Ineffective slack

Ineffective Slack Emt Jomson In what is known as the contribution-inducement

model the organization

is regarded as a coalition between various participants. pants receive larger inducements

together, what is called organizational ployees also constitute

If certain partici-

than are necessary to hold the coalition slack will arise. Superfluous

em-

slack.

The existence of slack enables the organization

to survive during bad

times. Slack is also said to reduce conflicts and to play a stabilising role in the organization. This theory is questioned in what follows -

the starting point being a

definition of the concept of slack. From the same initial assumptions as the slack theory, the article culminates

The Concept According

in diametrically

opposite conclusions.

ofSlack

to the contribution-inducement

model the organ-

ization is viewed as a coalition of participants. tion receives from each participant

The organiza-

a contribution

in the form

of inputs of various kinds, while in return for his participation in the organization the form

the participant

of money

or other

receives an inducement

benefits,

for example

in

social

status. In the long demands

run the inducements

will tend to coincide.

mutual adjustments

between them are not devoid of friction,

which is connected These

agreement Here,

with imperfections

imperfections

are

between

inducements

between

slack. Certain

receive larger inducements is to be maintained. to keep

them

therefore, (Cyert

& March,

Since ciated

used

additional

@ 1986 Scandimu2an JournalofManagm Studier. November

1986

then

stockholders

receive

slack is usually

In the short run, greater

than zero

1981).

salary and status are frequently

is therefore

positions

asso-

he will go in for

One of the more prominent

in organizations

a

higher wages than is necessary

the organization.

administrative

in the

is what is called

of the coalition

with the size of the department,

empire-building. tactics

necessary

members

1963; cf Pfeffer,

a manager’s

and the

the total inducements

For example,

within

available

of

than those needed if the coalition

or employees

organizational

absence

if the coalition is to continue.

and the inducements

larger dividend

by an

the total inducements

the difference

organizational

in the factor market.

accompanied

that are necessary

organization

and the inducement

In the short run, however, the

slack-creating the creation

of

and titles (Williamson,

1963; 1964; 1975). Before

calling

define the concept

the slack

theory

in question,

one must

of slack on the basis of economic

theory 111

ERNST JONSSON

Definition of th Slack Concept A surplus exists as soon as the participant receives an inducement in excess of his minimum requirement. The meaning attached by economic theory to the concept of surplus or economic rent is therefore identical to organizational slack in the sense of inducements to members of the coalition over and above those needed to keep them in the organization (cf Williamson, 1963; 1964; 1975). The surplus which various participants can receive from an organization are shown in the figure below, which is based on the assumption of imperfect competition on both factor and product markets. Moreover, in the short run labour costs are the only variable costs, whereas the costs of plant are fured. The LS curve in the figure indicates the supply curve in respect of variable factor inputs, i.e. the supply curve for labour inputs. The distance between this curve and the horizontal axis indicates the minimum wage per manufactured unit demanded by each employee in return for his taking part in the organization. As the LS curve shows, it is necessary to increase fie wage per unit manufactured in order to yield .a marginal increase in work inputs and production. The fact is that incoming employees are assumed to have more alternative job opportunities, and hence also a higher alternative value, than those already within the organization. The firm’s marginal cost curve (MC), which includes labour costs only, shows how the wage costs change when one additional unit of the good is produced. Since higher wages must be offered to all labour inputs, not only the marginal ones, the firm’s MC-curve rises faster than the supply curve for labour inputs. In the figure, neither the demand curve for the firm’s product nor the supply curve for labour inputs is perfectly elastic, i.e. horizontal. In such conditions all the members of the group - apart from the marginal member (with the largest alternative value) - will receive inducements exceeding those required to keep them in the organization. For example, where price is AB (i.e. where marginal revenue is equal to marginal cost) the various groups of participants receive the following surplus: the customers the horizontally lined area, the employees the vertically lined area and the management and the owners of capital the dotted area, less the alternative value of their contributions. The difference between the customers’ overall willingness to pay and the reservation prices (=the overall alternative value of resources employed) of other participants will be equal to the total surplus the organization generates through 112

INEFFECTIVE

SLACK

Price/Cost

I I

I I I I

I

. r

A

Volume of production

Figure

Simpl+d

illustrahn of swplur receiuedly variouspartici$antc

in an mganization.

113

ERNST JONSSON its activities.

This

surplus

above-mentioned

is equal to the sum of the three

areas in the figure less the alternative

of the contributions

of the managers

value

and the owners

of

capital. This surplus increases when price is CD ( = marginal cost). Compared

with a price of AB the surplus of the cus-

tomers, as well as that of the employees,

increase,

whereas the

surplus accruing

to the managers

and the owners of capital is

reduced.

