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The concept of "vertical architecture" defines the scope of a firm and the extent to which it is open to final and intermediate markets; it describes the configurations of transactional choices along a firm's value chain. A firm can make or buy inputs, and transfer outputs downstream or sell them. Permeable vertical architectures are partly integrated and partly open to the markets along a firm's value chain. Increased permeability enables more effective use of resources and capacities, better matching of capabilities with market needs, and benchmarking to improve efficiency. Partial integration promotes a more dynamic, open innovation platform and enhances strategic capabilities by linking key parts of the value chain. This permeable vertical architecture, accompanied by appropriate transfer prices and incentive design, facilitates resource allocation and guides a firm's growth process. Our longitudinal study of a major European manufacturer suggests that to understand how firm boundaries are set and what their impacts are, we need to complement the microanalytic focus on transactions with a systemic analysis at the level of the firm. It also shows how, over and above transactional alignment, decisions about boundaries and vertical architectures can transform a firm's strategic and productive capabilities and prospects.

We investigate trade-offs associated with delegating authority over multiple interrelated decisions in a complex task structure. The empirical setting is a business process of a global Fortune 50 firm. The firm decentralized its organization and redefined decision authority across organizational hierarchies between 2008 and 2011. We employ regression analysis of microlevel data on the allocation of decision authority between formal and real authority, and further on the organization design of 761 decision tasks within a hierarchy. Our findings show how the specialization of decision-relevant knowledge, the matching of required knowledge and managers' expertise, and information processing intensity affect (a) the occurrence of delegation and, (b) if delegation occurs, how far down the organizational hierarchy authority is delegated. We discuss how these findings complement existing theories on delegation by providing insights into when and how interrelated decisions are delegated across multiple levels of an organizational hierarchy.

This paper presents findings from a laboratory experiment on human decision making in a complex combinatorial task. We draw on the canonical NK model to depict tasks with varying complexity and find strong evidence for a behavioral model of adaptive search. Success narrows down search to the neighborhood of the status quo, whereas failure promotes gradually more exploratory search. Task complexity does not have a direct effect on behavior but systematically affects the feedback conditions that guide success-induced exploitation and failure-induced exploration. The analysis also shows that human participants were prone to overexploration, since they broke off the search for local improvements too early. We derive stylized decision rules that generate the search behavior observed in the experiment and discuss the implications of our findings for individual decision making and organizational search.