competing—and learning—in modular...

long range planning

Long Range Planning 34 (2001) 645–667 www.lrpjournal.com

Competing—and Learning—inModular Markets

Ron Sanchez and Robert P. Collins

This paper explains how the adoption of a modular approach to product and processarchitectures can greatly improve product development performance and provide apowerful framework for knowledge management and organisational learning. We firstconsider specific ways in which modular architectures enable both new processes forproduct development and new product strategies. We then explain how disciplinedadherence to the modular way of creating new products helps an organisation toidentify its current technological capabilities more clearly, and to define objectives andprocesses for strategically focused organisational learning. We discuss three seeminglycounterintuitive principles in the new strategic logic of managing in the modular way,as well as new management practices involved in the modular way of working. �c2002 Elsevier Science Ltd. All rights reserved.

IntroductionIn recent years managers in many industries have witnessedbroad transformations of their competitive environments.Among the most important of these transformations is an inten-sification of product market competition that challenges man-agers to find new ways to increase their firm’s product cre-ation capabilities.

In this article, we explain how strategic use of modular productand process architectures is now enabling some firms to creategreater product variety, to bring technologically-improved pro-ducts to market more rapidly, and to achieve lower costs of pro-duct creation and realisation. Drawing on the experience of GEFanuc Automation,1 a global leader in industrial automation sys-tems, as well as examples of leading-edge firms in other productmarkets, we explain how the modular approach to creating pro-ducts makes possible new kinds of product strategies and is help-ing firms reinvent the way they compete—and learn—in theirproduct markets.

0024-6301/02/$ - see front matter �c 2002 Elsevier Science Ltd. All rights reserved.PII: S 0 0 2 4 - 6 3 0 1 (0 1 ) 0 0 0 9 9 - 1

Ron Sanchez is Professor of

Strategy and Technology

Management at IMD

(International Institute for

Management Development),

Lausanne, Switzerland. He

holds a PhD in Technology

Strategy from MIT. He has

published widely on theory

and practice of modular

architecture and consults with

major corporations on

implementing modular

strategies and knowledge

management systems based on

modular architectures. His

book Modularity, Strategic

Flexibility and Knowledge

Management will be published

by Oxford University Press in

2002.

Robert P. “Bob”Collins was

Chief Executive Officer of

GE Fanuc Automation during

its adoption and

implementation of the modular

architecture approach to

creating products in the late

1980s and 1990s. During this

time, GE Fanuc became a

global leader in industrial

automation systems and today

provides automation

equipment and support

services to leading companies

around the world. Mr Collins

recently retired from GE Fanuc

Automation and is now head

of Capstone Partners, a

consultancy in executive

leadership for organisational

transformation and

improvement of value-creation

capabilities.

Modular Markets646

Many firms are now beginning to use some aspects of modulararchitectures in their product strategies, especially in creating“platform” designs for families of products.2 What is less widelyunderstood, however, is that modular architectures offer apowerful knowledge management framework for identifying afirm’s strategically important knowledge and capabilities and forleveraging them more effectively. When used in this key knowl-edge management role, modular architectures can help a firmboth discover its hidden capability bottlenecks and identify its besttargets for focused strategic learning and capability development.In addition, modular architectures provide a new means to co-ordinate and accelerate distributed learning processes within net-works of suppliers and collaborating firms. To achieve thesebenefits, however, firms must set new priorities and adopt newpractices in their product creation processes. In effect, managersmust learn to follow a new strategic logic for competing and learn-ing in modular product markets.

We begin our discussion by explaining one of the most visiblebenefits of modularity—the ability to configure new productvariations quickly and at low cost by “mixing and matching”components within a modular product architecture. We considerboth closed-system and open-system strategies for using the con-figuration flexibility of modular architectures, and explain howmodular product strategies are becoming the drivers of newkinds of competitive interactions.3

We then draw on the example of GE Fanuc to illustrate someof the key transformations a firm must undergo when adoptingmodular strategies. We explain how GE Fanuc redefined its pro-duct designs as modular architectures, converted its product cre-ation and realisation processes to the modular way of working,and adopted some simple design rules for quickly and efficientlyleveraging new products from its modular architectures. Theresult of this transformation was that GE Fanuc reduced its pro-duct development time and resource requirements by more thanhalf, while significantly increasing the range and number of pro-duct variations it offers to customers.

We then consider how a disciplined modular approach to cre-ating product and process architectures can illuminate both thecontent and structure of a firm’s technological knowledge. Weshow how modular architectures act as a powerful lens for dis-covering hidden capability bottlenecks that limit a firm’s abilityto create and realise new products. We also explain how somefirms such as GE Fanuc are now using modular architecturesto co-ordinate inter-organisational development processes thatsignificantly increase the speed and scope of a firm’s strategiclearning. Used in this way, modular architectures provide man-agers with a powerful knowledge management framework foraccelerating development of organisational capabilities.

