Keywords: organisational risk, profitability variations, outlay flexibility, firm performance, risk management, expenditure flexibility
Outlay flexibility and organisational risk: examining the relationship and its implication for firm returns
In today's uncertain business environment, management of organisational risk is necessary for long-term firm performance. Strategy scholars emphasise that firms need flexibility in managing risk in unstable environments. However, the concept of flexibility is multifaceted and has been discussed at various levels and for different aspects of the firm, which in turn has created confusion. In this paper, we consider outlay flexibility at the firm level, measured in terms of variations in capital expenditure, labour cost, R&D expenses, and selling and general administrative expenses. We propose that organisational risk would induce firms to be more flexible in terms of their expenses, and that flexible firms are able to generate greater financial returns over time. Analyses of pooled time series data from a sample of US firms over 1985–2001 support our hypotheses. The implications of these findings for future researchers and managers are discussed.