Organizational Slack and Information Technology Innovation Adoption in SMEs

Introduction

Organizations must strike a balance between stability and innovation –i.e., between exploitation of their current business model and processes and exploration and adoption of alternative solutions (March, 1991). Accordingly, understanding the processes by which organizations adjust their propensity to innovate, as well as the conditions most likely to foster innovation in a firm, is an important endeavor that has motivated a large innovation literature in management (see Daniel et al., 2004; Damanpour, 1991; Drazin & Schoonhoven, 1996; and Fiol, 1996, for reviews of this literature).

Prior theory predicting innovation rates highlights the role of organizational slack as an important condition that facilitates exploration and, thus, contributes to a firm’s innovativeness (Cyert & March, 1963; Greeve, 2003). On the other hand, slack is also argued to be related to inefficiencies in the use of resources (Bourgeois, 1981) and to less disciplined investment (Jensen, 1986), which may be detrimental to innovation. Given these competing arguments, Nohria and Gulati (1996) argued and found support for an inverted U-shaped relationship between slack and innovation. Their findings suggest that greater levels of slack increase the rate of adoption of technical and administrative innovations, but only up to a point. Beyond this point, excess slack appears to be counterproductive and results in reduced innovation rates.

Subsequent research by Geiger and Cashen (2002) extended Nohria & Gulati’s (1996) work by examining the shape of the slack-innovation relationship for different dimensions of slack. Prior studies had distinguished among available slack, recoverable slack, and potential slack (Bourgeois & Singh, 1983; Bromiley, 1991). Geiger & Cashen (2002) found available and recoverable slack to have a curvilinear, inverted-U shaped, relationship with innovation, while potential slack had a linear positive relationship to innovation.

An important limitation of the prior organizational slack literature is that it has overwhelmingly focused on large, publicly traded firms¹. With regard to the slack-innovation relationship, the technology adoption literature in information systems (IS) has shown a greater interest in small and medium enterprises (SMEs) and, thus, can be seen as filling some of the void left by the broader literature. In particular, a number of studies have explored the role of financial resources as an antecedent to SME adoption of specific IT innovations (e.g., Iacovou, Benbasat, & Dexter, 1995; Kuan & Chau, 2001; Mirchandani & Motwani, 2001). To date, however, this literature can offer only limited and tentative insights regarding slack-innovation relationships: First, most prior SME technology adoption studies undertake a superficial treatment (at best) of financial resource considerations as one of the many factors in the typical technology adoption model. Also, the definition and measurement of financial resource variables differs widely across studies and often deviates form the concept of financial slack. Moreover, in the few cases where financial drivers are operationalized as financial slack (i.e., Grandon & Pearson, 2004; Wang & Cheung, 2004), the reliance on relatively small samples and the focus on a single technological innovation limits the generalizability of findings and prohibits a comparative analysis of the characteristics of the innovation as a possible moderator of the slack-adoption relationship. In sum, there is limited evidence regarding the role of organizational slack on SME innovation adoption. Also, no prior study has investigated how different dimensions of organizational slack may influence innovation in SMEs. Furthermore, the presence of curvilinear relationships between slack and SME adoption has yet to be explored.