Obtaining these benefits from modular architectures requiresestablishing new priorities and new practices in managing theway a firm creates its products and processes. We therefore sum-marise some basic principles in the new strategic logic for man-

aging in modular markets—a logic that runs counter to muchconventional management wisdom. We consider three funda-mental, but at first counterintuitive, principles that managersmust master to compete effectively in modular markets:

� Products design organisations.� Standardisation increases flexibility.� Discipline enhances creativity.

We conclude by noting two ways that modular architecturescan help managers maintain a clear focus on the critical tasks ofsetting strategic directions and goals for their firms.

How modular architectures change productcompetitionEvery product has an architecture, which is defined by two funda-mental properties of a product design:

� The decomposition of the overall functionalities of a product(i.e., the set of benefits that the product will bring to its users)into the specific functional components that make up the tech-nical structure of the product.

� The interface specifications that define how the various func-tional components will interact with each other when theyfunction together in the product.

The functional decomposition of an architecture is usuallymost visible in assembled products, such as desktop computersthat are composed of distinct components such as micropro-cessors, memory chips, and disk drives. However, virtually allproduct designs can be decomposed into functional componentsor elements that interact in specifiable ways. A simple plastic cup,for example, can be decomposed into rim, wall and base, andeach of these components must interact with the others in speci-fied ways within the product design. Service products can alsobe decomposed architecturally into activity components. Retailbanking services, for example, are composed of routines for mak-ing deposits, transferring funds, providing overdraft protection,and so on, and each routine must interact with the other routinesin specified ways to provide each customer with a “seamless”banking service.

A product architecture becomes modular when:

� Interfaces between functional components are specified toallow variations in components to be substituted into the pro-duct architecture;

� Interface specifications are then standardised—that is, notallowed to change during the commercial lifetime of the pro-duct.

Most personal computers have modular architectures that

Long Range Planning, vol 34 2001 647

Adopting a modular

architecture is a

watershed event for a

firm

Modular Markets648

accept variations in components (such as disk drives or memoryboards of different capacities) as long as each variation conformsto the standardised interface specifications for that type ofcomponent. Standardising interfaces that allow substitutability ofcomponent variations lets a firm “mix and match” componentvariations in a modular architecture to configure product vari-ations that offer different combinations of component-basedfunctions, features, and performance levels.4

In creating modular architectures, firms may pursue eitherclosed-system or open-system strategies. In a closed-system strat-egy, a firm creates a proprietary modular architecture intendedto accommodate only component variations supplied by thefirm. In an open-system strategy, a firm may disclose its interfacespecifications so that other firms can develop components for itsproduct architecture. Alternatively, a firm may collaborate withother firms in establishing industry standards that define the typesof functional components they will use and the interface specifi-cations that will apply to each type of component.5

Adopting a modular architecture is a watershed event for botha firm and an industry, because it creates a well-defined andrelatively stable technical infrastructure that encourages firmsand their suppliers to develop component variations compatiblewith the architecture. Firms that create new products can thendraw on a growing array of new and improved modular compo-nents in configuring a stream of product variations. Moreover,when competition among suppliers of standard componentsdrives component prices down, costs of products also fall.

The flexibility to leverage new products by configuring newcombinations of components within a modular architecturemakes possible a number of new product strategy initiatives:

� Modular architectures can be used to explore customer prefer-ences for different combinations of functions, features andperformance levels through real-time market research.6 Sony,a skilled user of modular architectures, leverages many vari-ations of its products to discover “in real time” the mostdesired models in each of its markets. In developing the USmarket for its Walkman products, Sony introduced more than160 product models in a ten-year period to discover the com-binations of functions, features, performance levels, and pricemost preferred by US consumers.7

� Modular product variations may be leveraged to saturate themost profitable regions of product space and leave no uncon-tested product space to invite entry by competitors. This strat-egy has helped Sony maintain a dominant global market sharein Walkman-type products.8

� To maintain market leadership, interfaces in modular archi-tectures may be specified to accommodate new or improvedcomponents expected to become available during the com-mercial lifetime of the architecture. Improved products canthen be configured and brought to market as soon asimproved components are developed. Sony used this modular

strategy to introduce its HandyCam video cameras, offering arapid succession of upgraded models based on plannedimprovements in key components.

� When a modular architecture is strategically partitioned sothat product variety and change is “contained” in specificcomponents, other components may be standardised and usedin all or many of the product variations leveraged from amodular architecture. Effective use of standardised “commoncomponents” may significantly reduce costs of developing,producing, inventorying, and servicing, allowing substantialcost reductions while sustaining high levels of product variety.Today Volkswagen leverages six well differentiated productlines from its “A4” platform architecture,9 while achievingsubstantial cost savings by using sets of non-differentiatingcommon components in all models.

Firms that understand how to use modular architectures insuch ways may launch aggressive new product strategies that cre-ate new competitive dynamics in an industry. Product varietyincreases, technologically upgraded products come to marketmore quickly, and product costs (and prices) decline. Productmarkets as diverse as personal computers, consumer electronics,mobile phones, home appliances, power tools, sports bicycles,athletic shoes and financial services are now showing the com-petitive effects of the increasing modularisation of products.10

(See the Appendix for a summary of recent research on modulararchitectures and their roles in product and organisationstrategies.)

