Dynamics of Resource Slack and Constraints: Resource Positions in Action

The effects of resource positions

Resource positions have been linked to creativity, defined as the production of novel and useful ideas in any domain (Amabile, 1996), such that creative ideas differ from previously realized ideas. Accordingly, innovation is the successful implementation of creative ideas in an organization (Amabile, 1996). Existing studies of how resource positions influence decision making, creativity and innovation have produced mixed findings. Slack resources might fuel innovation, by promoting experimentation and risk taking (Bourgeois, 1981; Nohria & Gulati, 1996; O’Brien, 2003; Thompson, 1967). In this sense, substantial resource slack relaxes internal controls and allows firms to undertake multiple innovation projects while enabling the firm to survive, even if a project’s outcomes are unsuccessful (Agarwal, Sarkar, & Echambadi, 2002; Bradley, Shepherd, & Wiklund, 2011; Nohria & Gulati, 1996; Voss, Sirdeshmukh, & Voss, 2008). However, firms with abundant resources may be less inclined to experiment (George, 2005), because the routines they have established to exploit successful paths to market ultimately compromise their exploration of new ideas (Levinthal & March, 1993; Mishina et al., 2004). In contrast, resource constraints might foster creativity (Hoegl et al., 2008; Moreau & Dahl, 2005) and stimulate innovations that are more efficient, in terms of both time and money (Gibbert & Scranton, 2009; Hoegl, Weiss, & Gibbert, 2010).

Resource positions also influence how firms interact with their environment. Slack resources buffer firms against environmental shocks, stabilize the firm in times of distress (Cyert & March, 1963; Donaldson, 2001; Pfeffer & Salancik, 2003; Van Dijk, Berends, Jelinek, Romme, & Weggeman, 2011) and provide freedom and flexibility to allow the firm to adapt to changing competitive environments (Levinthal, 1997; Thompson, 1967). These buffers also can mask underlying problems though, or result in overconfidence (Kahneman & Lovallo, 1993; Ross & Staw, 1993). By isolating a firm from exogenous shocks, slack can promote managerial complacency, induce irrational optimism (George, 2005) and allow a firm to establish structural misfits with the environment (Litschert & Bonham, 1978). Instead, resource-constrained firms that experience the direct effects of environmental pressures instead are more likely to respond quickly and seek creative ways to overcome such pressures (Hoegl et al., 2008).

Researching resource positions

Various strategies have been applied in attempts to reconcile the conflicting findings arising from previous work on the implications of resource availability. For example, some studies propose a curvilinear relationship between available resources and firm performance (Hvide & Møen, 2010; Nohria & Gulati, 1996; Tan & Peng, 2003; Zhou & Wu, 2010) or explore mediation effects (Bradley, Wiklund, et al., 2011; Hoegl et al., 2008). Others imply that the effects of resource constraints and slack are contingent on the context, such as the market or competitive environment (Bradley, Shepherd, et al., 2011; Katila & Shane, 2005), perceived environmental threats (Voss et al., 2008), project and team characteristics (Hoegl et al., 2008) or recovery after an adverse event (De Carolis, Yang, Deeds, & Nelling, 2009). The actual effects of resource availability and operationalization of resource slack and constraints continue to be subject to controversy though (Bourgeois, 1981; Marino & Lange, 1983; Mishina et al., 2004; Nohria & Gulati, 1996).

Most studies operationalize resource slack and constraints at the firm level, using financial ratios (Greve, 2003) or measures that compare resource availability with industry averages as a proxy for resource demand (Bromiley, 1991; Daniel et al., 2004; George, 2005; Mishina et al., 2004). However, financial ratios often fail to reflect a firm’s resource availability or ability to invest accurately (Bottazzi, Secchi, & Tamagni, 2012; Kaplan & Zingales, 1997, 2000; Musso & Schiavo, 2008), nor do these measures indicate the firm’s actual resource demand (George, 2005), which is problematic if slack or constraints depend on perceived resource demands (George, 2005; Mishina et al., 2004; Renko et al., 2010). In addition, the majority of studies in this area adopt a cross-sectional approach, measuring slack or constraints at a single point in time, such that they ignore changes over time (Bourgeois, 1981; Mishina et al., 2004; Moses, 1992) and possibly conceal the underlying dynamics (Nohria & Gulati, 1996) that might explain the mixed results obtained from previous studies.

Dealing with resource constraints and resource slack

Entrepreneurs have various ways to deal with a shortage or abundance of resources. When resources fall short of demand, entrepreneurs might seek to lower or eliminate resource demands (e.g. abandoning existing plans for growth); cope internally and continue to operate under constrained conditions, by making do with the resources at hand (Baker & Nelson, 2005); or alleviate constraints through external resource acquisition (Hoegl et al., 2008). Internal coping implies a selection among the effects that can be established with a given set of resources (Sarasvathy, 2001; Sarasvathy, Dew, Read, & Wiltbank, 2008; Baker & Nelson, 2005), whereas external resource acquisition generally relies on outside parties for the resources needed (Pfeffer & Salancik, 2003). Entrepreneurs may also seek to attract external financial capital to fund the procurement of additional resources. When information asymmetries between capital providers and entrepreneurs (Jensen & Meckling, 1976) and transaction costs (Williamson, 1981) make this option expensive or unavailable, entrepreneurs search out different options, such as bootstrapping methods (Bhide, 1992). Bootstrapping methods aim to minimize capital requirements, optimize cash flows, and secure resources with less cost (Winborg & Landström, 2001; Winborg, 2009; Ebben, 2009; Ebben & Johnson, 2006). Other alternatives include reliance on social capital (Bouty, 2000; Davidsson & Honig, 2003; Hoang & Antoncic, 2003), resource cooptation (Starr & MacMillan, 1990), or inter-firm joint resource usages (Winborg & Landström, 2001). By building networks of partnerships, entrepreneurs also might obtain resource commitments from early-stage stakeholders (Sarasvathy et al., 2008; Sarasvathy & Dew, 2005).

