Vertical Scope, Turbulence and the Benefits of Commitment and Flexibility

Management Science, 61 (4), 2015, 915-929

32 Pages Posted: 12 Apr 2012 Last revised: 25 Aug 2015

See all articles by Jörg Claussen

Jörg Claussen

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management); Copenhagen Business School - Department of Innovation and Organizational Economics

Tobias Kretschmer

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management); Centre for Economic Policy Research (CEPR)

Nils Stieglitz

Frankfurt School of Finance & Management; University of Southern Denmark - Strategic Organization Design Unit (SOD) - Department of Marketing & Management

Date Written: January 1, 2014

Abstract

We address the contested state of theory and the mixed empirical evidence on the relationship between turbulence and vertical scope by studying how turbulence affects the benefits of commitment from integrated development of components and the benefits of flexibility from sourcing components externally. We show that increasing turbulence first increases but then decreases the relative value of vertical integration. Moderate turbulence reduces the value of flexibility by making supplier selection more difficult and increases the value 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-monotonic relationship between turbulence and integration.

Keywords: turbulence, vertical integration, commitment, flexibility, adaptation, NK model

JEL Classification: C15, L22, L24

Suggested Citation

Claussen, Jörg and Kretschmer, Tobias and Stieglitz, Nils, Vertical Scope, Turbulence and the Benefits of Commitment and Flexibility (January 1, 2014). Management Science, 61 (4), 2015, 915-929, Available at SSRN: https://ssrn.com/abstract=2038834 or http://dx.doi.org/10.2139/ssrn.2038834

Jörg Claussen (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Copenhagen Business School - Department of Innovation and Organizational Economics ( email )

Kilevej 14A
Frederiksberg, 2000
Denmark

Tobias Kretschmer

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Nils Stieglitz

Frankfurt School of Finance & Management ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

University of Southern Denmark - Strategic Organization Design Unit (SOD) - Department of Marketing & Management ( email )

Campusvej 55
DK-5230 Odense M
Denmark

HOME PAGE: http://www.sdu.dk/sod

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