Modularity, component outsourcing, and inter-firm learning

Modularization of product architectures is a strategy for managing complex design activities and production systems, and associated supply chain issues. It has wide-reaching implications, from design engineering to business strategy. With standardized interface specifications, component outsourcing is possible, both with respect to the division of tasks in functional specification and detailed engineering of a product architecture. However, failure at the system level could still take place if interface compatibility issues of the outsourced component with the rest of the system are not understood. Outsourcing creates a certain degree of supplier-buyer interdependence and possibilities for inter-firm learning. A study of Chrysler Jeeps WIPERs suggested that learning-by-failure from one product architecture cultivated closer cooperation between the supplier and Chrysler to solve technical problems as well as to be innovative in searching for the best technological solutions for future product architecture designs.     

The Influence of Digital Design and IT on Modular Product Architecture

The architecture of a product is the design and specification of inherent subsystems, components, and interfaces between subsystems. Well‐defined interfaces allow the development of standardized subsystems that may be shared across product lines, e.g., technology platforms. Past research shows the benefits of modular product architecture in terms of improving cost of goods through common components and materials as well as improving development time cycles for derivative products. Product architecture does not occur by accident; it must be engineered and implemented. This study explores the impact of digital design and information technology (IT) on the development of modular product architectures. Through an empirical study of 122 firms and follow‐up interviews with several respondents, we study the impact of digital design tools and IT infrastructure on the development of modular product architecture and overall project outcomes. The results indicate that a firm's IT infrastructure has a strong, significant relationship with the development of modular product architecture. The findings also show a strong, positive relationship between the development of modular product architecture and project outcomes. However, in contrast to the common perception that digital design tools enhance R&D productivity and effectiveness, we do not find a significant relationship between digital design tool usage and modular product architecture or overall project outcomes. The findings suggest that digital design tools and their organizational implementation need improvement in up‐front new product development phases.     

When the mirror gets misted up: Modularity and technological change

This study investigates how component technological change affects the relationship between product modularity and organizational modularity (the across‐firm mirroring hypothesis). Studying the air conditioning industry, we show that the across‐firm mirroring hypothesis does not hold for technologically dynamic components and the associated supply relationships. In this case, the mirror gets “misted up” with buyers and suppliers having recourse to information sharing even in the presence of highly modular components. Our study contributes to the debate on the organizational implications of modularity and its ramifications for the theory of the firm. Copyright © 2013 John Wiley & Sons, Ltd.     

Interfirm Modularity and Its Implications for Product Development*

Industries characterized by interfirm modularity, in which the component products of different firms work together to create a system, are becoming increasingly widespread. In such industries, the existence of a common architecture enables consumers to mix and match the products of different firms. Industries ranging from stereos, cameras, and bicycles to computers, printing, and wireless services are now characterized by interfirm modularity. While the increasing presence of this context has been documented, the implications for the product development process remain underdeveloped. For the present study, in‐depth field‐based case studies of seven firms experiencing an environment of interfirm modularity were conducted in order to deepen understanding of this important phenomenon. What unique challenges did this context pose and why? What solutions did firms experiment with, and which seemed to work? Based on an inductive process of data analysis from these case studies, three primary categories of challenges raised by this environment were identified. First, firms were frustrated at their lack of control over the definition of their own products. The set of features and functions in products were constrained to a great extent by an architecture that the firm did not control. Second, while an environment of interfirm modularity should in theory eliminate interdependencies among firms since interfaces between products are defined ex‐ante, the present study found, ironically, that interdependencies were ubiquitous. Interdependencies continually emerged throughout the product development process, despite efforts to limit them. Third, firms found that the quantity and variegated nature of external relationships made their management exceedingly difficult. The sheer complexity was daunting, given both the size of the external network as well as the number of ties per external collaborator. Partners with whom control over the architecture was shared often had divergent interests—or at least not fully convergent interests. The solutions to these challenges were creative and in many cases counter to established wisdom. For instance, research has suggested many ways for a firm to influence architectural standards. While the firms in the present sample followed some of this advice, they also focused on a more neglected aspect of architecture—the compliance and testing standards that accompany modules and interfaces. By concentrating their efforts in a different area, even smaller firms in this sample were able to have some influence. Instead of focusing on the elimination of interdependencies, it was found that firms benefited from concentrating on the management of interdependencies as they emerged. Finally, while layers of management and “bureaucracy” are often viewed as unproductive, these firms found that adding structure, through positions such as Relationship Manager, was highly beneficial in handling the coordination and control of a wide range of external relationships.     

