Mix, Time and Volume Flexibility: Valuation and Corporate Diversification

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