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 for Economic Research) - Ifo Institute for Economic Research; 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
April 1, 2012
Firms producing composite products face a tradeoff between the benefits of flexibility from sourcing components externally and the benefits of commitment from joint internal development of components. We study this tradeoff in a simulation model by varying the degree of complexity within and between the product components and the degree of environmental turbulence. The effect of complexity depends on whether complexity is within a component or at the interface between components. Specifically, interface complexity favors integrated solutions while component complexity favors non-integration. For turbulence, we find a nonlinear effect as moderate turbulence makes integration more attractive by offsetting some of the pitfalls of commitment to a single solution, while high turbulence increases the attractiveness of non-integration. We specifically discuss the empirical implications of these results.
Number of Pages in PDF File: 33
Keywords: uncertainty, complexity, adaptation, commitment, flexibility, turbulence, NK model
JEL Classification: C15, L22, L24working papers series
Date posted: April 12, 2012
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