Uncertainty and the Value of Commitment and Flexibility
Copenhagen Business School - Department of Innovation and Organizational Economics
Ludwig-Maximilians-Universität Munich - Faculty of Business Administration (Munich School of Management); CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute; London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)
Frankfurt School of Finance & Management; University of Southern Denmark - Strategic Organization Design Unit (SOD) - Department of Marketing & Management
June 30, 2013
We address the mixed empirical evidence and contested state of theory on the relationship between turbulence and integration by studying how turbulence affects the relative benefits of commitment from integrated development of components and of flexibility from sourcing components externally. Turbulence has a non-linear effect on the value of integration. Moderate turbulence reduces the benefits of flexibility by aggravating problems of supplier selection and increases the benefits of commitment by mitigating the status quo bias of integrated structures. Both effects improve the value of integration. Higher levels of turbulence undermine the adaptive benefits of commitment, while having a less adverse effect on flexibility, making non-integration more attractive. We also show how complexity and uneven rates of turbulence moderate the non-linear relationship between turbulence and integration.
Number of Pages in PDF File: 33
Keywords: turbulence, vertical integration, commitment, flexibility, adaptation, NK model
JEL Classification: C15, L22, L24working papers series
Date posted: April 12, 2012 ; Last revised: July 1, 2013
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