Thus,

the price-furing

principle

portance

as regards both the size of the aggregate

its distribution When

among

price, as shown in the figure, is estab-

lished on the basis of the contributions of a certain group of participants,

made by the members

the surplus accruing

to the

will be equal to zero only when the supply curve for

sellers or the demand implying

is of im-

surplus and

the participants.

equilibrium

members

applied

identical

curve

for buyers

alternative

values

is horizontal,

for members

i.e.

of the

group. Before

the overall surplus can be equal to zero both

these

must,

curves

aggregate

moreover,

willingness

tion corresponds

coincide.

The

to pay for the products

customers’

of the organiza-

exactly, in that case, to the aggregate

native value of resources

alter-

utilized.

[email protected] Normal Slack According

to Cyert

and March

(1963) organizational

slack

tends to be equal to zero in the long run. This is connected with the fact that the requirements organization

adapt themselves

alternatives

of the members

of the

to the actual inducements

outside the organization.

This conclusion

and

may be

questioned. Firstly, the minimum rational participant

requirement

In the long run the minimum to the trend of the alternative actual inducement.

if the number

thereby

members

requirement

is then adjusted

value rather than to that of the

inducement,

value overtakes

the participant

of alternative

also the alternative

value,

in each group of participants,

quirements

of the members

courses of action, vary between

the

the minimum

re-

of the group will find expression

as supply and demand

curves that are imperfectly

that

At the

is, nonhorizontal.

organization, imperfect this kind.

which

114

as a rule

competition, slack

same

time

operates

and

in markets

will therefore

normally

with

by curves of

as well as the long run, also the

elastic,

the individual

appears to be confronted

In the short

organizational participants

will,

leave the organization.

Secondly, and

and

value of his input.

If, in time, the alternative

the more slowly increasing moreover,

of a well-informed

reflects the alternative

the total

slack of the individual be greater than zero. For

INEFFECTIVE example,

in most

production nomic

cases the actual

will be composite

rent (Lipsey

& Steiner,

The total inducements

earnings

of transfer

of a factor

earnings

presented

organizational normal

by an organization

to the organization.

thus

minimum

In other words

slack, in the sense of surplus payments,

feature of the organization.

of slack may tentatively

of

and eco-

1972).

generated

appear, as a rule, to be greater than the aggregate requirements

SLACK

For this reason

be described

as nor&

is a

this type

slack.

“Normal”Slackax Exms Capa+? Slack in the form of surplus payments as excess capacity, organization

i.e. real resources

(Naslund,

1964; Pfeffer,

In an organization

1981).

where all contributions

ticipants are fully and efficiently regularly

is usually also defined not fully utilized by the

utilized, various participants

receive a surplus in relation

keep them

in the organization.

slack does not represent

in a real economic

effective

production,

to what is necessary

Consequently,

unutilized

capacity

made by par-

real resources

or excess

sense. Nor, at a given level of

can the organization

affect the size of

the overall surplus. This surplus is instead determined by the minimum

requirements

tive production,

this surplus

therefore

be termed

of the participants. is of maximum

normal,

of the organization, resources,

since

can

these

without the participants Thus

the management

be interested

size; it may and the owners

however, the surplus payments

participants

solely

In effec-

effective slack.

From the point of view of the management by other

appear

surplus

received

as unutilized

payments

concerned

can

financial

be reduced

leaving the organization.

and owners of the organization

in influencing

to

this type of

the distribution

may

of the aggregate

surplus to their own advantage.

To this end they could con-

ceivably, for example,

a price and wage policy that

implement

would result in their surplus increasing surpluses

accruing

to customers

at the expense of the

and employees.

Normal Slack as a Stub&w? According

to Cyert and March

of particular

with changes in external improve pants

so rapidly

factors. During

that the aspiration

have no time to adjust

extent, resources

and

(1963) the concept

use when dealing with the problems

so the organization

upwards

a boom these factors levels of the particito a corresponding

is able to assure

over and above its requirements.

recession organizational

of slack is associated

itself of

In the subsequent

slack will instead operate as a cushion, 115

ERNST JONSSON

and so, as a result of the fact that reserve resources represented by slack are available, the aspiration levels of the participants need not be reduced. Because of the unfavourable trend of the external factors, there will instead be a reduction in the surplus payments accruing to the organization during the boom. In this way organizational slack largely neutralizes the potential changes in the organization’s operational environment, and thus enables the organization to survive during bad times (Cyert & March, 1963). A recession tends to be accompanied by a strengthening of the buyers’ position at the expense of that of the sellers, while the opposite tendency would seem to prevail during a boom. In other words, the number of alternative courses of action open to the sellers seems to vary with the state of business, whereas the opposite applies to the buyers. Both the buyers’ willingness to pay and the sellers’ reservation prices will in that case be covariant with the state of business. If the willingness to pay and the reservation prices vary to the same extent, the total surplus will develop independently of the state of business activity A well-informed and rational participant also adjusts his negotiating requirement to the cyclical variation of the minimum requirement (=opportunity cost), For those participants who sell goods and services to the organization, the area of action vis-&is the management will, similarly, follow the business fluctuations. For that reason the inducements of these participants may also be expected to follow suit. However, if the participants, excluding the management and owners of capital, are unaware of or underestimate the increase in the opportunity cost during the boom, their inducement will be less than it would otherwise be. Instead, the inducement payable to the management and the owners of capital will increase by a corresponding extent. During the subsequent recession this increased inducement will, according to Cyert and March (1963) be transferred in return to the other participants, thus making it unnecessary to reduce their inducement in spite of the falling opportunity cost. However, in contrast to what is maintained, this state of affairs does not affect the organization’s chances of survival. Given an alternative pattern of behaviour where the participants are well-informed concerning the trend of the minimum requirement as economic activity fluctuates, they would in fact receive an enhanced inducement during the boom and a lower one during the recession. The opposite would apply for the owners of capital. Since the lower inducement during the recession is a consequence of the drop in the opportunity cost ( = the minimum requirement), the participants would nevertheless remain with the organization. In 116

