Technological and Organizational Dynamics (tinkering with firm theory)

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1 DIMETIC March 26, Strasbourg, BETA Technological and Organizational Dynamics (tinkering with firm theory) Stefano Brusoni -CESPRI, Bocconi University stefano.brusoni@unibocconi.it Table of Contents (AM and PM) Motivation An idiosyncratic survey The field, in a few words Research gap From modularity to modularization Radical innovation in tire manufacturing Radical innovation in organizational processes The role of knowledge integration capabilities Conclusions 1

2 Motivation Explain the (very) unlikely New trajectories and paradigms Breakthrough innovations Change in business models New architectures modularity and (de)modularization Reading list Background Scott W. R. and G. F. Davis (2007) Technology and Structure. Chapter 6 in Organizations and Organizing Rational, natural and open systems perspectives. Prentice Hall Orton J. D. and K. E. Weick (1990) Loosely Coupled Systems: A Reconceptualization. The Academy of Management Review, 15 (2): Henderson R. and K. Clark Architectural Innovation: The Reconfiguration of Existing Product Technologies and the Failure of Established Firms. Administrative Science Quarterly, Vol. 35. Langlois, R. N. and P. L. Robertson Networks and Innovation in a Modular System: lessons from the microcomputer and stereo component industries. Research Policy, 21: Chesbrough, H., and K. Kusunoki The Modularity Trap: innovation, technology phase-shifts, and the resulting limits of virtual organisations. In Nonaka, I. and D. Teece, (eds.) Knowledge and the Firm, Russell Sage Press. Session 1 Sanchez R. and J. T. Mahoney Modularity, Flexibility, and Knowledge Management in Product and Organisation Design. Strategic Management Journal, 17, Winter Special Issue: Brusoni, S., Prencipe A. and K. Pavitt (2001), Knowledge Specialisation, Organizational Coupling and the Boundaries of the Firm: Why Firms Know More Than They Make?, Administrative Science Quarterly, 46 (4): Nickerson J. and T. R. Zanger (2004) A knowledge-based theory of the firm The problem solving perspective. Organization Science 15 (6): Session 2 Nickerson J. and T. R. Zanger (2004) A knowledge-based theory of the firm The problem solving perspective. Organization Science 15 (6): Brusoni, S. and A. Prencipe (2006) 'Making Design Rules: A multi-domain perspective' Organization Science, 17 (2): EXAMPLES FROM: Brusoni S. and L. Cassi (2009). Reinventing the Wheel: Knowledge integration in tire manufacturing. Brusoni S. and A. Canato (2009). Do Organizations Dream of Electric Sheep? A model of routine change through identity adaptation 2

3 A long and distinguished history No way I m listing names here Scott W. R. and G. F. Davis (2007) Technology and Structure. Chapter 6 in Organizations and Organizing Rational, natural and open systems perspectives. Prentice Hall Three main building blocks (the tinkering part ) 1. Macro-framework for comparing things Problems 2. Micro-processes to make sense of things Search 3. Empirically observable relationships Modularity (more generally, interdependencies) 1. A framework for comparisons Exceptions Few Many Problems Unanalyzable Analyzable Craft Industries (film industry) Routines (steel mills) Nonroutine (aerospace) Engineering (heavy machinery) Source: Perrow. 1967: 196 (adapted) 3

4 1. A framework for comparisons Starting point: opportunism vs. knowledge generation Zingales vs. Simon. Do organizations emerge when markets fail? Or do organizations exist because they can do something better than markets?? And what is that something, btw? Key managerial problem is not about monitoring opportunistic individuals, but rather the selection of the problem which is most likely to generate desirable and appropriable knowledge and capabilities. After the problem is chosen, the manager must organized employees in order to solve it. Issue here is identifying the criteria to match the right problem with the right type of institutional set up. Hence, the need to compare things! What is a problem? Hora System 1 System 10 Subsystem 1 Subsystem 10 Component 1 Component 10 TEMPUS Component 1 Component 1,000 4

5 High interaction problem Moderate interaction problem Low interaction problem Hora and Tempus, and beyond Complex systems Hierarchical & decomposable systems Problem solving vs. problem framing What do economic institutions do? They choose which problem to solve and how to frame it decomposability They evaluate the solution they ve found aspiration levels If satisfied stop; else they activate search processes Different types of search processes Local search Heuristic search 5

6 2. Search 2. Search 6

7 The landscape Elements composing the landscape Fitness function Attributes The topology of the landscape is explained by the degree to which the contribution toward fitness of the attributes is interdependent. N = the number of elements which characterize the entity K = the number of elements with which a given attribute interact epistatic interactions Max K = N-1 NK (N= 3, K=0) 000 f x f.y. 0.6 f..z 0.8 f xyz (0.63) 110 (0.80) (0.53) 111 (0.70) (0.43) 000 (0.53) 101 (0.60) 100 (0.70)