Successfully pursuing modular product strategies, however,requires new processes for creating and realising products. Wetherefore next consider GE Fanuc’s experiences in converting tomodular product architectures and in creating modular processarchitectures to support its modular product strategies.

Reinventing product creation at GE FanucAutomationGE Fanuc Automation produces industrial automation systemsthat can be individually configured to control a great variety ofproduction processes. As factories around the world began tomodernise and automate in the 1980s and 1990s, demand forcustomised automation systems increased sharply, automationtechnologies advanced rapidly, and competition intensified asseveral major firms entered the market. These developmentschallenged GE Fanuc to find new ways to expand its range ofproducts, increase its speed of bringing technologically improvedproducts to market and reduce the costs of its products.

GE Fanuc’s first step was one taken by many firms in the1980s—replacing a traditional sequential product developmentprocess with a multifunctional team approach. This changereduced GE Fanuc’s product development cycle from about 30months to 20 months, but as other firms in the industry also


Reductions in

development time

would require a

fundamentally new

approach

Modular Markets650

adopted team-based development processes and reduced theirdevelopment times, the window of opportunity for profitablesales of new generation products narrowed to a few months orless. Extensive efforts by GE Fanuc’s development teams to achi-eve further time reductions were not successful. Adding morepeople to development projects, for example, seemed only toincrease the time required to complete a project.

GE Fanuc’s managers eventually realised that achieving furtherreductions in development time would require a fundamentallynew approach, and so they decided to “go back to the drawingboards” to rethink the way the firm developed new products.Their first step was to assemble a task force to analyse in detailseveral recent development projects to determine exactly howtime and resources were being consumed.

The task force’s analysis led to a startling discovery thatbrought into sharp focus a key relationship between productarchitectures and product development cycle times. The analysisshowed that designs of key components were frequently changedduring development projects to accommodate new marketdemands or to incorporate new technologies. Making designchanges in one component usually required changing the designsof other components that the component interacts with, whichin turn led to changes in the designs of yet more components,and so on, in effect causing “chain reactions” of time-consumingredesigns of components and respecifications of the interfacesbetween those components. The task force found that such chainreactions of component redesigns occurred many times duringa development project and typically consumed more than half ofthe time and resources required to develop a new product. More-over, because the interfaces between components were evolvingin uncontrolled ways as components were being redesigned, boththe component designs and the interface specifications thatemerged from each development project were unique to thatproject. By trying to use this traditional development process torespond to increasing market demands for more product variety,the firm was not only slow in bringing new products to market,it was also creating a costly and rapidly growing number of idio-syncratic components and parts that could only be used in oneproduct model.

This analysis persuaded GE Fanuc’s managers that a muchmore disciplined approach to managing component designs andinterface specifications was the key to achieving major reductionsof time, resources and overall costs in developing new products.GE Fanuc’s managers also began to understand that better co-ordination of component designs and interface specificationsacross the firm’s development projects was the key to increasingthe use of common components and lowering product costs.

GE Fanuc’s managers subsequently adopted three new prac-tices in their development processes:

(i) GE Fanuc adopted a standardised way of decomposing itsproduct architectures into key functional components,

which the firm calls technology building blocks. Figure 1shows the standard types of components that make up thetechnology building blocks in a typical GE Fanuc pro-duct architecture.

(ii) When developing a new product architecture, GE Fanucfirst defines “flexible” component interface specificationsthat allow a range of component variations within eachtechnology building block to be combined with a range ofcomponent variations in other technology building blocksto configure a large number of product variations.11

(iii) GE Fanuc also follows a strict policy of “freezing” the inter-face specifications between technology building blocks atthe beginning of component development processes. Ineffect, GE Fanuc constrains the subsequent developmentof new components to conform to interface specifications

Figure 1. The Technology Building Bocks in GE Fanuc’s Modular Pro-duct Architecture


Modular Markets652

that have been standardised for each technology buildingblock. The standardised interface specifications for each ofthe firm’s product architectures are then compiled in“interface documents” that are provided to both internaland external development groups.

Following adoption of these practices in GE Fanuc, time-consuming chain reactions of component redesigns were elimin-ated, because all component designs must now conform to astable set of standardised interface specifications. Eliminatingcomponent redesigns significantly reduced the amount of devel-opment resources consumed. Moreover, because componentdesigns must conform to a stable set of interface specifications,components can now be developed concurrently. As a result,development cycle times have been greatly reduced. Once fullyimplemented, this modular approach to managing product cre-ation reduced GE Fanuc’s time to bring a new product architec-ture to market to an average of six to nine months, comparedwith 20 months under its earlier process.

GE Fanuc’s greatly improved speed in developing new pro-ducts now lets the firm “fast cycle” through development of sev-eral new product architectures in the time previously requiredto develop a single new product. GE Fanuc now uses this fast-cycle capability to renew its product lines more frequently andto bring technologically improved products to market morequickly. By sharing its standard component interface specifi-cations with component suppliers, GE Fanuc has access to anexpanding range of available component variations that lets thefirm configure a virtually unlimited number of product vari-ations to meet individual customer requirements. Further, thefirm’s component interface specifications are now strategicallyco-ordinated to enable the use of certain common componentsacross product models and even across product architectures,leading to sharply lower costs for many key components.

