Flexible manufacturing systems and the internal structure of the firm

We investigate the relationship between the internal structure of the firm and the extent of flexibility of its technology. We demonstrate that increased vertical separation within the firm as implied, for instance, by subcontracting or by additional vertical layers of management yields investment in a more flexible technology. In contrast, increased horizontal separation as implied by lack of cooperation among different (horizontal) divisions within the firm has ambiguous implications on flexibility. When divisions of the organization confront significantly different levels of uncertainty, horizontal separation enhances technological flexibility. Otherwise, when the extent of uncertainty confronting different divisions is comparable it is cooperation that yields greater flexibility of the technology. We show that the attributes of the technology selected by a given firm may depend upon the internal structure of its competitor if those attributes can be observed by the competing firm. In particular, the firm chooses a less flexible technology if its competitor is vertically separated rather than integrated.  2002 Elsevier Science B.V. All rights reserved.