Product and Process Flexibility in an Innovative Environment

Armin Schmutzler, University of Zurich
Susan Athey, Harvard University

Abstract

This article studies several attributes of a firm's long-run decisions about organizational structure, attributes that affect the firm's short-run innovative activity. We focus on flexibility, which lowers the future costs of implementing innovations, and research capabilities, which improve the future opportunities for innovation. We consider two dimensions of innovation: demand-enhancing (product) and cost-reducing (process). These two types of innovation are complementary in terms of increasing the firm's net revenue in the short run. The complementarities between the firm's short-run decision variables then lead to complementarities between its long-run decisions about product and process flexibility and research capabilities.