Output flexibility—A competitive advantage for small firms

Abstract We explore three theoretical perspectives that look at output flexibility as a competitive advantage for small firms as was initially described by Stigler (1939). First, small firms are more willing to fluctuate their output. As a result: second, small firms can trade cost inefficiency with volume flexibility to increase their profits; third, output flexibility is a more viable source of competitive advantage in volatile and capital‐intensive industries, and less viable in profitable industries. Indeed, the empirical analysis of over 3000 companies representing 83 industries during the 1979‐87 time period supports our theoretical perspectives. Future research directions that combine firm flexibility and other strategic dimensions are discussed in the context of providing a general strategic framework for small firms competing against large ones.