Firm performance in dynamic environments: The role of operational slack and operational scope

• Author: Pankaj C. Patel,Jeremy J. Kovach,Andrew Manikas,Manpreet Hora
• Date: 01 July 2015
• Published date: 01 July 2015
• DOI: http://doi.org/10.1016/j.jom.2015.04.002

Journal

of

Operations

Management

37

(2015)

1–12

Contents

lists

available

at

ScienceDirect

Journal

of

Operations

Management

j

o

ur

na

l

ho

mepage:

www.elsevier.com/locate

/jom

Firm

performance

in

dynamic

environments:

The

role

of

operational

slack

and

operational

scope

Jeremy

J.

Kovacha,∗,

Manpreet

Horab,1,

Andrew

Manikasc,2,

Pankaj

C.

Pateld,3

aKenan-Flagler

Business

School,

University

of

North

Carolina

at

Chapel

Hill,

McColl

4700,

CB#3490,

Chapel

Hill,

NC

27599-3490,

USA

bScheller

College

of

Business,

Georgia

Institute

of

Technology,

800

West

Peachtree

St.

NW,

Atlanta,

GA

30308-0520,

USA

cCollege

of

Business,

University

of

Louisville,

Louisville,

KY

40292,

USA

dMiller

College

of

Business,

Ball

State

University,

2000

W.

University

Ave.,

Muncie,

IN

47306,

USA

a

r

t

i

c

l

e

i

n

f

o

Article

history:

Received

23

November

2013

Received

in

revised

form

15

April

2015

Accepted

20

April

2015

Available

online

4

May

2015

Accepted

by

D.R.

Guide

Keywords:

Operations

strategy

Operational

slack

Operational

scope

Environmental

dynamism

a

b

s

t

r

a

c

t

This

study

examines

the

effects

of

operational

scope

(breadth

of

product

offering,

extent

of

geograph-

ical

diversification,

and

extent

to

which

production

processes

can

effectively

meet

varying

demand)

and

operational

slack

(resources

in

excess

of

what

is

required

to

fulfill

expected

demand)

on

firm

perfor-

mance,

contingent

on

two

components

of

a

firm’s

dynamic

environment,

unpredictability

and

instability.

We

collate

quarterly

data

on

3857

publicly

traded

firms

in

19

industries

from

the

years

1991

to

2013

(representing

99,559

firm-quarter

observations).

Using

panel

data

analysis,

we

find

that

narrow

prod-

uct

offerings,

low

geographical

diversification,

low

levels

of

excess

capacity,

and

low

inventory

slack

are

each

positively

associated

with

firm

performance.

More

importantly

though,

we

find

that

operational

scope

is

associated

with

improved

performance

in

unpredictable

environments,

whereas

operational

slack

is

associated

with

improved

performance

in

unstable

environments.

These

findings

contribute

to

the

research

on

operations

strategy

by

identifying

the

industry-specific

environmental

conditions

under

which

operational

slack

and

operational

scope

are

associated

with

firm

performance.

©

2015

Elsevier

B.V.

All

rights

reserved.

1.

Introduction

In

order

to

remain

successful

in

competitive

markets,

organiza-

tions

must

maintain

a

stable

operational

core

under

environmental

variation

(Thompson,

1967).

Examples

of

exogenous

variations

include

pricing

and

scheduling

uncertainties

from

a

firm’s

upstream

supply

of

materials

or

the

downstream

demand

uncer-

tainties

for

a

firm’s

finished

goods

(Lee

and

Billington,

1992;

Bozarth

et

al.,

2009).

Variations

are

reflected

in

the

environmen-

tal

dynamism

of

an

industry,

such

that

firms

in

more

dynamic

environments

will

experience

more

variations

than

those

in

less

dynamic

environments.

In

this

study,

we

investigate

two

operational

strategies

for

managing

the

potential

consequences

arising

from

dynamic

environments:

maintaining

operational

slack

and/or

broadening

operational

scope

(Boyer

and

Leong,

1996).

∗Corresponding

author.

Tel.:

+1

919

962

5991.

E-mail

addresses:

jeremy

kovach@kenan-flagler.unc.edu

(J.J.

Kovach),

manpreet.hora@scheller.gatech.edu

(M.

Hora),

andrew.manikas@louisville.edu

(A.

Manikas),

pcpatel@bsu.edu

(P.C.

Patel).

1Tel.:

+1

404

385

3465.

2Tel.:

+1

502

852

4869.

3Tel.:

+1

765

285

3194.

Specifically,

we

investigate

whether

operational

slack

and

opera-

tional

scope

moderate

the

relationships

between

two

components

of

environmental

dynamism

–

unpredictability

and

instability

–

and

firm

performance.

Our

study

aims

to

address

the

question:

How

do

operational

slack

and

operational

scope

moderate

the

associ-

ation

between

environmental

dynamism

(that

is

unpredictability

and

instability)

and

firm

performance?

Our

empirical

setting

draws

on

3857

publicly

traded

manufacturing

firms,

representing

99,559

quarterly

observations

from

1991

to

2013.

Operational

slack

represents

the

buffer

resources

available

to

support

the

operational

activities

of

a

firm

and

allows

firms

to

better

match

variations

between

supply

and

demand.

Insufficient

opera-

tional

slack

leads

to

reduced

responsiveness

to

demand

variations

and

reduced

reliability

of

product

deliveries

(Wefald

et

al.,

2010).

Excess

capacity

and

inventory

(each

representing

a

form

of

oper-

ational

slack)

help

firms

effectively

manage

demand

variation

for

their

products

(Sharfman

et

al.,

1988;

Palich

et

al.,

2000).

Oper-

ational

scope

represents

a

firm’s

breadth

of

product

offering,

geo-

graphic

diversification,

and

the

extent

to

which

a

firm

can

utilize

its

production

technology

to

effectively

meet

varying

demand

(Tang

and

Tikoo,

1999;

Vokurka

and

O’Leary-Kelly,

2000;

Ramdas,

2003;

Boyabatli

and

Toktay,

2004;

Benito-Osorio

et

al.,

2012).

Diverse

product

offerings

allow

firms

to

better

manage

product-specific

http://dx.doi.org/10.1016/j.jom.2015.04.002

0272-6963/©

2015

Elsevier

B.V.

All

rights

reserved.