In contrast, when entrepreneurs believe they have slack resources, they can redeploy them to various new uses, depending on the type of resources available, their accessibility (Bourgeois & Singh, 1983), ease of recoverability (Greve, 2003; Singh, 1986) and liquidity (Mishina et al., 2004; Penrose, 1959). The various types of resource slack include human resource (Mishina et al., 2004), financial (Nohria & Gulati, 1996; Tan & Peng, 2003), operational (Bourgeois, 1981) and customer relational (Voss et al., 2008) slack. Entrepreneurs also vary in the degree of managerial discretion or flexibility they have to (re)deploy slack resources (George, 2005; Nohria & Gulati, 1996; Sharfman, Wolf, Chase, & Tansik, 1988). Entrepreneurs thus can decide differently according to their resource availability, involving various degrees of creativity, but it is not clear how resource positions influence their decisions.

Perceived resource positions

Research on sensemaking and subjectivity in entrepreneurship provides some insights into how entrepreneurs likely determine their resource positions, according to their past experiences and imagined futures. As Porac, Thomas and Baden-Fuller (1989) and Weick (1995) recognize, people act on the basis of the sense they make of the situation at hand. Entrepreneurs make such sense by creating an account, together with others, from an array of prior experiences, assessments of current conditions and of what can be done in the future (Weick, 1995). This account, which might manifest in an espoused strategy, also provides a means to convince others to engage and perhaps provide resources (Cornelissen & Clarke, 2010). In a changing environment, sensemaking involves a continuous, dynamic practice to deal with new and adapted experiences. That is, to make sense of the world around them, entrepreneurs relate their perceived resource position to their (social) environment, past experiences, decisions and actions. When an entrepreneur perceives resource constraints, (s)he may determine that the situation demands making do with whatever resources are available (Baker & Nelson, 2005; Weick, 1993); another entrepreneur in the same situation might perceive some form of resource munificence and pursue firm growth strategies (Edelman & Yli-Renko, 2010). As Bourgeois (1981) notes, these resource perceptions include both existing and potential resources. Overall, the entrepreneur’s perceived resource position is highly subjective and temporary, so sensemaking processes determine how entrepreneurs choose a particular course of action.

The Austrian school of economics (see Jacobson, 1992; Kirzner, 1997) suggests that entrepreneurs’ subjective perceptions of their resources drive decision making. These perceptions generate heterogeneity among entrepreneurs, often because they lack accurate data (Kirzner, 1997; Von Hayek, 1937), but also because entrepreneurs evaluate resources and their potential differently, depending on their varying preferences. Hence, the value of the resources is always in the eye of the beholder (e.g. Foss & Ishikawa, 2007; Foss, Klein, Kor, & Mahoney, 2008).

The radical subjectivist strand of Austrian economics (Lachmann, 1976, 1986) further suggests that it is not only perceptions of (potential) resource availability, but also the imagined actions enabled by these resources that play an important role (Chiles et al., 2007; Chiles, Tuggle, McMullen, Bierman, & Greening, 2010; Foss et al., 2008; McMullen, 2010). If evaluations of resource availability depend on how entrepreneurs imagine making use of resources to support a venture (Cohen et al., 1972; George, 2005; Mishina et al., 2004), their dissimilar imagining creates heterogeneity in perceived resource positions. The imagined action scenarios vary partly according to how entrepreneurs make use of the resources they have at hand, such that a similar resource base (e.g. equal amounts of available funds) can have different implications for different entrepreneurs (Baker & Nelson, 2005; Chiles, Tuggle, et al., 2010; Mosakowski, 2002).

Because resource positions are perceptual and dependent on imagined action scenarios, and sensemaking processes influence decision making, firm-level measures of constraints and slack, as used in most studies, appear inadequate for understanding the relationship between resource positions and decision making. Moreover, resource availability, foreseen resource demand and imagined futures may change with time, creating a need to consider resource positions from a process perspective.

Case selection

We selected three high-tech start-up firms in different emerging industries. The relation between resource positions and decision making is easier to establish for nascent than for mature firms (Renko et al., 2010), and the creation and development processes of start-ups often involve decision making under uncertainty (McMullen & Shepherd, 2006), such that resources have key roles, especially for high-tech start-ups (Alvarez & Busenitz, 2001). Therefore, we selected start-ups in the telecom and solar energy industries, which were relatively immature industries at the time our focal start-ups were founded (1997, 1999, 2000). Because their industries were marked by high degrees of uncertainty, the entrepreneurs had substantial freedom to choose their venture’s path to market, rather than having to conform to mature market structures (Ambos & Birkinshaw, 2010).

Each case covers the venture’s development, from idea conception, through the founding of the venture, to commercial exploitation and market interaction. With our objective of studying resource positions and their influence on decision making and venture development, we needed to study the venture from its very start, to determine how initial resource positions affect its development and entrepreneurial decision making (Shane & Stuart, 2002; Sorensen & Stuart, 2000; Stinchcombe, 1965), and for a period long enough to allow for some evolution (Ambos & Birkinshaw, 2010). We selected ventures that were founded at approximately the same time and in the same country (The Netherlands), to avoid substantial variance due to differences in national culture or economic climate. To avoid a (strong) success bias, we selected two successful ventures (i.e. substantial growth in staff and/or revenues) and one failure (i.e. no growth, insolvency, bankruptcy). We provide an overview of the three cases (SunCo, ChipCo and TextCo) in Table 1.

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Table 1.

Overview of cases.

