable ..................................................................................................................................56 Independent Variables ..............................................................................................................................57 Analysis ....................................................................................................................................................59 Results..........................................................................................................................................................60 Autonomy and Jolts ..................................................................................................................................63 Post Jolt Consequences ............................................................................................................................65 Resource Effects .......................................................................................................................................66 Alternative explanations and robustness checks .......................................................................................66 Discussion.. (72)
Conclusion (77)
CHAPTER 4 – RESOURCES AND BEHAVIOR - STUDY 3 (78)
Introduction.................................................................................................................................................78 Theory..........................................................................................................................................................78 Making Do: Bricolage and Entrepreneurial Management .......................................................................78 Dynamic Environments and the Availability of Slack Resources for Firm Growth ..................................81 Entrepreneurial Management as a Mediator of Financial Slack and Firm Growth ................................83 Methods........................................................................................................................................................93 Sample ......................................................................................................................................................93 Measures ..................................................................................................................................................95 Results..........................................................................................................................................................99 Tests for Robustness ...............................................................................................................................105 Discussion...................................................................................................................................................106 Implications for theory and research .....................................................................................................107 Future research directions .....................................................................................................................109 Conclusion.. (111)
CHAPTER 5: CONCLUSIONS (112)
Introduction...............................................................................................................................................112 Summary of Findings................................................................................................................................112 General Contribution and Implications..................................................................................................114 Limitations and Future Research............................................................................................................115 Concluding Remarks (117)
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REFERENCES (119)
APPENDIX 1 – SUPPLEMENTAL PLOTS FOR RESOURCES AND ENVIRONMENTS (138)
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LIST OF TABLES
Resources and Environments – Study 1
Table 1: Descriptive statistics and correlations ……………………………….
34
Table 2:
Feasible GLS regression panel estimates of slack and environment as predictors of performance in new firms ………………………………
35
Resources and Adaptation – Study 2
Table 1:
Means, Standard Deviations, and Correlations of Key Variables (61)
Table 2:
Results of Discrete-Time Hazard Models Combined for Independent and Subsidiary Organizations (62)
Table 3:
Comparative Event History Analysis of Failure Rates Considering the Effects of Resources During a Hostile Jolt (68)
Table 4:
Estimates for Alternative Explanations to Autonomy ………………
70
Resources and Behavior – Study 3
Table 1:
Means, Standard Deviations, Reliabilities, Intercorrelations and
Shared Variance Measures …..………………………………………..
103
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LIST OF FIGURES
Introduction Figure 1: Differing theoretical viewpoints on managerial discretion and resources.…………………………………………………………….
3 Figure 2: General model of studies (6)
Resources and Environments – Study 1
Figure 1: Descriptor for environmental configuration (23)
Figure 2a: Configural Effect of High Dynamism and Munificence on the Available Slack-Performance Relationship (38)
Figure 2b: Configural Effect of Low Dynamism and Munificence on the Available Slack-Performance Relationship (38)
Resources and Adaptation – Study 2
Figure 1: Hazard Rates of 1994 to 1998 Cohorts of Independent and
Subsidiary Organizations ………………………………………….
64 Figure 2:
Comparison of Hazard Rates for Independent and Subsidiary Organizations Founded in 1984 and 1994 …………………………. 65 Figure 3: Representative Hazard Rates of 1994 Cohort of Independent and Subsidiary Organizations …………………………………………..
71
Resources and Behavior – Study 3
Figure 1: Slack and Entrepreneurial Management Theoretical Model (84)
Figure 2:
Structural Equation Results: Financial Slack and Entrepreneurial Management to Subsequent Firm Growth Model (102)
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Resources
“Restrictions on the amount of resources a small firm can obtain have a more-far reaching effect. Regardless of how bright may be its prospects, its expansion may be limited by an inability to obtain capital on any terms, and it may never get to put its plans to the test.”