Applying modularity principles to processarchitecturesAs GE Fanuc began to use the flexibilities of its modular productarchitectures to introduce more new products more quickly inthe 1990s, managers began to understand the importance ofdeveloping complementary flexibilities in the firm’s process capa-bilities. Reasoning that designs of processes could also be decom-posed architecturally into “component” activities that interact inspecifiable ways, GE Fanuc’s managers defined the basic buildingblocks in the firm’s product creation and realisation processes.As shown in Figure 2, managers identified design, manufacturingand user capabilities as the key technology building blocks inGE Fanuc’s process architecture. Staff then spent several monthsdefining the specific capabilities available to the firm in eachtechnology building block.

GE Fanuc’s next step was to define process interface specifi-

Figure 2. The Technology Building Blocks in GE Fanuc’s Modular Process Architecture

cations governing the interactions of the technology buildingblocks in its process architecture. Like its interface specificationsfor products, these process interface specifications are compiledin “process interface documents” that are disseminated through-out the firm. As suggested in Figure 2, GE Fanuc’s process inter-face documents contain both technical specifications defining thecurrent capabilities in each process technology building blockand certain “design rules” governing the interactions between thefirm’s product architectures and the design, production and usercapabilities in its process architectures. Let us take a closer lookinside each of these process interface documents.

The Design Process/Product Architecture Interface Documentdefines the current design capabilities of the firm and providesdesign rules governing how those capabilities may be used increating and leveraging product architectures. The current capa-bilities in GE Fanuc’s design technology building block aredefined by (i) a “design library” of currently available designsfor parts and components that are compatible with one or moreof the firm’s product architectures, and (ii) a set of “design tools”(design methodologies) that GE Fanuc’s developers must use indesigning new parts and components. To assure that its currentdesign capabilities are used quickly and efficiently, a basic designrule adopted by the firm requires developers to re-use an existingcomponent in the design library whenever it can provide theperformance required for a new product. If no suitable compo-


A design rule requires

designers to select

components that the

firm is capable of

producing

Modular Markets654

nent design is available in the design library, then a second designrule requires developers to create a new component design byfollowing an existing design methodology in the current set oftools. Following these two design rules assures that GE Fanuc’sdevelopers will not waste development time “re-inventing thewheel” by inventing new component designs or design method-ologies when existing designs and methodologies can do the job.

The Design Process/Production Process Interface Documentgives designers detailed definitions of current production capa-bilities of the firm and its key suppliers. In defining the internaland supplier capabilities included in its production technologybuilding block, GE Fanuc’s managers went well beyond simplycompiling general descriptions of production capabilities. Rather,the firm defined precisely the limitations in each productioncapability that impose constraints on the components the firmcan make and assemble. The firm’s production capability inassembling printed circuit boards (PCBs), for example, is definedby the maximum and minimum dimensions of PCBs that canbe processed through GE Fanuc’s or its suppliers’ assembly lines,by current limitations in component sizes and pin spacings thefirm or its suppliers can mount on a PCB, and so on. In effect,clearly defining the constraints that available production capabili-ties impose on the products the firm can make has enabled GEFanuc’s managers to understand clearly the actual flexibilitiesthat the firm currently has to operate within those constraints.

To assure that new product variations that designers want toleverage from GE Fanuc’s modular product architectures can bereadily manufactured, the Design Process/Production ProcessInterface Document also includes a design rule that requiresdesigners to select or create component designs that the firm andits suppliers are currently capable of producing.

A similar approach was followed in defining GE Fanuc’s usercapabilities technology building block. GE Fanuc’s automationsystems are monitored by human operators who have beentrained to recognise a number of Windows-based templates andicons displayed on computer monitors to represent various pro-duction processes. These templates and icons are now compiledin the Design Process/User Process Interface Document to rep-resent current user capabilities. A design rule requires that exist-ing templates and icons be re-used wherever possible in new pro-duct designs, because introducing new templates or iconsimposes significant costs of providing additional training to largenumbers of operators.

Defining the capabilities in its process architecture and co-ordinating the interactions of its product and process architec-tures through clear design rules has enabled GE Fanuc to becomeas fast in producing and installing new products as it is indeveloping them. When new products are designed to be manu-factured within current production capabilities, for example,newly developed products can go into full production in a matterof days, not months. When a new product architecture doesrequire new process capabilities, however, those capabilities can

be defined before development of product components begins.This early definition of new process capability requirementsenables concurrent development of both new product compo-nents and the new process capabilities needed to make andassemble new components.

Using modular architectures to manageknowledge and strategic learningAs GE Fanuc’s managers implemented their modular approachto product creation, they began to understand another importantbenefit of modular architectures. Well-defined modular architec-tures provide a powerful framework for identifying and leverag-ing a firm’s current knowledge, for discovering hidden “capa-bility bottlenecks”, and for extending and accelerating strategiclearning processes. Let us examine each of these important bene-fits.