	SunCo	ChipCo	TextCo
Country of origin	The Netherlands	The Netherlands	The Netherlands
Period covered in study	1997–2010	2000–2003	1999–2010
Number of events	36	30	41
Total number of interviews	9	9	10
Number of archival documents	63	54	32

Data collection

The data include archival and interview data. The archival data collected (149 documents) consist of annual reports, strategic planning documents, patents, company presentations, newspaper articles, web articles and public interviews. Interviews (28 in total) were conducted with the founders, employees, investors and other important stakeholders of the ventures. During the semi-structured interviews, we first invited the interviewees to elaborate on their role in the organization and describe the development trajectory of the venture. Subsequently, we posed questions about important decisions during the venture’s development trajectory, especially those related to the management team and employees, products and services, clients, revenue models, suppliers, partners, competitors, intellectual property protection, locations and facilities. We also asked about environmental shifts, such as market dynamism or important changes in the business environment. If the interviewee mentioned significant events, we asked follow-up questions to obtain sufficient details. During these discussions we raised additional questions, when relevant, about (initial) resource endowments, resource needs, resource acquisition, and planning and decision making. (The complete interview protocol is available on request.) The interviews lasted 69 minutes on average and were conducted by at least two interviewers; with the exception of one telephone interview, all the interviews were conducted face-to-face. If necessary, we requested additional information or conducted follow-up interviews for clarification. Each interview was digitally recorded and transcribed.

Data analysis

To investigate how resource positions evolve and influence decision making, we sought to identify resource positions at the time of the decision and processes by which they influenced decision making. Therefore, the data analysis consisted of three steps, using coding procedures developed by Van de Ven and Poole (1990).

First, we analysed the interview transcripts together with archival data to create a case-specific event list of important decisions – locations, management team, employees, products and services, investments, clients, suppliers, partners, and competitors – for each firm. Significant decision-making events such as introducing a first product, contacting a potential customer or hiring an employee involve various degrees of creativity. Creative decision making typically entails the exploration of new ideas, areas, products or technologies. In each case, a member of the research team identified and coded these events, and then these initial event lists were subjected to extensive discussions among the research team, until we reached consensus on their identification. For each event, we recorded the time of occurrence, to facilitate chronological ordering. We used QSR Nvivo software to code the events, which helped us maintain a chain of evidence across the raw interview data, archival data, and events (Yin, 2009). To mitigate any retrospective bias, we collected data about each significant event from at least two sources (e.g. interviews and documents), such that any biases or memory lapses were likely offset by those of other informants (Golden, 1992; Huber & Power, 1985). In addition, we concentrated on significant events, which are easier to remember more accurately (Chell, 2004). Finally, we sent the event lists to the interviewees for validation. The final lists (30–41 events per case) enabled us to consider single decision-making events, as well as their longitudinal implications (Langley, 1999).

Second, the analysis focused on determining the decision-making process for each event. We coded these processes according to the decision trigger (or decision-motivating tension; Zeleny, 1982) and subsequent decision outcome, in the form of an observed action. Two types of decision triggers demand action by entrepreneurs: organizational objectives and environmental change. Both triggers emerged from our data analysis and also correspond with previous research (Cheng & Kesner, 1997; Keeney, 1994; Voss et al., 2008). In addition, we coded the resource position, as perceived by the entrepreneurs, according to the decision to be made in relation to each particular event. The decision-making process coding began with all three members of the research team coding the first 30 events of the TextCo case together. Next, one team member coded the remaining events in the first case and discussed these codes with the team. Two team members used the refined coding rules to code the remaining two cases; that is, each case was coded by at least two team members. The subsequent discussion led to some minor changes, but all differences in codes assigned by different coders were resolved through discussion. For the observed resource position codes, we found that we needed a more elaborate discussion; so two members of the research team worked together to identify the resource positions perceived by the entrepreneurs and establish appropriate categorizations. These categories thus materialized from our data, rather than prior theory, related to the different resources available relative to demand at the time of the decision. After carefully (re)examining all events, we iteratively refined and aggregated the categories, which produced a coding scheme that we applied to code all the events again. Table 2 displays the final coding scheme, definitions, and illustrative quotes.

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Table 2.

The resource positions identified (coding scheme).

Resource Position	Description	Illustrative Quote
Constraint	Shortage of resource availability relative to resource demand
Financial	Shortage of available cash or other financial means	Everybody, every start-up, received 40 million dollars to build their own fab. And well, we raised 7 million dollars that year, and yes, that is of course way too little to build your own fab. (Founder ChipCo)
Capacity	Shortage of operational or production capacity	Suddenly, demand drastically increased. … And then, I immediately started planning for a new factory, so we could expand. (Founder SunCo)
Capability	Shortage of human resources or know-how	What became apparent was that they had very strong technological capabilities, but a lot less experience in terms of product feel, and on top of that almost no commercial experience. (VC investor ChipCo)
Slack	Excess of resource availability relative to resource demand
Financial	Excess available cash or other financial means	So every weekend I came back with maybe 5000 guilders we charged [the nightclubs] for the text messages. So all nightclubs continuously paid upfront for these text messages … we have always been funded by our customers. (Founder TextCo)
Capacity	Excess operational or production capacity	[After buying a factory] we had more volume, that’s good, but then came the crisis … we saw that there was going to be a lot of oversupply. (Founder SunCo)
Capability	Excess human resources or know-how	You just have to realize you’re able to do more than just selling modules. We have a great deal of skills here and sometimes we are able to help or advise our customers, who are stuck with a project, because we do it ourselves. (Founder SunCo)

The analysis ultimately yielded six resource positions (i.e. perceived resource availability relative to perceived resource demand) at the time of a decision. We identified three types of constraints: financial, capacity, and capability. In accordance with our conceptualization of resource positions, these three types of constraints mirrored the three types of resource slack we identified. Financial resource positions reflect the relative availability of cash or other financial means; capacity resource positions refer to operational or production capacity; and capability resource positions involve human resources or know-how (see Table 2). Unlike previous research in this area that mainly draws on firm-level measures (Daniel et al., 2004; Mishina et al., 2004), we define resource positions as the abundance or shortage of resources perceived by the entrepreneur. A focus on (the heterogeneity among) individual entrepreneurs is essential, because researching firm-level phenomena must start with the individuals constituting these firms (Abell, Felin, & Foss, 2008; Felin & Foss, 2005; Foss, 2011).

To facilitate further in-depth analyses, we created tables with information about the decision-making processes in each start-up. These tables include, for all events, the (decision-making) event number, year the event took place, decision trigger, resource position at the time of the decision, decision outcome, and illustrative quotes. For each case, Tables 3–5 show the decision-making processes for key decision-making events.