Product and Process Modularity's Effects on Manufacturing Agility and Firm Growth Performance

Modularity in product design has been hailed as a way to speed new product development (NPD), to reduce NPD cost, and to enhance customization possibilities for consumers. Modularity in process design may speed new product manufacturing setup times, reduce costs, and enhance the profitability of the lower volumes that customization often entails. However, empirical evidence is scarce that either product or process modularity—individually, jointly, or sequentially—actually produce these or other proposed benefits (e.g., performance growth). This study builds on general modular systems theory (GMST) by examining the theoretical relationship between product and process modularity and the effects of each on firm growth performance. Using structural equation modeling, partial versus complete mediation by manufacturing agility is also scrutinized. In one pair of models, product modularity and process modularity are separate direct antecedents to manufacturing agility, which is modeled to affect firm growth performance; in a second pair of models, product and process modularity are related antecedents to manufacturing agility, with product modularity preceding process modularity. Results from the best‐fitting model show that product modularity directly and positively affects process modularity, manufacturing agility, and firm growth performance. Process modularity was unrelated to manufacturing agility, and neither process modularity nor manufacturing agility predicted growth performance. Consistent with GMST, the study provides empirical evidence of the power of one element of a modular system to orchestrate a fit between a firm's product and manufacturing strategies and to directly drive system performance. Thus, modularity in product design is revealed as the key to understanding GMST effects concerning how changes in one system generate changes in other systems.     

Modularity,strategic flexibility,and firm performance: a study of the home appliance industry

Recent theorizing has proposed that modular product and process architectures are key enablers of strategic flexibility. We formulated an integrative conceptual model encompassing antecedents, contributing factors, and outcomes of modularity. We then tested this model on data from managers in U.S. and U.K. home appliance companies using structural equations modeling. The results indicate a positive relationship between modular product architectures and performance, with product model variety as a mediating variable. The results also highlight linkages between perceptions of market context and the use of modular products architectures, and between complementary organizational capabilities and firm performance. Copyright © 2002 John Wiley & Sons, Ltd.     

Modularity in making: simplifying solution space for user innovation

An increasingly popular form of open innovation in the digital age is ‘making,’ where users innovate across multiple disciplines and make products that meet their needs, using mechanical, electronic, and digital components. These users have at their disposal, a wide solution space for innovation through various modular toolkits enabled by digital‐age technologies. This study explores and outlines how these users simplify this wide solution space to innovate and make tangible products. Following a modularity theory perspective, it draws on case studies of users and their innovations: (1) Users with initial prototype product designs based on the Internet of things (IoT) from a maker event and (2) users with established product designs from the online community platform Thingiverse. The studies found that users reused the design in the form of existing off‐the‐shelf products and utilized digital fabrication and low‐cost electronics hardware as a ‘glue’ to create physical and informational interfaces wherever needed, enabling bottom‐up modularity. They iteratively refined their innovations, gradually replacing re‐used designs with own integrated designs, reducing modularity, and reducing wastage. The study contributes to open innovation and modularity with implications on the design of products and toolkits enabled by the digital age.     

