Environmental complexity, slack, and firm performance

Abstract

Firms hold excess resources, known as slack, that could be valuable as the environment becomes more complex. This article provides evidence on how higher environmental complexity alters the slack-performance relationship in the long run by introducing three types of effects: the efficiency effect, the profitability effect, and the incentives effect. After measuring those effects on a panel of Colombian firms, we show that firms implement multiple and simultaneous purposeful actions on organizational slack to compete in more complex environments. Depending on the slack type, complexity can encourage the efficient use of slack, it can alter the incentives to hold slack, and it can change the profitability of slack. Those results could be used to answer how efficient or profitable are firms’ levels of slack, and if they have higher incentives to accumulate more slack.