Mix, Time, and Volume Flexibility: Valuation and Corporate Diversification

28 Pages Posted: 7 Aug 2009 Last revised: 25 Apr 2014

Date Written: November 27, 2012

Abstract

This article examines the joint impact of three types of operational flexibility in a theoretical model of a two-product firm that makes capacity, production and pricing decisions at three points in time with an underlying continuous-time information evolution. Mix flexibility is measured by the cost of switching production between the two products. Volume flexibility is measured by the fraction of production cost that is variable at the time when the production decision is made. Finally, time flexibility is measured by the relative timing of the production decision. We show that mix and volume flexibilities are substitutes in creating firm value but both are complementary to time flexibility. We discuss the implications of these results for the optimal investment in different aspects of flexibility. We also relate these results to corporate strategy and show how different types of flexibility impact the benefits of corporate diversification.

Keywords: Flexibility, Real Options, Forecast Updating, Diversification

JEL Classification: C61, C44

Suggested Citation

Chod, Jiri and Rudi, Nils and Van Mieghem, Jan Albert, Mix, Time, and Volume Flexibility: Valuation and Corporate Diversification (November 27, 2012). Review of Business and Economic Literature 57(3), Available at SSRN: https://ssrn.com/abstract=1445629 or http://dx.doi.org/10.2139/ssrn.1445629

Jiri Chod (Contact Author)

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Nils Rudi

INSEAD - Technology and Operations Management ( email )

Boulevard de Constance
77 305 Fontainebleau Cedex
France

Jan Albert Van Mieghem

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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