-Edith Penrose The Theory of the Growth of the Firm, 1959
Resourcefulness
A bootstrap operation places you in the heart of the market sooner than any other
business structure. …Just as hunger will make you alert, so lack of capital will make you keenly aware of the business environment… With low overhead, frugal means and fragile budgets, you can’t buy your way out of problems. You have to learn your way out. The creativity and tenacity you have to develop will make it hard for you to be put out of business.
- Paul Hawken Growing a Business, 1988 Founder, Smith & Hawken
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CHAPTER 1: INTRODUCTION
New ventures almost always begin with fewer resources than their more established competitors. Limited resources increase liabilities of newness (Stinchcombe, 1965) by reducing: (1) the influence that firms can have over their competitive environment (Romanelli, 1989), (2) flexibility in establishing organizational routines (Mosakowski, 2002), and (3) perceived legitimacy necessary in establishing reliable exchange partners (Baum, 1996). A study by Dun and Bradstreet of bankruptcies painted
a bleak picture showing that 53 percent of all companies failed within five years of
founding with 80 percent of firms failing within 10 years of birth (Romanelli, 1989). Of companies that failed, research shows that undercapitalization, excessive debt, and cash flow issues were common symptoms (Bates, 1990; Brüderl & Preisend?rfer, 1998; Cooper, Dunkelberg, & Woo, 1988). Successful ventures also list financial management as problematic in their growth and performance. Surveys of Inc. magazine’s 500 fastest
growing companies (Terpstra & Olson, 1993) and surveys of a cross-section of small
businesses (Dodge, Fullerton, & Robbins, 1994) revealed that maintaining adequate capital and cash flow were dominant internal problems facing entrepreneurial firms. Does this suggest that new ventures will continually be at a competitive disadvantage to larger firms endowed with greater resources?
Evidence also exists that some organizations with fewer financial resources
outmaneuver their better-resourced rivals using resourcefulness to overcome their initial disadvantages (Ganz, 2000). By resourcefulness, I refer to the ability, in this case of entrepreneurs, to use personal and social resources for successfully dealing with problems, especially those of novelty (Rachman, 1990). Many of the out-of-ordinary
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successful businesses that are industry leaders today started with the same limited capital of typical small firms. Surveys of Inc . 500 companies in both the 1980’s and 1990’s
indicate that two-thirds started with less than $50,000 capital and almost always from personal sources (Bhide, 2000). Many of these industry leaders like Siebel and Ebay were known for their fiscal discipline starting on “folding tables” (Michael, 1998) using “pluck, persistence and imagination to lever their tiny pool of funds into the organizational triumphs that they are today” (Little, 1987). While there is a general appreciation for heroic stories of entrepreneurial success, are these explained as simply a
matter of frugality and a little luck (Blechman, 1991; Timmons, 1990)?
Academic research has also addressed the importance of resources in organizational theories of survival (Aldrich & Ruef, 2006; Hannan & Freeman, 1977; Stinchcombe, 1965), growth (Penrose, 1959; Wiklund, 1998), and performance (Barney, 1991; Conner, 1991; Cyert & March, 1963; Jensen & Meckling, 1976; Wernerfelt, 1984). Resources are defined in this work as the financial, physical, and human capital available to achieve organizational goals (Chandler & Hanks, 1994; Hofer & Schendel, 1978). Fundamentally, resources are associated with the discretion, or “latitude of action,” they afford the firm in pursuing organizational outcomes (Hambrick & Finkelstein, 1987). Theories tend to be divided on the effects of discretion along two discrete continuums as shown in Figure 1. One continuum focuses on the role of environments. At one end of the spectrum, organizational ecology emphasizes external environments in firm survival with little role for managerial discretion in the process (Baum, 1996; Hannan & Freeman, 1989; Hannan & Freeman, 1977). At the other end, strategic choice (Child, 1972) and to
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a lesser extent resource dependence theorists (Pfeffer & Salancik, 1978) argue that managers play an important role in using resources to adapt to competitive contexts.
Figure 1. Differing theoretical viewpoints on managerial discretion and resources.