Most firms lack a systematic framework for identifying knowl-edge that is currently “inside” a firm or available to it. Conse-quently, to determine whether a firm has the knowledge neededto commercialise a new product idea, managers must typicallyobtain feasibility assessments from various technical expertswithin the firm. The process of assessing feasibility is time-con-suming, but more importantly, such assessments are frequentlyperformed under considerable time pressures and often produceincomplete or inaccurate assessments. The consequences are thatfirms sometimes do not undertake development projects theycould readily complete, or—more critically—they sometimescommit to projects they actually do not have the know-how tocomplete.

As GE Fanuc came to understand, clearly defining both thecomponents currently available in its design library and thedesign tools currently available to component developers createsa “balance sheet” of the firm’s current design capabilities. Newproduct ideas, once decomposed into sets of required compo-nents, can be quickly compared against the balance sheet todetermine which needed components the firm already has orcould readily design, and which components would require newdesigns or new design methodologies. Similarly, defining its cur-rent production and user capabilities enables GE Fanuc to recog-nise which new product ideas would require developing new pro-duction or user capabilities, and which would not. Thus, in afundamental sense, GE Fanuc’s careful architectural definition ofits current product and process capabilities enables its managersto “know what we know”—and therefore to leverage the firm’scurrent knowledge more effectively.

Equally as important, GE Fanuc’s managers can also recognisewhen new product ideas would require capabilities the firm doesnot currently have. In effect, the careful definition of capabilitiesinvolved in creating modular product and process architecturesbrings to the surface the hidden “capability bottlenecks” thatlimit a firm’s ability to design, produce and support new pro-


Modularity offers

more than product

strategies

Modular Markets656

ducts. The capability bottlenecks that are currently limiting afirm’s options for creating new products can then be targetedfor focused strategic learning and capability development. GEFanuc now uses this method to generate an evolving “Wish List”of well-defined capabilities that the firm wished it had, becausethey would open up significant new market opportunities for thefirm. The Wish List is carefully and frequently reviewed by GEFanuc’s senior and mid-level managers to select opportunities forstrategic investments in developing important new capabilities.

GE Fanuc’s modular architectures also help the firm todevelop more finely-tuned approaches to managing its strategiclearning and capability development. For each of the technologybuilding blocks in its modular product architectures, GE Fanucpursues a specific strategy for developing and sourcing compo-nents. Certain components (like memory chips) are technicallynecessary, but are not sources of distinctive performance in thefirm’s products, and the firm simply buys the most cost-effectivecomponents currently available in the market. Components likemicroprocessors and operating systems, however, are importantperformance drivers in GE Fanuc’s products. Microprocessordesign is not a capability in which the firm believes it could bea world leader, so GE Fanuc works with world-class micropro-cessor firms as strategic partners in developing new micropro-cessor designs for its products. However, GE Fanuc does haveworld-class capabilities in developing operating systems and pro-grammers for the sensors and controls used in industrial auto-mation systems. GE Fanuc therefore develops these technologybuilding blocks internally as a key source of strategic competitiveadvantage. GE Fanuc pursues similar strategies for developingthe technology building blocks in its process architectures.

GE Fanuc also uses its modular architectures to stimulate andco-ordinate globally distributed, inter-organisational learningprocesses. Because interface specifications for modular architec-tures define the essential outputs of component developmentprocesses (i.e., component designs that conform to standardisedinterface specifications), developing components for a modulararchitecture can become a “loosely coupled” process carried outautonomously and concurrently by competent developmentgroups anywhere in the world. By publishing the interface speci-fications for components in its modular architectures, GE Fanucnow benefits from the activities of more than 300 firms world-wide that develop components compatible with GE Fanuc’s pro-duct architectures. The growing range of component variationscompatible with the firm’s modular architectures greatlyenhances GE Fanuc’s ability to configure customised automationsystems to serve every customer’s requirements.

A few firms such as GE Fanuc have realised that modularityoffers more than product strategies. Modular architectures arealso a foundation for learning organisations that can quicklyadopt the most advantageous combinations of internal, collabor-ative and market arrangements for developing and sourcing newcomponents and capabilities. It is no coincidence that firms in

industries with the highest sustained rates of technological pro-gress—e.g., semiconductors, personal computers, and telecom-munications equipment—are also the most extensive users ofmodular architectures.12

New management roles in modular approachesto product creationModular approaches to managing product creation also differfrom traditional approaches in the roles that managers play andthe kind of technological learning that occurs in each approach,as suggested in Figure 3.

Traditional product development typically requires initialinputs from product line managers to agree on the general per-formance attributes and cost characteristics desired for a newproduct. Given a statement of these goals for a new product,developers first create a system design that decomposes the newproduct into subsystems and components. As we have discussedearlier, interface specifications typically change frequently as newcomponent designs are developed, and the lack of stable compo-nent interfaces during development processes leads to chain reac-tions of component redesigns. These chain reactions mean that

Figure 3. Comparison of Management Inputs and OrganisationalLearning in Traditional versus Modular Product Development Pro-cesses


The objective of

modular development

is to create a

platform for strategic

initiatives

Modular Markets658

mid-level managers must frequently adjudicate a variety of“interface issues” arising between component developmentgroups.