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Table 3.

Decision-making process for key events, SunCo.

Event	Year	Decision Trigger	Resource Position	Decision Outcome	Illustrative Quote
3	1999	Need for office space after founding.	Financial slack.	Founder 1 and Founder 2 establish a new entity, SunCo, facilitated by their existing businesses. They name their company after Founder 2’s company, as this name is already established and has a good reputation in the construction industry.	When you talk about starting, it was very small-scale, facilitated by another small company I owned. It was just me, with one other guy. We did not start with huge investments but built up very slowly. (Founder 1 SunCo)
4	1999	Founder 2 sees potential in a specific technology and wants to pursue the development of this technology.	Financial slack & capability constraint.	The founders commit many resources to this technology development, and to establish the new technology, more people and technological specialists are hired.	We did invest a great deal in development. Compared to many other companies, really a lot. But it is because, to the other shareholder [Founder 2], it was worth the money. He told us: ‘this is what I want to do, this is my project. I will put in a lot of money because I believe in it’. (Founder 1 SunCo)
8	2001	Additional input (technological expertise) for technology development is needed.	Financial slack & capability constraint.	Strategic cooperation is started with research institutes in the Netherlands and abroad to perform specific technological development.	We try to get the knowledge we need from anywhere, not only developing it within our organization. We are doing some co-development activities in-house, because they are of key importance, but we avoid doing too much ourselves. [University X] knew how to make crystals. We figured: then they can also make solar cells. So we contacted them and started joint development, together with research institutes in the Netherlands. (CTO SunCo)
10	2002	Dutch renewable energy subsidies are unexpectedly stopped.	Anticipated financial constraint.	Founder 1 explores doing projects across the border with Germany, where solar energy is still subsidized.	The subsidy programs of many renewable energy initiatives were discontinued. And so the entire Dutch solar energy industry went down. The grants discontinued – this became evident already in 2001. So we had to go abroad and that was actually the jump we made. (Founder 1 SunCo)
12	2003	German solar cell supplier goes bankrupt, which already received 300K Euros in prepayments from SunCo.	Capacity constraint & anticipated financial constraint.	Founder 1 sees the opportunity of taking over the supplier’s factory, to get some money back and at the same time expand their business by integrating a supplier and getting a firmer foothold in the German market.	The [supplier’s] factory lay idle in March 2003, while I had a few nice projects, for one of which I had deposited 300,000 Euros [to the supplier] which was now with the trustee in bankruptcy. You cannot imagine how it got me in a cold sweat and how this kept me awake. I immediately said to [Founder 2]: ‘we need to take over that business; the Dutch market is going down and they have our 300,000 Euros’. (Founder 1 SunCo)
14	2003	As demand for solar panels increases, production capacity falls short.	Financial slack & capacity constraint.	Founders increase production in the German factory that they just took over and plan an additional factory to produce modules for the expected demand.	We took over and in September the factory was up and running again. Because of the high demand, at the end of the year we were profitable again, with cutbacks in the organization. And then I immediately started planning a new factory, where we could expand. (Founder 1 SunCo)
22	2008	Technology development is not progressing, major problems appear during pilot production.	Financial slack & capability constraint.	Additional investments in technology development to solve the technological problems and keep the development on track.	We are running behind schedule. But the concept is so convincing and [Founder 2] is so convinced it will become a success that he just pushes it through. This is actually also entrepreneurship: just say that we should persevere, believe in it. (CTO SunCo)
23	2008	Shortage of raw material in the market drives up the prices, substantial prepayments are needed to secure sufficient material. SunCo is unable to pay these large pre-payments.	Financial constraint.	They co-invest in a US silicon plant to get more reliable supply and stable prices for delivery.	We only made solar modules and we did not have the money to grow very aggressively. And at that moment there was a big shortage of raw material in the value chain. … You had to pay millions of dollars in advance in order to get delivery contracts. We could not do much … we can do better ourselves, so therefore we wanted to be in the raw material business ourselves. (Founder 1 SunCo) That’s why we participated in a US-based joint venture with a raw material producer. Thereby we secured the basic material for solar modules. (COO SunCo)
25	2008	Technology development is not progressing and the economic crisis sets in.	Capability constraint & financial constraint.	Joint venture with an East-Asian company to produce a related technology, as a back-up for the original technology.	Due to the crises and while not being market-ready with our first generation [products], the development came under pressure. So we had to delay the development, reduce the team to the core team, and we continued with the chosen technology. … [Did we want to] put [the development] aside? Never. Think how to proceed? Yes. Therefore we tried to connect with [the Eastern Asian company]. We said: we continue together with them, we can accelerate, and spread the risks. And now we have a situation better than ever imagined. (Founder 1 SunCo)
30	2009	Due to the economic crisis, demand for solar modules drops, creating cash flow problems; banks halt loans.	Financial constraint.	SunCo starts negotiations with [a competitor] for a joint venture, which is needed to combine capacities and funding. The announcement of the merger also serves as an assurance to the banks that SunCo is still sustainable.	An interesting moment was our planned merger with [a competitor]. In fact, we just bought time with the banks, to get our interest rates at a reasonable level and to restore our trustworthiness at the banks in 2009. (COO SunCo)
34	2010	SunCo and a competitor negotiate the possible merger but cannot agree on the price. SunCo stays independent.	Financial slack.	SunCo withdraws from the merger; the (financial) need for cooperation has disappeared as well.	We talked for months. We could not get on the same page and more and more we got the feeling that it was not going to happen. At some point, the negotiators lost their belief in the cooperation. In the first quarter of 2009, [the market] was very bad. The second [quarter] was slightly less, but in the latter half of the year the market quite recovered. We eventually had net profits in 2009; not very much, but still. (Founder 1 SunCo)

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Table 4.

Decision-making process for key events, ChipCo.