模块化:解决复杂系统问题的有效方法--以家庭装修项目为例

模块化是系统的分解与集成，它是追求创新效率与节约交易费用的分工形式。作为解决复杂系统问题的有效方法，模块化可以使复杂的系统问题简单化、僵化的系统灵活化、耗时的工期高效化、集中的决策分散化。模块化的关键点与难点在于对系统的功能性分析，而模块化程度则取决于系统的可分性与投入、需求的多样化。     

The incentives for cost reduction in a differentiated industry

This paper investigates how the incentives for cost reduction in a differentiated industry depend upon the degree of product substitutability. When goods are imperfect substitutes, both Cournot and Bertrand competition result in underinvestment in the sense that a social planner would be willing to pay more for a given cost reduction than a profit-maximizing firm. Overinvestment may occur when the goods are sufficiently close substitutes. Similarly, Cournot competition provides a stronger incentive to innovate than Bertrand competition if the degree of substitutability is low, and a weaker incentive if this degree is high.     

Selecting Influential Business-to-Business Customers in New Product Development: Relational Embeddedness and Knowledge Heterogeneity Considerations

This study examines how the most influential business‐to‐business (B2B) customers, both existing and potential, involved in providing input to a new product development (NPD) project influence new product advantage. As the relational literature suggests, involving customers who have had close and embedded relationships with a firm's new product organization, such as a firm's largest customers, and customers who have been involved in past collaborative activities, should lead to the development of superior products. To the contrary, the innovation literature suggests that a firm may become too close to its large, embedded customers resulting in less innovation and in lower performing products. Also, the relationship between the heterogeneity of the knowledge of the most influential customers and new product advantage is examined. A contingency perspective is hypothesized such that the degree of product newness sought in the project moderates the effects of both relational embeddedness and knowledge heterogeneity on new product advantage. Empirical findings from a sample of 137 NPD projects support this contingency view. For projects seeking to develop incremental products, where the product being developed is an extension or an enhancement to an existing product, new product advantage tended to be higher in projects using embedded or homogeneous customers. For incremental projects, projects using less‐embedded or heterogeneous customers tended to have lower product performance. For projects following a highly innovative product strategy, new product advantage tended to be higher in projects that involved heterogeneous customers. These heterogeneous customers provided NPD projects with a diversity of perspectives, competencies, and experiences that fostered significant product innovations. The study contributes to the literature by empirically testing relational and innovation theories in NPD projects and by providing evidence on the importance of relational embeddedness and knowledge heterogeneity in selecting influential customers in NPD projects.     

Implementing the lead user method in a high technology firm: A longitudinal study of intentions versus actions

The customer or user's role in the new product development process is limited or nonexistent in many high technology firms, despite evidence that suggests customers are frequently an excellent source for new product ideas with great market potential. This article examines the implementation of the Lead User method for gathering new product ideas from leading edge customers by an IT firm that had not previously done much customer research during their new product development efforts. This case study follows the decision‐makers of the firm through the process, where the end result is the generation of a number of useful product concepts. Besides the ideas generated, management at the firm is also impressed with the way the method makes their new product development process more cross‐functional and they plan to make it a part of their future new product development practices. Approximately one year later the firm is revisited to find out if the Lead User method has become a permanent part of their new product development process. The authors find, however, that the firm has abandoned research on the customer despite the fact that several of the lead‐user derived product concepts had been successfully implemented. Management explanations for their return to a technology push process for developing new products include personnel turnover and lack of time. Using organizational learning theory to examine the case, the authors suggest that the nontechnology specific product concepts generated by the lead users were seen as ambiguous and hence overly simplistic and less valuable by the new product development personnel. The technical language spoken by the new product personnel also increased the inertia of old technology push development process by making it more prestigious and comfortable to plan new products with their technology suppliers. The fact that the firm was doing well throughout this process also decreased the pressure to change from their established new product development routine. The implications for these finding are that: 1) it is necessary to pressure or reward personnel in order to make permanent changes to established routines, and 2) researchers should be careful at taking managers at their word when asking them about their future intentions.     

