Matching slack resources and investment strategies to achieve long-term performance: New perspectives on corporate adaptability

Abstract

Managers are continually challenged to balance the tradeoffs between adapting to rapidly changing market environments and focusing on existing core efficiencies. In this paper, we advance new perspectives on corporate adaptability by departing from the premise of the previous research that treats a firmʼs investment strategies and management of its slack resources in isolation. We contend that firms with adaptive capabilities attempt to match the type of slack resources (i.e., absorbed/specific or unabsorbed/flexible) with the nature of their investment strategies (i.e., exploration vs. efficiencies in existing assets). We further advance that the dynamics of strategy and performance relationship is moderated by the market turbulence level.Our empirical evidence from a sample of adaptive technology-intensive firms shows that under stable market environments, firms tend to use flexible slack resources (such as cash holdings and cash flows) to finance R&D expenditures in growth options. On the other hand, specific resources (such as plant, property and equipment) are used to support capital expenditures in existing assets. Our evidence further indicates that matched firmsʼ performance dominates that of unmatched firms, and, further, matched firms have fairly similar profitability in the long run. Under turbulent market environments such as the Dot.Com bubble (1999–2002) and the sub-prime mortgage crisis (2007–2009), we find investment in growth opportunities and innovation is slowed down while cash and liquid assets are accumulated to create a buffer against the risk of financial distress.