INEFFECTIVE

SLACK

other words, the cushioning function which, it is claimed, the capital-owners’ slack fulfils affects only the distribution of the overall surplus over the period of the business cycle. Even if those participants who are sellers were to be unaware of the trend as regards the relative scope of action during economic fluctuations, there is still no reason to expect a counter-cyclical redistribution of the surplus. The fact is that, in their capacity as professional participants, the managers are likely to be aware that their scope of action vis-a-vis these participants will diminish during the boom and expand during the recession. For this reason it is hardly to be expected that the managers will increase the surplus payable to these participants during a recession if this means taking a cut in their own surplus.

Y@ectiue

Slack” as a Stubiher?

The concept of slack is usually also given another meaning: the organization employs more employees than necessary and there is, for example, management slack, or it is in other respects inefficient in its resource utilization. In other words, this state of affairs may be denoted in&&ive slack. This form of slack corresponds to what Leibenstein calls X-inefficiency, that is the internal inefficiency of firms (1966). As X-inefficiency refers to the ratio of inputs to output, the existence of such slack can in fact be said to imply real excess capacity. As a result of ineffective slack there is an overall surplus generated by the organization, smaller than it would be in the case of effective production. It is also said that this type of slack increases during the boom, since the pressure to be efficient is in fact less at such times than it would otherwise be. The slack created during the boom is instead taken into use during the subsequent recession, thus making it easier for the organization to survive this period with its falling profits. Thus this form of slack also is said to fulfd a stab&sing function (Cyert & March, 1963; Naslund, 1964; Cohen & Cyert, 1965). This view is challenged in the following. Let us assume that the organization has an opportunity to introduce labour-saving measures during a boom. The net effect of these is that the supply curve for labour inputs and the marginal cost curve per unit manufactured show a proportionally equal fall at all levels of production. As long as ineffective slack is not allowed to arise during the boom, the total surplus will thus be greater than it woukl be in a hypothetical situation where the. laboursaving measures are not introduced. From the point of view of the organization, as well as that 117

ERNST JONSSON

of society, it might therefore be more efficient to prevent ineffective slack from arising during the boom than to eliminate it later on during the recession. Those resources that are taken into use to prevent slack must not then give a higher yield through being taken into use in some other part of the organization. In such conditions it seems that the existence of ineffective slack will tend to reduce the organization’s chances of survival rather than increase them. It would also appear that the danger of conflict within the organization will be greater if employees are dismissed during a recession than during a boom when more alternative jobs are available. In contrast to what is usually claimed, it therefore seems that the existence of ineffective slack will increase the conflicts within the organization (see, for example, Pfeffer, 1981).

DiamtrikalJyApposite Conduxions As long as a participant receives an inducement larger than is necessary to keep him in the organization there is, according to Cyert and March (1963), what is known as organizational slack. With economic theory as the starting point, this slack may be described as being synonymous with the concept of economic rent. It is therefore a question of the surplus in relation to his opportunity cost that the participant receives as a result of his taking part in a certain organization. In contrast to what is maintained, this type of slack does not represent unutilized real resources. Irrespective of whether the organization’s real resources are fully and efficiently utilized, it would seem instead that it is usual for the participants to receive slack payments in both the short and the long run. For this reason these payments may be described as normal slack (surplus). The organization’s chances of survival, moreover, are not affected by the way in which this slack is distributed among the participants over the period of the business cycle. Slack in the sense of real excess capacity arises in an organization only when the personnel strength is greater than is necessary or where resource utilization is inefficient in other respects. Such ineffective slack can, for example, arise during a boom period when the insistence on efficiency is less than it would otherwise be. The overall surplus generated by the organization will, by the same token, be smaller than is the case with effective production. In contrast to what is maintained it would seem that this ineffective slack (i.e. owing to loss of surplus) is likely to reduce the organization’s chances of survival and increase the danger of conflicts. It may therefore be argued that ineffective slack should be kept at as low and even a level as possible. 118

INEFFECTIVE

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