8 NK (N= 3, K=2) f x.. f.y. f..z f xyz 010 (0.70) 110 (0.63) (0.53) 111 (0.43) (0.50) 000 (0.47) 101 (0.40) 100 (0.83) NK for real ELECTRICAL ENGINE ICE ELECTRIC TRANSMISSION SYSTEM BATTERIES PACK FUEL TANK CONTROL SYSTEM Hybrid propulsion system N=6, low K Control Box Data Gathering. ELECTRICAL ENGINE ICE Cables Converter BATTERIES PACK FUEL TANK Control box Sensor System Inverter HMI Digital Signal Processor Commutation System Hybrid propulsion system N=14, higher K Source: Vaccaro, Brusoni and Veloso, 2008 Data Gathering System Data Transmission System Display 8

9 NK and search for real REPLICATION IN PROJECT M TECHNICAL COMPETENCIES ARCHITECTURAL REPLICATION COMPLEMENTARY ASSETS GRANULARIZATION OF THE DESIGN SPACE PRODUCT INNOVATION REPLICATION IN PROJECT T STRATEGIC OBJECTIVES ARCHITECTURAL REPLICATION FUNCTIONAL REPLICATION Source: Vaccaro, Brusoni and Veloso, Empirically observable relationships (aka hypotheses) Modularity A literature which identifies a set of candidate relationships between organization and technology 9

10 Baldwin and Clark: Modularity creates options System before Modularization System after Modularization System Option Option Design Rules Option Option Option Option Option Option Core concepts Reinforced Overturned Linkages between core concepts and components Unchanged Changed Incremental innovation Architectural innovation Modular innovation Radical innovation Source: Henderson and Clark, 1990: 12 10

11 Core concepts Reinforced Overturned Linkages between core concepts and components Unchanged Changed Incremental innovation Photolithograph ic equipment Litium batteries in laptops Radical innovation Source: Henderson and Clark, 1990: 12 Modular Products 11

12 and Modular Industries The Old Vertical Computer Industry - Circa 1980 Sales and distribution Application software Operating systems Sales and distribution Application software Operating systems Computer Disk drives The New Horizontal Computer Industry - Circa 1995 Retail Stores Superstores Dealers Mail Order Word Word Perfect Lotus DOS and Windows OS/2 Mac UNIX Packard Compaq Dell HP IBM Etc Bell Seagate Quantum Western Digital I-net SAP Linux Maxtor Computer Chips Intel Architecture Motorola RISC Chips Contract manufacturers Printers Selectron SCI Flextronics HP Jabi l Epson Celestica IBM DEC Sperry Wang Univac Source: Adaptation from Only the Paranoid Survive by Andrew Grove, Please note, I Interchangeable parts: a different way of doing things Production Maintenance Distribution Modularity: a different way of changing things New technology of technical change (Arora and Gambardella, RP, 1994) Decomposing the process of innovation Knowledge dynamics 12

13 Please note, II ARCHITECTURAL PROPRIETARINESS CLOSED OPEN ARCHITECTURAL STRUCTURE INTEGRAL MODULAR Minicomputer industry Niche strategy, sophisticated users, inhouse development. Challenge from producers of complementary assets Networking industries Incumbents maintain competitive position if innovative processes are fast and incremental in nature Open Source software (some) Strategic choice of key components and capabilities to keep the control of supply chain. Workstation and PC Industry Consumer electronics Short term success in terms of entry into new segments Loss of control in the long run (e.g. IBM OS/2) Background Globalisation of product markets Increased segmentation of product markets Shortening life cycles Technical change and knowledge specialisation Increase in breadth and depth of relevant knowledge bases From product to platforms Modularity as a possible response to increasing complexity in firms learning environments Definition One-to-one mapping between functions and components Standardised interfaces 13

14 Advantages Increase the number of options Increase division of labour and the use of market coordination Decouple the development of the architecture from the development of modules Increase flexibility Parallel search (speed of experimentation) Upgradeability (speed of entry) Economies of substitution (without cannibalization) The Modular Age (the hypotheses) Modularity as a product design strategy (e.g. Ulrich, 1995) One-to-one mapping between functions and components Standardised interfaces Modularity as an organisational design strategy (e.g. Sanchez and Mahoney, 1996) Product architecture as information structure E.g. PC industry Modularity as a property of the knowledge base (e.g. Arora, Gambardella and Rullani, 1998) Knowledge codification into general and abstract modules E.g. Chemical engineering 14