Event	Year	Decision Trigger	Resource Position	Decision Outcome	Illustrative Quote
4	2000	VC investor notices that the professor and PhD students are struggling with defining their business.	Financial slack & capability constraint.	A CEO is hired by the VC investor to kick-start the nascent venture by setting up the basic organizational structures, writing a business plan and basically defining their business.	I linked the four technical founders to [the CEO] in order to talk to each other. The team matched and started planning a business. My thought was: if they come with a good plan, then we are going to finance it. (VC Investor ChipCo) The professor did not see it, and had no idea how to start a company. So they had many discussions on what they could do, where to focus on, products, etc. So [the VC investor] tried to coach them, but it resulted in nothing. Then they called me: ‘Go talk to the professor and his PhD students.’ These chips are designed for the telecom market and my background is in the telecom market. (CEO ChipCo)
7	2001	PhDs and CEO look to start company and funding is secured by means of a VC contract.	Financial slack.	ChipCo is founded, the founding team is composed, and office space is hired to have some space outside the university facilities.	When the signature for the money was there, we could leave our jobs [at University X]; at least for some time there was salary. … When we were really separated from the university, we could think in a different way. This was the moment we really started thinking about the first form of a business plan. (Founder 1 ChipCo)
10	2001	Founding team needs to determine the (scope of the) first product.	Capability slack & financial slack.	They invest in product development of a high-end system-integrating chip for the telecom market, which would demonstrate the cutting-edge technology and capabilities of ChipCo.	On the one side, we had the VCs, pushing us to proceed developing the holy grail, not to focus on simple sub-products. We thought: we make first some hybrid model for a couple of simple products to get already some revenue while we continue the development of more complex products. [The VC investor] was totally against this, we had to completely focus on the holy grail. … This was not a real product, it was a demonstrator … which showed all aspects of our technological capabilities. (Founder 1 ChipCo)
12	2001	The telecom market crashes and anticipated demand drops significantly.	Financial slack.	Despite the market changes, ChipCo continues the development of its product.	Then the crisis came and so you could see the entire semiconductor industry collapse. As a consequence, some parties opened up their production facilities, which we could use [to develop our product]. (CEO ChipCo)
15	2001	ChipCo needs to establish dedicated production facilities (a ‘fab’) for their integrating chip.	Financial constraint, capability constraint & capacity constraint	ChipCo searches for partners to outsource the production, since it does not have enough money for its own production facilities.	[The CEO] and I were looking to build a fab ourselves, and in parallel we looked whether we could just use existing facilities. That was actually unusual in this business. Everybody, every start-up, received 40 million dollars to build their own fab. And, well, we raised 7 million dollars that year, and yes, that is of course way too little to build your own fab. But that made us realize that we had to do things in a different way. So we started looking for production partners. And that is exactly the path we ended up taking. (Founder 1 ChipCo)
19	2002	Product development and process improvement require additional employees and production runs.	Financial constraint (anticipated), capacity constraint.	The ChipCo team decides to increase the number of test runs, to enable quicker adjustments of the product with the aim to keep development on track.	At one point we had that 7 million. Initially, we did one design run every month. We improved our own process every run, as we were inventing something new. One run takes 100,000 Euros, as all parties have to perform their tasks every run. But we also had our daily costs of keeping the business going; we had to pay 20 staff members, the rental fees, etc. It is a very costly business. Then we increased to two runs a month and we burned our money even faster. (CEO ChipCo)
26	2002	Customer feedback on samples of the integrating chip indicates the product cannot be incorporated in the existing designs of potential customers.	Capability slack & anticipated financial constraint.	In view of future monetary constraints, ChipCo starts exploring options for an alternative product (based on its existing technology) that customers can implement more easily in their designs.	When it became clear that the roadmap for integrated products was actually much further ahead than we thought, they [the ChipCo team] defined for example a new product which used the same functions in a completely different way, in this case a monitoring chip. …
					It was more a niche market than [integrating chip], but at that time, the feeling that we needed to generate revenue became stronger and stronger. … The long-term vision did not change, but the quest became: OK, what is needed for tomorrow? (VC investor ChipCo)
27	2002	ChipCo wants to start producing an additional product but has no revenue from the integrating chip.	Financial constraint.	Facilitated by the existing VC investors, the founding team visits more than 40 VCs to attract additional funding.	I visited 40 international investors in half a year and presented the business plan. And I tried to summarize the entire company in a few PowerPoint pages. Twelve of them were interested in the company, but dropped out one by one. (CEO ChipCo)
28	2003	ChipCo experiences the reinforcing effects of a collapsed target market, no product sales and few financing options.	Financial constraint.	To generate options to continue the company, ChipCo’s founders and engineers start exploring more alternative applications of ChipCo’s technology, even in very distant fields, such as mobility and defence applications.	At the moment that everybody…, that the telecom market collapsed, that clients told us not now, not at this moment, then we started looking at alternatives. Yes, because, still we were able to build about anything. So we looked at a project to make a supercomputer. … We looked at military applications. All sorts of communications, such as back-up facilities for banks. … We also looked at other applications, like motion sensors. We looked at the Segway, because we could integrate the gyroscopes that keep the thing upright on a square millimetre. We have looked at many opportunities where we could have created other applications. (Founder 1 ChipCo)

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Table 5.

Decision-making process for key events, TextCo.

