An examination of the relationship between financial slack and organizational strategy: a study in two industries

Abstract

A recurring debate in the Business Policy literature has centered on the nature of the relationship between strategy and structure. One school argues that the fit between context and structure determines straté9Y„ while opponents contend that management values determine strategy which, in turn, shapes structure. Litschert and Bonham (1977) have attempted to reconcile these viewpoints with their integrative model of strategy formation. The main premise of this model is that organizational slack moderates the contingent nature of strategy formation. When slack is high, the model predicts that strategy will be based on management values and that a loose fit will occur between structure and context. When slack is low, however, the necessary tight fit between context and structure will determine strategy.

This study tested the Litschert-Bonham model by comparing the strategies used by organizations with varying levels of slack within two different industries. lt was determined that an organization's absolute level of slack was significantly related to choice of strategy. However, the strategies of high-slack firms were not necessarily more diverse than were those of low-slack firms within a similar context. Moreover, low-slack firms in different contexts tended to follow the same strategy - a finding which was opposite the model's prediction.

Two secondary objectives of the study involved the clarification of measurement issues surrounding two of the model’s major components: slack and strategy. ln the former case, Marino and Lange's (1983) absolute slack indicators were compared to Bourgeois’ (1981) slack measures. The former absolute measures were consistently related to strategy while the latter relative measures failed to reach significance.

Finally, a multivariate procedure called cluster analysis was utilized to divide the sample firms into five strategic groups. These five empirically derived strategy types clearly related to Glueck’s (1980) conceptual typology of corporate level strategy. This was the first study to offer empirical support for Glueck’s widely cited typology.