Behavioral Theory
Strategic Choice
Agency Theory
(more)
Org. ecology
(less)
Along a second continuum, theories differ on whether managerial discretion has positive or negative consequences for firm outcomes. Behavioral theories emphasize that
discretionary resources have a positive effect by reducing conflicts within the firm and
providing latitude for experimentation (Cyert & March, 1963). Agency-based theory argues that discretion has a negative effect leading to greater inefficiency (Leibenstein, 1969) and the pursuit of managerial self-interest that does not maximize firm
performance (Jensen, 1986). While each of these theoretical perspectives has provided a foundational understanding of organizations and resources from a particular vantage, they have often done so in isolation of each other leaving several areas to expand the current body of knowledge significantly.
First, a considerable stream of resource-related research has developed around the
notion of organizational slack (Bourgeois, 1981; Cyert & March, 1963; Penrose, 1959;
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Thompson, 1967). Resource slack describes the discretionary resources available after current operational needs are met (Nohria & Gulati, 1996). Resource slack has been
examined in choices regarding organizational structure (Yasai-Ardekani, 1986), strategy (Cheng & Kesner, 1997; Mishina, Pollock, & Porac, 2004), and risk-taking (Miller & Leiblein, 1996; Steensma & Corley, 2001) among others. Current research attempting to reconcile alternative theories regarding slack have argued that there is an optimal level of slack beyond which there are diminishing returns (George, 2005; Tan & Peng, 2003). Left unexplored is the possibility that the positive and negative effects of slack in cross
industry studies are not only a function of resource optimization but also a function of the
specific environment in which slack resources are deployed.
Second, environments change and at times change rapidly. Understanding how organizations adapt has drawn considerable interest from scholars (Hrebiniak & Joyce, 1985; Levinthal, 1997). Scholars have examined the matching of firm strategies and structures to environments (Caves, 1998; Jennings & Seaman, 1994), the role of external relationships in the ability to change (Pfeffer & Salancik, 1978; Singh, Tucker, & House, 1986), the development of dynamic capabilities (Eisenhardt & Martin, 2000; Teece, Pisano, & Shuen, 1997) as well as possible limitations to organizational change (Freeman & Hannan, 1983). However, there is still scarce evidence of why some firms with strong initial positions are unable to adapt when environments shift whereas others with fewer initial endowments persevere.
Third, resource related scholarship has often focused on the direct relationship of
resources to organizational outcomes (Bates, 1995; Damanpour, 1991; Holtz-Eakin, Joulfaian, & Rosen, 1994; Levinthal & March, 1981; Reynolds & White, 1997; Taylor,
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2001). However, resources do not directly convert to outcomes without the mediating actions of organizations and managers. Previous research has lacked attempts to model intervening behaviors.
This dissertation has the following general purpose. This work seeks to
understand how organizational resources interact with both the environment and firm behaviors to affect organizational outcomes. This study is conducted in the context of entrepreneurial firms. Entrepreneurship is often described as the creation of organizations (Gartner, 1988; Low & MacMillan, 1988) or more broadly as the emergence of new
economic activity (Davidsson & Wiklund, 2001). In two studies that comprise this
dissertation, I examine new firms and in the third study I examine entrepreneurial behavior for a broader age of firms. My firm samples are relevant because resources are often limited in entrepreneurial firms where they may be particularly critical. (George, 2005). Furthermore, new firms are often understudied from the theoretical perspectives mentioned previously. Within this broader purpose, I conduct three studies that seek to address this void in the literature. In the first study, I examine the connection between resources and environments . I address the role of slack resources on performance in four possible configurations of munificence and dynamism illustrating boundaries to current explanations of slack resource effects and offer an alternative viewpoint to explain where slack resources matter most. In the second study, I examine the connection between resources and adaptation . I investigate how choices regarding structure affect organizational autonomy and the use of resources in firm survival. By comparing differences in independent and subsidiary firms at founding and during an environmental jolt, I gain insight into the endowments of organizations and their competitive evolution
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