Interface issues take several familiar forms. For example, whenone component development group requests a change in asecond group’s component design that is needed to help the firstcomponent work better in the overall product design, the seconddevelopment group may not agree with the intent of therequested design change. Managers will then have to interveneto decide whether a component design change should be made.If a design change is to be made, managers may have to ensurethat each development group co-operates fully in making designchanges, and may have to decide how the costs of redesign will beallocated to each development group. Moreover, if a componentdevelopment group has gone on to another development project,managers may have to decide whether a needed component rede-sign should receive priority over the group’s current design pro-ject. As GE Fanuc found in analysing its traditional developmentprocesses, such decisions can consume very significant amountsof middle management time, as suggested in Figure 3.

By contrast, the modular approach to product developmentmust be initiated with a higher level of inputs from top manage-ment, because the objective of the modular development processis to create a platform for the firm’s strategic initiatives in a givenproduct market over a strategically determined time horizon—often two or three years or longer. Thus, a higher level of partici-pation by top management is needed to provide strategic guid-ance in defining the extent of market coverage and the rate oftechnological upgrading desired from a new product architec-ture. These strategic inputs from top management then set thegoals for the specification and standardisation of componentinterfaces that will “design into” the product architecture thedesired strategic flexibility to leverage and upgrade products.

When fully specified and standardised, the interface specifi-cations for a new modular product architecture provide an infor-mation structure that implicitly co-ordinates each componentdevelopment group’s activities. As long as all developmentgroups design components that conform to the standardisedinterface specifications of the modular architecture for theircomponent, middle managers no longer need to adjudicate inter-face issues during development, because interface issues nolonger arise. The time that middle managers spend managingcomponent development processes can be greatly reduced andlargely directed to checking whether individual componentdevelopment groups are staying on schedule and within budget.

Throughout the modular development process, both top andmiddle levels of management have a critical role to play in ensur-ing that all component development groups agree to a set ofstandardised component interfaces for a modular architecture—and then strictly conform to those interfaces in creating theircomponent designs. As firms that have worked with modulardevelopment processes have learned (many of them the hard

way!), discipline by all component development groups in stick-ing to the standardised interface specifications is the key to rad-ically reducing development time through concurrent compo-nent development.

New approaches to managing interface specifications also playa critical role in the technological learning that occurs in modulardevelopment processes. Because interface specifications changefrequently during traditional development processes, componentdevelopers tend to take a very pragmatic, problem-solvingapproach and specify interfaces that are simply adequate for spe-cific components at their current state of development. A similarpragmatic approach is also likely in finalising interface specifi-cations after debugging a newly developed product. When devel-opers manage interface specifications in this ad hoc way, theyoften fail to develop in-depth systematic understanding aboutthe ways that different types of components can reliably interactin product architectures. Thus, traditional product developmentoften results in “spotty” technological knowledge limited to spe-cific component designs.13

Creating modular product architectures, however, leads devel-opers to acquire much more systematic architectural knowledgeabout how various components work and interact. An analogyfrom just-in-time (JIT) manufacturing suggests why. The disci-pline of running a lean JIT production system in which all pro-cesses are expected to work right all the time helps a firm quicklydiscover and solve problems in producing parts that would beobscured if the firm maintained “buffer inventories” of parts.Analogously, the discipline of fully specifying component inter-faces that are expected to work perfectly for a range of compo-nent variations in a new modular product architecture encour-ages developers to discover and diagnose deficiencies in theirknowledge of how such components systematically behave andinteract. Such deficiencies in a firm’s architectural knowledge areusually obscured in the traditional development process by the“process buffer” of allowing frequent ad hoc changes in inter-face specifications.

Architectural learning about components is also fostered whena firm uses system integration methods to debug a new modularproduct architecture. In systems integration, component interac-tions are analysed and tested for all combinations of componentvariations allowed by the modular architecture to developinsights into the “system behaviours” of the various types ofcomponents. These insights can then be incorporated in new orimproved interface specifications for governing the interactionsof components in a firm’s product architectures. When a firmadopts the further discipline of regularly translating its architec-tural learning into improved interface specifications, the firm’sinterface documents become both an archive and a balance sheetof the firm’s technological knowledge about the building blocksof its products and processes.


