Sanchez and Mahoney (1996). Modularity, flexibility, and knowledge management in product and organization design. SMJ

Nearly Decomposable Systems Simon, 1962 – Hierarchy: a decomposition of a complex system into a structured order of successive sets of subsystems – (which have their own subsystems, etc.) Hierarchy may be a feature of both Product and Organizational Design – Hierarchy does not mean that there must necessarily be an overt exercise of authority in the Simon (1962) sense of the term. ‘Nearly’ Decomposable – Interactions among subsystems are weak i.e., divisions function as quasi-independent or loosely coupled systems

Learning Processes Innovation may involve: 1.Creating new information about the functions components can perform (learning about components per se) 2.Creating new information about the ways these components interact (Product Architectures) Henderson & Clark 1990

Learning Processes 4 Modes of Learning

Modular Product & Org Designs Tightly Coupled Implications – If the specs of input & output are tightly coupled 1.The processes for developing those products require intensive managerial coordination 2.This results in a tightly coupled organizational structure coordinated by managerial authority hierarchy Loosely Coupled Controlling the output of component development processes by standardizing interfaces can substitute for managerial authority and attention

Modular Product & Org Designs Tightly Coupled Implications – If the specs of input & output are tightly coupled 1.The processes for developing those products require intensive managerial coordination 2.This results in a tightly coupled organizational structure coordinated by managerial authority hierarchy Loosely Coupled Controlling the output of component development processes by standardizing interfaces can substitute for managerial authority and attention Note that a coupling of components in a product design is different from those in an actual (physical) product.

Modular Product & Org Designs Modular Product Architecture – A loosely coupled product design creates a flexible product architecture Uses Modular Components: whose interface characteristics are within the range of variations allowed by a modular product architecture – Loose coupling of component designs within a modular product architecture allows ‘mixing and matching’ of modular components This, in turn, can be a source of strategic flexibility as it enables firms to respond more rapidly to changing markets and technologies Finally, specifying required outputs permits those processes to also be separated so that they can be performed autonomously & concurrently – Loose Coupling can lead to Modular Organizations Firms have reduced intensity/complexity of management’s task in product development, resulting in greater flexibility

3 Approaches to Creating Knowledge 1. Traditional Sequential Development 1.Note: The Evolving Product Architecture will need a tightly coupled organizational structure (1 firm or a tight group of firms)

3 Approaches to Creating Knowledge 2. Overlapping Problem Solving 1.Note: the evolving information structure (aka Product Architecture) requires intense managerial coordination

3 Approaches to Creating Knowledge 3. Modular Product Design

Modular Product Design (revisited) Creates a complete product architecture that defines required outputs of component development processes before beginning development of components – Results in: Less breakdown losses and delays in information flows Learning is insulated from unexpected changes in product architecture Firms can combine their capabilities more readily Improved architectural learning – Henderson & Clark 1990: Compartmentalization of information around components creates ‘filters’ that block information flows

Modular Product Design (revisited) Example: Earth-Moving Equipment Industry These are complex systems composed of many subsystems including hydraulics, drive train, chassis, vehicle electronics, engine, etc. – The firm has to decide which components & subsystems they will focus their learning efforts on, and which will be managed using its architectural knowledge to define modular component specifications. This kind of architectural learning is becoming a strategically important means for assessing and coordinating an extended network of component development capabilities in other organizations

Conclusion The creation of modular product architectures not only creates flexible product designs, but also enables the design of loosely coupled, flexible, 'modular' organization structures. Implications – Firms will undertake internal development of fewer components – We may see increasingly dynamic product markets – The ORGANIZATIONAL FORM can be a variable to be managed strategically. What are some potential costs to modular designs?