SANCHEZ, R., & MAHONEY, J. T. (1996). STRATEGIC MANAGEMENT JOURNAL, 17, PRESENTED BY CHRISTINA L. FRYE Modularity, Flexibility, and Knowledge Management in Product and Organization Design Ron Sanchez

Overview Applies principles of “nearly decomposable systems” (Simon, 1962) Examines the interrelationships between: 1. product design, 2. organizational design, 3. processes for learning and managing knowledge, and 4. competitive strategy

Core Conclusions Creation of modular product architectures creates flexible product designs…  …enables “loosely coupled, flexible, ‘modular’ organization structures” (p. 73)…  …facilitates the creation of embedded coordination due to fully specified and standardized component interfaces (part of the modular product design)… …reduces the need for overt exercise of managerial authority across the interfaces… …reduces the intensity and complexity of a firm’s managerial task in product development… …and gives greater flexibility to take on larger numbers/greater variety of product creation projects

Terminology & Core Concepts Modularity: “a special form of design which intentionally creates a high degree of independence or ‘loose coupling’ between component designs by standardizing component interface specifications” (p. 65) Complex systems consist of parts that interact and are interdependent  The interrelated parts create subsystems, but the interactions among subsystems (in a nearly decomposable system) are weak (Simon, 1962)  This decomposing of structure can enable more adaptable designs for creating products

Modularity in Product & Organization Designs Designs can vary in the degree to which they are decomposed (i.e., tightly or loosely coupled)  This degree depends on the extent to which the change in the design of one component changes other components.  Is there a high degree of interdependence or are the components independent?  Modularity  create independence through standardized component interface specifications

Modular Product Designs Components make up the products   relationships between components are defined by specifications of inputs and outputs to link the components   these interfaces are specified in a product design   the complete set of component interface specifications = product architecture Tightly coupled designs require intensive managerial coordination On the other hand, specifying standardized component interfaces permit for effective coordination without continual exercise of managerial authority

Standardized Component Interfaces Provides an information structure that coordinates loosely coupled activities with component developers (Radner, 1992) Modular product architecture use these standardized interfaces to create flexible product architectures.  Allows for variations in components, substitutions, and strategic flexibility (Sanchez, 1995)  Facilitates continuous change (Spender & Grinyer, 1995)

Modular Organization Design The information structure provided in the modular product architecture provides a means to embed coordination of loosely coupled component development processes (p. 66)  Allows for “modular organizations” that continuously change and solve problems via interconnected coordinated self- organizing processes  Creates “resource chains” to link resources and capabilities throughout the organization to respond quickly and broadly with lower costs (p. 68)

Managing Knowledge & Learning If modularization is to work, firms need a high level of “architectural knowledge” (Sanchez, 1996; Wright, 1994)  Need to know how the components function and interact in a product  Narrow, specific knowledge is not sufficient To successfully innovate and have effective and efficient product development, need to consider how knowledge is created and information is transferred  “Traditional” sequential development  Overlapping problem solving  Modular product development

Models for Managing Knowledge & Learning (page 71) 1. Traditional Sequential Development Processes  Define product concept  sequence design and development tasts  prioritize greatest needs for knowledge (repeat)  Results in information losses, slow progress, incompatibilities between components, etc.  Requires tight structure and managerial oversight 2. Overlapping Problem Solving  Staggered sequential development  Greater sharing of information and less information loss 3. Modular Product Development  Create a complete information structure with defined outputs and fully specified component interfaces  REQUIRES ARCHITECTURAL KNOWLEDGE!!!

Modular Product Design Process Advantages This process allows learning at the component level to be “insulated” from disruptions (p.70) Because interfaces are specified, component-level learning processes can be concurrently and autonomously carried out by loosely coupled groups  Firms may be able to combine capabilities more readily with their extensive network of component developers  Firms may be able to increase the absorptive capacity of the firm (Cohen & Levinthal, 1990)  Firms have potential for combinative capabilities of the firm’s current architectural knowledge (Bartlett, 1993; Kogut & Zander, 1992)

Modular Product Design Process (Cont’d) Decoupling architectural (broad) and component (specific) levels of learning allows firms to effectively exploit stocks of knowledge (March, 1991) Process permits for “mixing and matching” modular components to leverage product variations Enables firms to learn about markets, leverage variations quickly and at reduced costs

Conclusion Extends the principle of decomposition Trends to create modular product architectures not only creates flexible/modular product designs  also supports flexible/modular organization designs This requires and supports embedded coordination that fully specified standardized component interfaces  The results is a reduced need for overt exercise of managerial authority and greater strategic flexibility. Standardizing interfaces in modular system architectures is a design option for achieving increased flexibility, inter- organizational coordination, and flatter organizations.