"Flexible manufacturing systems and the internal structure of the firm," International Journal of Industrial Organization Volume 20, Issue 8, October 2002, pages 1061-96.
Abstract: 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 uncertainties vary significantly across different divisions horizontal separation enhances technological flexibility. Otherwise, when the nature of uncertainty is comparable across divisions it is teamwork and cooperation that yield 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 competing firms. In particular, the firm chooses a less flexible technology if its competitor is vertically separated rather than integrated.