Managing operational flexibility under demand uncertainty

Many firms in many different industries are increasingly adopting operational flexibility to better manage demand uncertainty and to cope with intense competition. Such operational flexibility comprises of several different dimensions including product (or mix) flexibility, volume flexibility, new product flexibility, delayed differentiation, etc. In this dissertation, we focus on two such types of flexibility, product flexibility and volume flexibility, and model firms\u27 decision to adopt one or both of these flexibility choices to mitigate uncertainty in demand and to respond to competition. Chapters 2 and 3 of the dissertation focus on product flexibility, which entails the ability to manufacture more than one product on a production line. In Chapter 2, using an analytical model, we distill the impact of competition on the adoption of product-flexible technology under uncertain demand. We find that in equilibrium, flexible and inflexible technologies can coexist, and that investment in flexibility is not a universal best response. Next, we empirically test the analytical findings of Chapter 2. Though we find robust evidence that automotive manufacturers use flexibility as a competitive weapon (flexibility is deployed in market segments in which there are large number of flexible competitors), the evidence also suggests that firms that invest in flexibility in response to higher flexible competition actually have lower productivity. Hence, flexibility may be of limited use as a strategic weapon against competition, contrary to the arguments advanced in much of the extant literature. Findings from the empirical chapter hint that product and volume flexibility (the ability to increase or decrease total production volumes) may be interrelated: a firm that has one type of flexibility may also possess, to some degree, the other type as well. Hence, Chapter 4 analytically explores the intertwined nature of volume and product flexibility. We systematically show that product flexibility mitigates uncertainty in demand for individual products better than volume flexibility, which in turn is better at managing uncertainty in aggregate demand. Moreover, product-flexible technology handles substitutable (complementary) products better (worse) than volume-flexible technology. Surprisingly, there are limited advantages to adding product flexibility to volume flexibility because of possible diseconomies of scope. The analysis is undertaken with both endogenous and exogenous (retro-fitting) capacity choices