Event	Year	Decision Trigger	Resource Position	Decision Outcome	Illustrative Quote
2	1999	The founders come up with the idea to use SMS technology for nightclub advertising.	Capacity slack, capability slack & financial constraint	The founders start experimenting with SMS. They collect phone numbers and send messages containing the weekly programme of the nightclub. They use existing contacts, and the university’s and parents’ resources.	As students, we just had little expenses. … The first two years we worked without salary. We started fairly easy, each time taking small steps; we never had an investment requiring a big step. … We had a modem and a [telephone provider] phone to upload and post the message to a number. This was done for a list of 100 numbers, each number separately. For a hundred numbers, this was feasible. So, we asked our parents if we could use their telephone line and some sockets for plugging in the laptop. (Founder 1 TextCo)
10	2000	Founders get several investment offers.	Financial slack.	The founders refuse several investment offers to keep full control over their business. They decide to go for cash-flow financing and do not need investment to finance their small development steps at the moment.	For us, it was a choice whether or not we wanted to have external financers. Many companies in this sector have at some point chosen for venture capital and other investors. We have consciously chosen not to use external financing, though we had 20 times the chance to do so, if we wanted. This is a strategic choice we made: ‘Can you pay it yourself to facilitate growth? … Or would you grow more if you would have more money and would it be more productive if you get shareholders’ capital?’ We deliberated over this choice over and over again. (Founder 2 TextCo)
14	2001	A specific SMS service, Premium SMS (voting in TV shows) is introduced to the market by competitor [SmartText]).	Financial slack.	The founders decide not to pursue premium SMS; they do not believe in the concept. They continue their focus on bulk SMS (sending multiple messages at once).	In 2001, a competitor [SmartText] … started with this idea of Premium SMS, together with [a popular TV-show where contestants compete to stay in a house]. The whole idea was that you can vote by means of SMS for who should leave the house, and you need to pay a guilder [for voting]. So we really made a bad decision at that moment, because we did not believe in it. (Founder 2 TextCo)
17	2002	Founders want to expand their business in the nightclub sector, and one of the founders likes to experiment with introducing different products.	Capability slack.	Founder 1 introduces a new product: recording videos of parties at nightclubs and selling the videos on DVD. Moreover, he starts (among other things) importing and selling white gloves.	Several times I really tried to bring other products to market, just because I like it. We did really quite bizarre things in the club market. I set up ‘[DVD product]’ for clubs. We went with five people and me as cameraman to clubs and recorded videos, which we then burned on DVD and people could buy them for 35 dollars or Euros. It was so much fun, but very labour intensive. It was not really a great success. … In Poland everybody was wearing white gloves; they love black light. So, I thought, let’s import white gloves from China. Great fun and we can experiment with them in the club market. We will see whether we will make [successful] business out of it. But it was not a mega business model. So, we tried several things. (Founder 1 TextCo)
21	2003	The founders want to grow their company by offering more services.	Financial slack & capability slack.	The founders invest in research and development and file a patent (for 100K Euros) on a new product.	We started thinking: if we send a text message to a file [of phone numbers], we can also send an email. So we extended our system with email. We have a patent on [mail service] and on [firewall service]. (Founder 2 TextCo)
22	2004	A nightclub recommends exploring the Polish market and invites founders to Poland.	Financial slack & capability slack.	The founders accept the invitation, because they perceive that they cannot grow in their Dutch home market anymore. They open an office in Poland, facilitated by local contacts there.	In 2004, one of our customers in the club market had family in Poland and asked us to come along to Poland. So, we went to Poland and looked around. There were also nightclubs that wanted to do some advertising. So, we copied the model we had in The Netherlands [to Poland]: going to the clubs, talking to people, etc. We found a nice clever lady, we rented office space, and went there every month. That all went well. (Founder 1 TextCo)
24	2004	As it starts operating outside nightclubs, speed and delivery statistics become very important to customers in logistics and banking sectors.	Financial slack & capability constraint.	The founders initiate the development and introduction of their monitor service, a SMS planning and monitoring system (that can also be used by other market parties).	They [a logistics company] have integrated SMS in their planning system. We saw immediately that this service just has to work; if a message is late, they arrive late at a customer. …. So then we went through a learning process: how are we going to monitor and particularly how are we going to send those text messages and [check] how well that goes? Very quickly it was taken to a much higher level. … This is a product that takes the service to a much higher level. (Founder 1 TextCo)
26	2006	TextCo notices the huge success of [SmartText] with Premium-SMS.	Financial slack & capability slack.	TextCo starts developing Premium-SMS technology. This decision was a strategic move; the same technology could be sold to other competitors as well.	[SmartText] and the TV ran off with premium SMS. At a certain moment, I thought, we should actually do something with it. We took the decision. It was quite a sizeable investment, but monthly revenues are high as well. And we went on the market with a revolutionary new pricing model for that market. Our competitor [SmartText] earned perhaps 5 cents per text message; we said: just give us 500 Euros per month. The television show producers liked this idea very much since it lowered their costs with some 100K Euros. (Founder 1 TextCo)
35	2008	A large Dutch bank experiences problems with its current SMS service provider.	Capability slack.	TextCo’s founders approach the bank and offer their services. With their expertise, TextCo starts SMS service for banking (a new market), at a new service level.	Our competitor experienced problems with the technology because they had many personnel changes, so no one knew how the system worked. So this was our chance. … We took over two years ago. This was very exciting, because they actually send almost five text messages every second of every week-day. So that means that if, for just one minute, they are not paying attention, then 300 text messages go wrong, and because it concerns a bank, it means that for every text message a customer is missing payments. (Founder 1 TextCo)
37	2009	Industry standards are moving to 24-hour customer support.	Financial slack & capacity slack.	TextCo starts 24-hour support to control SMS traffic and service. They start with a few people to set up the 24-hour support centre.	The light has not been turned off since January 2009. So there are always people here. … We really decided not to outsource [this 24-hour service], but to do it ourselves. A reasonable investment, but there are also many people using the [bank]. It concerns a text message that you get when you log in to your [bank] account. People log on to their account at night, so it should always work. And then it is really nice if you get to tell your clients: we are looking at your system. This includes all SMS or other products. (Founder 1 TextCo)

Finally, we conducted in-depth analyses of the decision-making processes. To trace patterns in resource positions over time, we created a graphical overview of the resource positions per event per case (see Figure 2). By combining these overviews with detailed descriptions of the events in the decision-making process tables (e.g. Tables 3–5), the nature of the resource positions could be studied. Noting the large variety in resource position configurations, i.e. combinations of different types of slack and constraints, we grouped events with similar resource positions across cases, to analyse their relation with decision making. In so doing, we drew on several tabular representations to group events by the types of resource slack, resource constraints and their particular combinations. However, in grouping the events and establishing a link between resource positions and decision making, we did not identify any direct, consistent effects of resource positions. Therefore, we redirected our attention toward the underlying dynamic complexity that appears to influence the relationship between resource positions and decision making.