Modular Markets660

A new strategic logic for competing in modularmarketsManagers interested in applying modularity concepts in theirfirms must learn a new strategic logic for competing that contra-dicts much conventional management wisdom. The strategiclogic of modular architectures is based on some new “first prin-ciples” of organising and managing that at first seem counter-intuitive. We now briefly consider three principles in the newstrategic logic of modular markets.14

“Products design organisations”Implicit in the design of every product are specific tasks thatmust be performed in order to develop and realise that product.As a result, the product designs a firm creates greatly influencethe organisation the firm could adopt to develop, produce, dis-tribute and service its products. When the component designsin a product architecture are complexly interdependent, pro-cesses for creating and realising components will also be com-plexly interdependent and must be organised to support frequentcommunication, co-ordination and other interactions. By con-trast, when interface specifications are standardised in a modulararchitecture, component designs that conform to those interfacespecifications become “loosely coupled”, in the sense that variouscomponent designs can be freely interchanged in the productarchitecture. Processes for creating and realising those com-ponents can then also become loosely coupled—i.e., they becomelargely autonomous and do not require frequent communicationand co-ordination between component development groups. Inthis sense, at a fundamental level, “products design organis-ations”.15

The implications of this principle for strategic managers areprofound. In essence, the principle tells us that making a firm’sprocesses and structures more flexible and “modular” requiresas an essential first step making the firm’s product architecturesmore modular. Without adopting flexible modular productarchitectures, the goal of creating flexible modular organisationswill remain an elusive dream.

“Standardisation increases flexibility”Standardising components and interactions at a lower level of asystem is the key to creating important forms of flexibility in ahigher level of the system. For example, standardising the basicgoods and services required to travel by automobile brings flexi-bility to the “higher level” process of taking automobile trips.Just imagine how difficult and time-consuming travelling by carwould be without standardisation of gasoline types, gas pumpnozzle sizes, lubricant types, tyre sizes, types of highway signs,traffic rules requiring cars to stay on one side of the road, andso on.

Analogously, if the functions and interactions of componentsin a new product architecture are not standardised, developingthe new product architecture becomes complex, difficult and

time-consuming. Standardising component types and interfaces,however, greatly reduces the time, cost and difficulty—or inother words, increases the flexibility—of processes for developingand leveraging new product architectures.

“Discipline enhances creativity”Creativity is often assumed to require an environment withunfettered freedom to explore and experiment. Yet as we havesuggested here, a firm’s creativity in developing new productscan be greatly enhanced by following some well-defined rules forcreating. These rules occur in two forms, each governing a differ-ent level of creative activity.

One form of creativity consists of combining things(components or activities) in new ways that are permitted by acurrent set of combinatorial rules. For example, blues musiciansoften improvise new “riffs” or patterns of notes within the tra-ditional structure of chords and progressions—i.e., the combina-torial rules—that define blues as a form of music.

A second form of creativity consists of creating new sets ofcombinatorial rules that bring new possibilities for improvising.For example, jazz has evolved from a fairly narrow set of earlymusical patterns—i.e., combinatorial rules—to the muchbroader and more highly elaborated sets of chords, progressionsand beats that now characterise modern jazz as a form of music.Analysis of the evolution of the combinatorial rules that definejazz reveals both the ongoing adaptation and incorporation of“components” borrowed from other music forms and the inven-tion of new musical components, as well as experimentation withnew ways of combining components. In other words, in emerg-ing as a new form of music, jazz has explored a number of trans-formative rules for creating new combinatorial rules for inter-relating music structures and components.

In the same way, the creation of new products can flourish byfollowing both combinatorial and transformative rules for cre-ating. When a firm creates a modular product architecture, theinterface specifications for the architecture provide a set of com-binatorial rules within which developers can freely improvise newproducts based on new combinations of modular components.Of course, firms also need to be creative by “thinking outsidethe box” and periodically going beyond the combinatorial possi-bilities of their current architectures. It is impossible to recognisewhat constitutes “outside the box” thinking, however, if youcan’t tell what, in effect, is already “inside” the boundaries of thebox. When a firm’s managers can clearly understand the combi-natorial limits inherent in the interface specifications of itsmodular architectures, it becomes much easier to recognise orimagine next generation architectures that would represent sig-nificant transformations beyond the current capabilities of thefirm.

Contrary to the popular notion of unfettered freedom as thecradle of creativity, discipline in exploiting the combinatorialpossibilities of a current modular architecture and in defining


A firm’s creativity can

be enhanced by

following well-defined

rules

Modular Markets662

transformative modular architectures with new combinatorialpossibilities may well be the more productive—and more man-ageable—engine of creativity. One of the greatest strategic bene-fits of modularity, therefore, may be providing clear rules formanaging both creative improvisation within an organisation’scurrent capabilities and creative transformations to new sets oforganisational capabilities.

ConclusionThe complexity and dynamics of contemporary businessenvironments challenge all managers to find new frameworks formaking sense of competitive environments and for identifyingeach firm’s strategic options for action. We therefore concludeour discussion of modularity by suggesting a further—and per-haps the most important—benefit that modularity can bring tothe managers of a firm.

Traditionally, firms have developed individual products, andfor most firms today the units of strategic analysis and planningremain the individual products they offer to markets. Yet todaythe rate of change in most product markets is so great, and thebreadth of product variety needed to meet customer demandsis so broad, that focusing management attention on individualproducts can lead to overwhelming complexity. For managerstrying to understand the scope and speed that a firm must sustainin creating new products for its markets, thinking in terms ofindividual products may no longer be the most appropriate—oreven feasible—way to grasp a firm’s strategic options forapproaching markets. Today, managers who think in terms ofindividual products may fail to see the “forest” because of theirfocus on the “trees”.