Perspective—Riding the Wind: Managing New Product Development in an Age of Change

New product development (NPD) has never been more challenging or rewarding than it is today. With the dawning of the new millennium, new product developers now find themselves in an “age of change,” the likes of which the world has never known. The rate of change is numbing, if not stupefying for many business people. With the winds of change blowing at near gale force intensity levels, this is clearly a time for NPD professionals to pursue new product and market strategies that are anchored on sound business fundamentals. This article begins with a brief review of the Product Development & Management Association's 1998 International Research Conference held in Atlanta. The theme for the conference was “Achieving Excellence in New Product Development and Management.” The article then offers a reflective look at seven NPD themes that could dominate new millennium business thinking and offer guidance to those seeking new product success. The article's first theme discusses why NPD is increasing in importance. The second theme outlines key NPD building blocks which NPD champions must bolster for new product success. The third theme explores the value in conceptualizing NPD output in items of “turns per decade.” The fourth theme champions the notion that continuous quality improvement is an integral part of NPD's contribution to a firm. The fifth theme explains why product elimination is an essential element in the innovation process. Theme number six reminds readers that fun and optimism are essential and commonly overlooked ingredients for sustaining NPD achievement. The seventh theme states that product development professionals build credibility and successful careers by delivering on promises made. Innovation opportunities embedded within each theme are explored from both firm‐level and individual developer‐level perspectives. In building the case for their themes, the authors initially provide a rationale for NPD's growing stature and importance. Then they suggest NPD strategies that firms can implement with high likelihood of success. The article concludes with suggested actions that individual developers can undertake to bolster their own careers while simultaneously strengthening the NPD profession.     

How New Product Introductions Affect Sales Management Strategy: The Impact of Type of "Newness" of the New Product

How do firms adjust sales management strategy for new product launch? Does sales management strategy change more radically for different types of new products such as new‐to‐the‐world products versus product revisions? Because firms introducing a new product rely considerably on their sales force in the product launch effort, the types and degree of changes made in managing the selling effort are important issues. Past studies have demonstrated that firms make substantial adjustments in their sales management strategy when they introduce a new product. This study expands on previous investigations by examining whether sales management strategy changes are conditioned by the type of newness of the new product to the market and to the firm. Australian sales managers were asked to respond to a mail questionnaire concerning pre‐ and post‐new product launch sales management activities. Three groups of firms were compared: (1) those with new‐to‐the‐market and new‐to‐the‐firm products (i.e., new‐to‐the‐world products); (2) those with products new to the firm but not new to the market; and (3) those with products that are revisions to the firm and not new to the market. The study finds that firms do not make the most adjustments for products with the greatest degree of market newness—the new‐to‐the‐world types of products—except in the sales management strategy categories of compensation and supervision. In the other sales management strategy categories defined for study—organization, training, quotas and goals, and sales support as well as for all categories in the aggregate—sales management strategy changes were greatest in incidence, as measured both by the percent of firms making changes and the average number of changes per firm, when the new product was new to the firm but not new to the market. These results suggest that, because different types of new products face different competitive environments, there may be greater incentive for a not‐new‐to‐the‐market new‐to‐the‐firm product to make changes in sales strategy. Uncertainties about market size and customer location with new‐to‐the‐world products may limit the understanding of what changes to make in the strategy categories of quotas and territories. Similarly, uncertainties about product use and customer acceptance of new‐to‐the‐world products may limit the development of training and sales support materials by these firms. Instead, these firms may rely more on compensation and supervision to direct sales efforts for new‐to‐the‐world products. However, observing the market experience and performance of the first‐to‐market product can benefit firms launching a not‐new‐to‐market and new‐to‐the‐firm product, allowing them to rely more on strategy changes in training, sales support materials, organizational adjustments such as redeployments, and quotas.     