15 Modular networks distinct breaks in the value chain tend to form at points where information regarding product specifications can be highly formal.... within functionally specialized value chain nodes activities tend to be highly integrated and based on tacit linkages. Between these nodes, however, linkages are achieved by the transfer of codified information. (Sturgeon, ICC 2002, but see also Sanchez and Mahoney (SMJ, 1996), Arora, Gambardella and Rullani (JMG, 1997). Products design organisations defining an information structure that holds the organisation together without need for explicit managerial authority. Sequential organisation of product development process Source: Sanchez and Mahoney, SMJ

16 Modular organisation of product development process Source: Sanchez and Mahoney, SMJ 1996 Modes of learning Learning about components functions and designs Moderate Significant Learning about component interactions and configurations Moderate Significant Source: Sanchez and Mahoney, SMJ 1996 Incremental learning at the component level Architectural learning Modular learning at the component level Radical learning at the architectural and component levels 16

17 Disadvantages Very costly architecture to put in place Needs to achieve a thorough understanding of the system Trade off at strategic level Performance vs. variety Hold up problems and TC issues Learning trade off Speed of search vs. breadth of search Modularity creates papers! Modularity as product design strategy Automotive (Womack et al 1990), mainframes (Langlois, 1997), bycicles and trolleys (Ulrich, 1995), micro computers (Langlois, 1992), work stations (Garud and Kumaraswamy, 1993), personal computers (Baldwin and Clark, 2000), software design (Cox, 1986), hard disk drives (Chesbrough and Kusunoki, 2001), aero-engines (Prencipe, 1997), chemical engineering (Brusoni, 2003), domestic house appliances (Worren et al, 2002). Product variety and mass customization - Weelwright and Clark, 1992 Upgradeability - Garud and Kumaraswamy, 1995 Economies of scale and scope at the platform level - Gawer and Cusumano, 2002 Parallel experimentation - Baldwin and Clark, 2000 Decreased coordination costs - Schilling, 2000 Recombination as business strategy - Galunic and Eisenhardt,

18 Gap Long term viability of modular organizations depend upon the ability of introducing new architectures and platforms BUT: Lack of empirical analysis of processes of modularization, or re-modularization, or de-modularization. Modularity literature normally accepts the idea that architectural and component-level knowledge are fully separable Some firms specialize on developing architectures, others focus on components??? The Turing machine-view of industrial evolution: platform- and industry-evolution are themselves modular processes. The Dynamics of Product and Industry Structure NICHE COMPETITORS INTEGRAL PRODUCT VERTICAL INDUSTRY MODULAR PRODUCT HORIZONTAL INDUSTRY TECHNICAL ADVANCES HIGH- DIMENSIONAL COMPLEXITY SUPPLIER MARKET POWER ORGANIZATIONAL RIGIDITIES PRESSURE TO DIS-INTEGRATE PRESSURE TO INTEGRATE PROPRIETARY SYSTEM PROFITABILITY Fine & Whitney, Is the Make/Buy Decision Process a Core Competence? Source: Fine

19 The Dynamics of Product and Industry Structure Hidden assumptions in standard story (1) new architectures developed recombining existing modules (2) embedded coordination (i.e. design rules) Architectural-level innovation is more than recombination of existing modules E.g. chemical engineering, tire manufacturing, jet engines, LAN equipment, construction industry, financial services New modules. Where do they come from? New skills and capabilities The limits to embedded coordination Developing and maintaining systemic knowledge despite (ITenabled) strategic outsourcing Role of systems integrators (broad capabilities, lean activities) which very actively coordinate transitions Issue 1 Now Modularity as an organisational strategy Key question: how to organise for the development of new modular or not- product architectures? How to overcome the tunnel vision effect? How to avoid so-called modularity traps? 19

20 Later Issue 2 How do new problem frames come into being? Technological frames the case of radical process innovation robotization Organizational frames the case of radical managerial innovation Six Sigma Fujitsu and the HDD The case of Fujitsu exemplifies the case of a firm that successfully managed the introduction of a new product architecture, stemming from a major technological breakthrough embodied into the magneto-resistive head. During the modular phase, Fujitsu like other firms relied on a decoupled network of external suppliers. Unlike its competitors, Fujitsu did not discontinue its investments in systems knowledge and materials and component technology in its R&D labs (Chesbrough and Kusunoki, 2000: 13). Fujitsu s systems knowledge went well beyond the range of products and components that the company produced in house. 20