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Figure 2.

Transient and multidimensional resource positions (perceived).

Case descriptions

Perceived and transient resource positions

We identified different types of resource positions, as shown in Table 2. A closer inspection of the perceived resource positions in each case and across cases, in Figure 2 and the decision-making process tables (key events in Tables 3–5), reveals several interesting observations. In particular, entrepreneurs’ perceptions of resource positions are not static but transient and changing over time. Perceived resource positions can change any time a situation involves some reflection on (anticipated) available resources relative to (anticipated) resource demand. Both perceived resource availability and perceived resource demand can shift easily, such that the resource position perceived by the entrepreneur becomes a transient imagination. For example, by the end of 2002, the founders of SunCo believed they had sufficient financial resources to buy an existing solar development project, but this view changed when a key supplier (which they already had prepaid thousands of Euros) was about to go bankrupt. This anticipated financial constraint stimulated the entrepreneurs to come up with an idea to prevent severe losses.

This example also illustrates how anticipated resource positions arise from imaginations of the future and influence entrepreneurial decision making: anticipated financial constraints (i.e. expected bankruptcy of supplier) led the entrepreneurs to act to prevent future losses. These findings highlight how resource positions may enter subjectively imagined futures (Chiles et al., 2007). The constantly changing positions and configurations of the bars in Figure 2 reflect the ever-changing perceptions of (anticipated) resources relative to demand, demonstrating the transient nature of perceived resource positions. Therefore, the time-invariant or annual measures of slack and constraints used in previous studies (e.g. Daniel et al., 2004; Nohria & Gulati, 1996; Tan & Peng, 2003) appear to generate situational snapshots, with limited longitudinal reliability.

We also explore how understanding resource positions as perceived and transient might relate to conventional, firm-level measures of resource positions. In Figures 3–5, we depict different operationalizations of financial slack and constraints for all three cases, including three common firm-level measures of financial resources (relative to demand) obtained from annual reports: cash (George, 2005; Voss et al., 2008), current assets divided by current liabilities or current ratio (Bourgeois, 1981; Bromiley, 1991; Daniel et al., 2004), and the difference between current assets and current liabilities (Bradley, Wiklund, et al., 2011; Mishina et al., 2004). A comparison of longitudinal patterns reveals that the firm-level financial measures convey different, and at times inconsistent, information with respect to the level of financial slack. The three firm-level measures produce graphs with different shapes, implying opposite conclusions. Consider, for example, Figure 3(a) versus Figure 3(c) for TextCo: The cash measure (a) indicates substantial excess financial resources during 2006–2008, whereas the difference measure (c) implies significant financial constraints in the same period, because current liabilities exceed current assets. This important finding sheds some new light on why previous studies offer conflicting results regarding the effects of slack and constraints.

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Figure 3.

Financial slack: Firm-level vs. perceived resource positions (TextCo).

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Figure 4.

Financial slack: Firm-level vs. perceived resource positions (SunCo).

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Figure 5.

Financial slack: Firm-level vs. perceived resource positions (ChipCo).

Figure 3(d) further illustrates the difference between these objective financial measures and perceived, transient resource positions. Consider 2007 for TextCo. The firm-level financial measures indicate the company is experiencing either financial slack or financial constraints for the entire year; our approach reveals a more fine-grained and dynamic picture. Thus, firm-level measures appear poorly suited for capturing and incorporating the subjective nature of resource positions (Chiles et al., 2007; Chiles, Tuggle, et al., 2010; Foss et al., 2008; Kor, Mahoney, & Michael, 2007). Researchers must attend to the heterogeneity among individual entrepreneurs to understand firm-level outcomes (Felin & Foss, 2005; Foss, 2011), particularly with regard to their subjective perceptions of resource positions (Foss et al., 2008).

A micro-level perspective of dynamic perceived resource positions over time entails both subjective and volatile resource availability and subjective and variable imagined resource demands. For example, TextCo’s entrepreneurs experienced both financial slack and constraints during 2007, depending on their perceptions of their financial resources available relative to the amount they needed. Its founders were looking to expand the company, but financial constraints limited their ability to do so, so the founders made the decision to start looking for investors, as TextCo Founder 2 explained:

First, that did not work really well, because we didn’t have a track record. … Then we hired someone to make a business plan and slides and then we went to visit 10 investors.

Yet in the same year, TextCo’s founders experienced enough excess financial resources to take over entire divisions of competing companies. Founder 2 further noted:

[In] 2007, there were so many acquisitions. And we took part in that too. … And we did that twice, successfully. So we just told competing companies: ‘We are buying your division!’ … We told them: ‘Yes, you will sign over your customers to us and we will give you money in return.’

In summary, considering resources positions as perceived and transient offers an appropriate approach, because it provides a more accurate, fine-grained representation than do firm-level measures. These observations also correspond well with events that can be tracked in firm-level measures. Returning to Figure 2, we find that the solid bars representing TextCo’s financial resource positions do not exhibit a particular pattern but move almost randomly up and down over time, in line with the company’s internal cash-flow financing strategy and organic growth. SunCo’s financial resource positions in Figure 2 instead indicate a wave-like pattern, representative of its initial large financial commitments to product development, followed by the constraining effects of the economic downturn. ChipCo’s financial resource positions in Figure 2 also display a pattern consistent with its (anticipated) venture capital rounds and subsequent bankruptcy: financial slack during the first rounds of venture capital, followed by a series of constraints related to costly production. Later, in anticipation of new funding, it made investments to speed up the development process, but the inability to attract additional funding led ChipCo to declare bankruptcy.