Firm Heterogeneity,New Investment and Acquisitions

This paper presents a model of investment in which heterogeneous firms choose between new investment and acquisitions. New investment involves purchasing a new plant for an existing variety. Acquisitions involve purchasing a plant and a variety from a selling firm. Using a variable‐elasticity demand system, I show that if varieties within a differentiated industry are imperfect substitutes, mid‐productivity firms invest. As varieties approach perfect substitutability, high‐productivity firms invest. For both cases, within the region of investing firms, the most productive choose acquisitions over new investment. In analyzing firm‐level data from Compustat, I find evidence that supports these predictions.     

The power and limits of modularity: A replication and reconciliation

Research Summary: We ask two questions: First, what are the underlying mechanisms that explain the power of modularity? Second, is the power of modularity robust in nonmodular problems? We replicate and then reconcile the key results in two prior models on modularity: E&L and S‐search. Our results yield several important insights. First, a significant portion of the advantage enjoyed by S‐search is attributed to multi‐bit mutation. Second, organization‐evaluation needs to be used in combination with multi‐bit mutation. Third, when the underlying problem structure becomes nonmodular, S‐search outperforms E&L search, even though the advantage is reduced. More generally, organizational designers need to pay close attention to how different elements of modular search interact, and avoid making incremental adjustments. Managerial Summary: Modularity in product or organizational design is an approach that divides a system into smaller modules and attempts to augment the system level performance by experimenting with new modules. Because of its potential benefits such as parallel problem solving, adaptability in turbulent environment, or high speed in experimentation, both scholars and practitioners subscribed to the “power of modularity” thesis. Despite its popularity, there are significant number of cases where the superiority of modular design does not hold. We compare and contrast two representative prior studies that had different views on modeling organizational evolution under a modular design principle. By doing so, we are able to uncover what contributes to the superiority of modular design. Our results suggest that, when conducting experimentation under a modular design, it is important to (a) experiment multiple decision components simultaneously within a single module; and (b) allow evaluation of the changes to be made by the module‐level manager not by the organization‐level manager. When the manager does not know whether the modularity in organizational design fits with the modularity in the task, it is advised to do multiple experimentation in a single module at a time while allowing the organization‐level manager to evaluate the changes.     

Complementarity,capabilities, and the boundaries of the firm: the impact of within‐firm and interfirm expertise on concurrent sourcing of complementary components

Theories of the firm raise conflicting arguments about how complementarities between two or more components affect firms' knowledge and production boundaries. Traditional arguments in the boundaries of the firm literature suggest that firms will tend to produce sets of complementary components internally, while more recent modularity studies argue that firms can outsource to gain flexibility. We resolve these views by examining concurrent sourcing, which arises when firms both make and buy the same components. We argue that concurrent sourcing of complementary components becomes more common in two cases: when firms have relevant knowledge about the components in conjunction with suppliers (interfirm expertise) and, perhaps more surprisingly, within the firm (within‐firm shared expertise). The results suggest that firms often need to make in order to know, but can partially outsource if they possess sufficient expertise. Copyright © 2009 John Wiley & Sons, Ltd.     

Allocation of inventive effort in complex product systems

This paper examines the allocation of inventive effort in complex product systems. I argue that complex product systems, e.g., personal computers (PCs), are distinguished by functional interaction among several components, each guided by a relatively autonomous bundle of technical and economic characteristics. I try to explore whether the dynamics of such interactions between components of complex product systems can help us understand changes in the relative allocation of inventive effort. I advance and empirically test three hypotheses: (1) emergence of component constraints (bottlenecks) in product systems will trigger research and development (R&D) investment to resolve the constraints; (2) slack component firms have a strong incentive to invest in resolving component constraints; and (3) the incentive of slack component firms to invest in resolving component constraints is increasing in their prior sunk R&D investments in slack components. In sum, I argue that interactions between components in a product system conditions the R&D incentives of firms and also that the incentives are increasing in their prior investments or capabilities. Using product reviews from technical journals, I trace the constraint components in the PC from 1981 to 1998 and attempt to predict shifts in the allocation of inventive effort in the subsequent period. The empirical results strongly support all three hypotheses. This study highlights the paradoxical effect of modularity in complex product systems. Modular design architectures, while contributing to accelerating the pace of technical change, also tend to limit the economic benefits of firms' component R&D efforts, especially when different components technologies are progressing at different rates. This often creates an impetus to enlarge the scope of firm R&D activities beyond the component product markets that firms operate in. Other implications for R&D decision making are discussed. Copyright © 2007 John Wiley & Sons, Ltd.     