21 Lessons from Fujitsu Modular products yes Modular organizations yes, in terms of the production and engineering activities carried out in house. Modular knowledge bases no! Fujitsu maintained wide capabilities. Similar evidence is emerging from a range of industries as diverse as aero-engines, chemicals, oil, automotive. Systems integration activities but always? The aims of innovating organisations generate variety to discover novel solutions distinctiveness which refers to the different scientific and technological disciplines organisational units use and develop co-ordinate dispersed learning processes responsiveness which refers to the capabilities needed to identify and actively manage changing technological and organisational interfaces 21

22 The notion of coupling The interaction of distinctiveness and responsiveness determines the degree of coupling among organisational units (Orton and Weick, 1990). Coupling: the extent to which changes in one element of the network impact other elements in the same network. Decoupled networks, loosely coupled networks, tightly coupled networks. Coupling and the notion of imbalance 1. Technical imbalances act as focusing devices for technological change in interconnected systems (Rosenberg, 1976). Complexity of product-level imbalances: predictability vs. unpredictability of components interdependencies (March and Simon, 1958; Williamson, 1971) Reaction and separation process. 2. The distinction between technologies (as bodies of knowledge) and products (as arrays of physical components) highlights two analytically distinct sources of imbalances. Complexity of technological-level imbalances: even vs. uneven rates of change of component technologies Catalysis vs. control systems technologies 22

23 The organisational implications Component interdependencies Predictable Unpredictable Rate of change of component technologies Even Uneven Source: Brusoni, Prencipe and Pavitt, 2001 The organisational implications Component interdependencies Predictable Unpredictable Rate of change of component technologies Even Uneven PC Industry The modular network Source: Brusoni, Prencipe and Pavitt,

24 The organisational implications Component interdependencies Predictable Unpredictable Rate of change of component technologies Even Uneven Mobile Phone Systems Design, production and R&D in house. Source: Brusoni, Prencipe and Pavitt, 2001 The organisational implications Component interdependencies Predictable Unpredictable Rate of change of component technologies Even Uneven Automotive Industry Outsource production & detailed engineering. Both contract and in house R&D. Source: Brusoni, Prencipe and Pavitt,

25 The organisational implications Component interdependencies Predictable Unpredictable Rate of change of component technologies Even Uneven Hard-Disk Drive industry Outsource production & engineering. Both contract and in house R&D Automotive Industry Outsource production & engineering. Both contract and in house R&D. Source: Brusoni, Prencipe and Pavitt, 2001 The organisational implications Component interdependencies Predictable Unpredictable Rate of change of component technologies Even Uneven Modular networks Loosely coupled systems Loosely coupled systems Vertical integration Source: Brusoni, Prencipe and Pavitt,

26 The organisational implications Component interdependencies Predictable Unpredictable Rate of change of component technologies Even Uneven Market-based mechanisms Systems integrators Systems integrators Hierarchy Source: Brusoni, Prencipe and Pavitt, 2001 Systems integration (Prencipe, 1997, 2000, 2003) Systems integration skills Understanding of underlying technological disciplines and therefore ability to integrate them Technological understanding of the entire system behaviour in terms of relevant parameters Ability to design the entire system Ability to design most key components of the system Ability to assemble components interfaces The emphasis is on the understanding of the underlying bodies of knowledge and ensuing system behaviour, rather than on the activities of design and assembly. Systems integration firms maintain an understanding of the bodies of knowledge and system behaviour to re-compose what has been decomposed 26

27 Systems integration Static systems integration relates to the refinement, adaptation, and optimisation of the architecture set by a product family and, therefore, it refers to the exploitation of the potential of the architecture to meet customer demands. Within architecture developments Intelligent customership: it enables firms to gain a better understanding of the underlying technologies of outsourced components in order to control and integrate changes and improvements. Dynamic systems integration refers to the capabilities required to envisage new architectures to meet evolving customer and regulatory requirements in an effective and efficient way. Exploratory research capabilities needed for the co-ordination of change across (a) different bodies of technological knowledge (b) organisational boundaries The notion of systems integration: the case of the civil aviation industry Share of patents by field and company Architectural Sub-architectural Physical Functional Aero-engine maker (company C) First tier supplier Second tier supplier 27

28 Issue 1 - Conclusions Conclusion I product modularity has major implications for organisational design, sometimes. Things other than product characteristics are at stake The evolution of specialised bodies of knowledge Appropriability considerations (big gap in the literature, btw) Risk architecture (even bigger gap, possibly) Conclusion II the division of labour does not necessarily match the division of knowledge (in loosely coupled systems) Hard to decouple completely architectural developments from module-level developments Hence, role for systems integrating firms Later Issue 2 How do new problem frames come into being? Technological frames the case of radical process innovation robotization Organizational frames the case of radical managerial innovation Six Sigma 28