Multidimensional resource positions

Different types of resource constraints and resource slack can be perceived simultaneously, as also illustrated in Figure 2. In contrast with one-dimensional measures, which indicate that firms experience either resource constraints or slack, we observe simultaneous combinations of constraints and slack. Therefore, resource positions appear multidimensional, in contrast with the conventional wisdom that implies constraints or slack are absolute positions in time (Bradley, Wiklund, et al., 2011; Nohria & Gulati, 1996; Tan & Peng, 2003). By identifying financial-, capacity- and capability-related resource positions (see Table 2), we observe that entrepreneurs can experience constraints and slack at the same time, as illustrated by ChipCo’s event 14 in Figure 2. In 2001, the founders of ChipCo anticipated severe financial constraints; they needed to secure a second round of VC funding but also received a complaint from another company claiming patent infringement. ChipCo’s CEO explained:

During the second round funding we faced a blocking patent, … where we would have to pay royalties of about 20 percent on everything we sold and a sign-up fee of, I believe, half a million, really ridiculous. … We were in the middle of [securing] that investment round and [potential VC investor] told us: ‘This is a major event, so we will need to see. This changes the entire situation.’

At the same time, ChipCo employed top-notch scientists, with plenty of underutilized (slack) capabilities. According to its CEO:

The brainpower of our guys, I mean, we had about four or five PhDs from [university X], super smart guys, real betas – tremendous amount of respect for those guys who all got their PhD at the intersection of physics and electrical engineering, real eggheads with international status. … They worked to see if they could come up with a re-design to work around the patent. Within two weeks they came up with seven re-designs!

In this example, financial constraints arising from patent infringement and slack capabilities jointly characterized the resource position at the time of the decision; together they spurred creative solutions. The finding that entrepreneurs can (simultaneously) perceive different types of constraints and slack reflects early theorizing about the role of resources in organizations (e.g. Hannan & Freeman, 1993; Scott, 1987; Thompson, 1967), and it signals that attempts to attribute particular effects to one-dimensional measures are highly problematic. The use of one-dimensional measures can result in outcomes driven by unobserved factors, which may explain the mixed prior findings regarding the effects of resource slack and constraints. Resource slack or constraints thus cannot be scrutinized in isolation; instead, they must be examined in more comprehensive ways.

Mixed effects of constraints and slack: Underlying dynamics

We now turn to exploring how perceived, anticipated and relative resource positions pertain to decision making. Previous research has not been able to provide consistent insights regarding the effects of resource constraints or slack. We grouped events with similar resource positions in tables to establish a link between resource positions and decision making; however, we did not detect a recurrent or systematic pattern at the event level. The perception of constraints in some instances motivates entrepreneurs to engage in some creative explorations (e.g. Table 4, event 28, ChipCo), whereas entrepreneurs perceiving constraints in other settings do not pursue that direction (Table 3, event 25, SunCo). Similar results arise with regard to the effects of slack resources (Table 5, events 14 versus 21, TextCo). At times, constraints encourage the production of creative ideas; at other times, slack resources stimulate such ideas; and in still other instances, neither constraints nor slack induce creative solutions. But why do constraints and slack not have univocal effects?

In line with our theoretical argument, our findings show that a decision outcome is unlikely to relate directly to an observed resource position. The relationship between resource positions and decision making instead depends on several underlying dynamics, including those at the individual, temporal, and resource position levels. In the remainder of this subsection, we ground these key factors and relationships in our data.

Perceived resource positions and individual dynamics

Resource positions reflect an entrepreneur’s perception of available resources relative to demand. Unlike previous research that has tended to overlook the role of individuals in organizations (Abell et al., 2008; Felin & Foss, 2005; Foss, 2011) because it adheres mainly to firm-level measures (Daniel et al., 2004; Voss et al., 2008), we conceptualize resource positions as the abundance or shortage of resources perceived by the entrepreneur. Perceived resource availability and demand are entrepreneur-specific and highly subjective, in line with sensemaking (e.g. Cornelissen & Clarke, 2010; Weick, 1995) and Austrian economics (e.g., Foss & Ishikawa, 2007; Foss et al., 2008) research. An entrepreneur’s imagination influences the subjective evaluation of available resources (Chiles et al., 2007; Chiles, Tuggle, et al., 2010; McMullen, 2010), so firm-level measures cannot address the heterogeneously perceived value of available resources in relation to imagined action scenarios. The commonly used, financial firm-level measures, which result in contradictory characterizations of a start-up’s resource position, thus are less appropriate for describing the effects of resource slack and constraints.

The idea that resource positions are transient imaginations has important implications for related studies, because the relationship between resource positions and decision making is subject to individual-level dynamics. Different entrepreneurs perceive resource availability relative to imagined demand in distinct ways – as clearly exemplified by the two SunCo founders – and therefore make different decisions. Our findings thus extend prior research that suggests that founders likely engage in creative and innovative activity by nature, by habit, or in response to certain resource positions (Baker & Nelson, 2005; Bundy, 2002; Woodman, Sawyer, & Griffin, 1993). For example, effectuation theory implies that the way entrepreneurs make decisions depends on their individual expertise and the degree of uncertainty (Sarasvathy, 2001; Sarasvathy et al., 2008; Read & Dolmans, 2012). As the degree of uncertainty may shift for each event, it is impossible to find a direct or generalizable effect of resource availability, because individual perceptions and decision-making drive firm-level behaviour and outcomes.

Various decision outcomes also arise from the interaction between entrepreneurs who team up for a particular venture. Both individual perceptions and interactions between individuals thus influence the relationship between perceived resource positions and decision making (Chiles et al., 2007; Chiles, Vultee, et al., 2010; Ford & Gioia, 2000; McMullen, 2010). In this sense, our findings extend research on collective creativity by showing how interactions between entrepreneurs, perceiving distinct resource positions, can affect the production and implementation of creative ideas (Ford & Gioia, 1995; Hargadon & Bechky, 2006; Kurtzberg & Amabile, 2001; Sawyer & DeZutter, 2009; Sawyer, 2008; Woodman et al., 1993). Our study also extends previous work on perspective taking and creativity (McMullen, 2010) as antagonistic perspectives might generate underlying tensions, and founders who cannot converge on a shared perspective on resource positions may nix their partners’ creative ideas. Ongoing research should incorporate these individual and collective effects and gather the perceptions of all entrepreneurs (and perhaps their stakeholders) about their resource availability and imagined resource demand.