The Long Tail of the Auto Industry Life Cycle

This article explores how the industry life‐cycle theory, proposed by Abernathy and Utterback, can be reinterpreted from the viewpoint of product architecture dynamics. The “long tail” of the automobile industry life cycle, observed during the past several decades, is explained by an evolutionary framework in which a product's architecture is treated as an endogenous variable affected by customers' functional requirements, environmental‐technical constraints, and their changes. The present article explains how the existing industry life‐cycle model effectively explains the early history of automotive product‐process innovations, but that it fails to explain the “long tail” of the life cycle, and that an evolutionary approach of product architectures can be used to explain the architectural sequence and the long‐term trend of the increase in nonradical innovations. That is, the industry life‐cycle model certainly fits well with the actual pattern of product‐process innovations at the early phase of the automobile's development, between the 1880s (invention) through the 1920s (the end of the Model T) and into the 1960s, when product differentiation continued without significant product/process innovations (e.g., the Big Three's annual model change). But the question remains how this model can explain the rest of the industry's history (1970s to 2010s), which is characterized by “rapid incremental innovations,” or a “long tail of the life cycle,” with its upward trend of technological advancement rather than the end of innovations or the beginning of another industry life cycle (i.e., “dematurity”). The evolutionary framework of product architecture predicts that the macro architecture of a given product category (e.g., passenger cars) will be relatively integral when the functional requirements that customers expect, the constraints imposed by society and the government, and the physical‐technical limits inherent in the product are strong, and that it will be relatively modular when they are weaker. The dynamic architectural analysis starts from the Lancaster‐type analysis of a set of function‐price frontiers for a given product category (e.g., cars). Based on the design theories, it hypothesizes that the shape of function‐price frontiers are different between integral models and modular models. It then hypothesizes that price‐oriented customers tend to choose relatively modular products, whereas function‐oriented customers choose relatively integral products more often than not, other things being equal. Thus, the macro architecture of a given product can be determined depending on whether each architecture's price‐function frontier touches the price‐function preference curves of its customers. As for the future architecture of the car, its macro architecture, determined by markets and environments, will remain relatively integral and complex as long as it continues to be a fast‐moving heavy artifact in the public space, whereas its micro architecture, determined by engineers, will be somewhat mixed, as the engineers try to simplify and modularize the automobile design wherever the market and technology permit. The evolutionary framework of architectures also predicts that the architectural sequence inside the industry life cycle will differ by products (e.g., cars and computers) depending upon the dynamic patterns of technological advancement (e.g., shifts of the price‐function frontier) and market‐societal constraints (e.g., shifts of the price‐function preference curve).     

Your new product development (NPD) is only as good as your process: an exploratory analysis of new NPD process design and implementation

Given industry competitiveness, how do firms' new product development (NPD) process designs differ when responding to an innovation mandate? How do NPD design elements differ across firms when implementing NPD processes? These design elements are strategic business unit (SBU) senior management involvement, business case content, customer interactions, and cross‐functional integration. What are the consequences of different combinations of NPD process design elements for innovation productivity? We explore these questions via a collective case study of newly implemented NPD process designs at three different SBUs of a major US‐based international conglomerate, 1 year after receiving the mandate to grow through innovation. Our analysis suggests that industry competitiveness and firm characteristics influence the NPD process design as SBUs employ distinct combinations of NPD design elements. The differential emphasis on design elements leads to variation in process design and divergence in innovation productivity.