Modular architectures, by contrast, are strategic platforms forleveraging a range of product variations and for managingplanned technological upgrading of products over time. Usuallya significant part of a market can be served—often for anextended period of time—by a well conceived and well executedmodular architecture. Modular architectures therefore provide anew unit of strategic analysis and planning that encompasses apotentially wide range of individual products. As many seniormanagers in companies that have adopted modular architectureshave realised, thinking in terms of modular platforms rather thanindividual products can significantly reduce the complexity man-agers face and bring into focus the broader and longer-term viewof products and markets that managers must have.

Further, when the standardised interfaces in modular architec-tures are used to co-ordinate product creation and realisationprocesses, those processes can become largely self-managing.Both mid-level and senior managers can then redirect much oftheir time and attention from the routine tasks of monitoring,problem solving and intervention in those processes to refocuson the essential tasks of strategic direction-setting and goal-set-ting.

In the final analysis, the greatest benefit for the managers ofa firm that adopts the modular way of working may well be agreatly improved ability to see the firm’s strategic options morebroadly and clearly—and to reclaim the time needed to providevision and leadership in pursuing those options most effectively.

Appendix.Recent research on modular architecturesEconomists were among the first researchers to study the impactof product architectures on competition. Several industrialorganisation economists16 have investigated the competitiveimplications of adopting standardised interfaces between pro-ducts (and by extension, standardised interfaces between compo-nents in products). The institutional economists Langlois andRobertson17 also documented the key role of standardised modu-lar interfaces between components in stimulating high rates ofinnovation in the personal computer and consumer electronicsindustries.

Strategic management researchers began to investigate thecompetitive consequences of modularisation of product architec-tures in the 1990s. Garud and Kumaraswamy18 investigated theuse of modular architectures to achieve economies of substi-tution—the cost savings that result when component variationscan be “substituted” into a product design to create new productvariations at low cost. Sanchez and Sudharshan19 analysed theenabling role of modular architectures in the real time marketresearch—the use of modular architectures to leverage productvariations used to explore markets in real time through fast, low-cost leveraging of modular product variations.

The use of architectures to manage interactions of productand process designs began to be researched in the 1990s. For,example, Shirley20 and Ulrich,21 explored a number of ways inwhich product architectures can be used to improve co-ordination of a firm’s new product designs and its manufactur-ing processes.

Some key implications of modularity for strategic managementbegan to emerge in the mid-1990s. Sanchez22 explained howmodular architectures can be the basis for creating significantnew strategic flexibilities that enable firms to bring a broaderrange of products to market more quickly, to upgrade their pro-ducts more frequently, and to create new products at lower costsof development. Sanderson and Uzumeri23 documented Sony’suse of modular product architectures to manage families of con-sumer electronics products such as the Walkman. Sanchez24 sub-sequently analysed the considerable changes in the marketing pro-cesses of firms that are possible when they can use modularproduct and process architectures to leverage large numbers ofproduct variations.

Some broad organisational implications of modularity weresuggested by Sanchez and Mahoney25 in their research into therole of modular architectures in creating more flexible organis-


Modular Markets664

ation designs and more effective processes for organisationallearning and innovation. Meyer and Utterback26 and Meyer,Tertzakian and Utterback27 have explored the ways in whicharchitectures can help identify strategically important capabilitiesand define objectives for more focused research and develop-ment. Research into the impacts of standard modular architec-tures on technology-intensive organisations and technical work-ers has been undertaken by Tushman and Murmann28 andWade29, among others. Sanchez30 described new kinds of productdevelopment processes and new allocations of development tasksthat organisations need to adopt when they begin to use modulararchitectures. Baldwin and Clark31 have drawn on their historicalstudies of the computer industry to suggest some general impli-cations of modular architectures for the management of productdevelopment and market strategies.

The broader technological, organisational and strategicimpacts of modular architectures are now being elaborated bygrowing numbers of management researchers. Schilling32 hasproposed a general theory of modular systems and the incentivesthat give rise to modular systems in a product market. Drawingon his studies of firms that are now making the conversion tothe modular way of working, Sanchez (forthcoming) explainshow modular architectures can serve as a comprehensive frame-work for integrating technology strategy, product strategy, organ-isation strategy and organisational learning.

References1. GE Fanuc Automation is a joint venture of General Electric

Company of the US and Fanuc of Japan, and is managed asa GE company. As Chief Executive Officer, Robert P. “Bob”Collins led GE Fanuc Automation during its adoption andimplementation of the modular architectural approach tocreating products in the late 1980s and 1990s. During thistime, GE Fanuc became a global leader in industrial auto-mation systems and today provides automation equipmentand support services to leading corporations around theworld. Collins recently retired from GE Fanuc Automationand is now head of Capstone Partners, a consultancy inexecutive leadership for organisational transformation andimprovement of value-creation capabilities.

2. H. Meyer and J. M. Utterback, The produce family and thedynamics of core capability, Sloan Management Review 34,29–47 (Spring 1993). M. H. Meyer, P. Tertzakian and J. M.Utterback, Metrics for managing research and developmentin the context of the product family, Management Science 43,88–111 (January 1997). D. Robertson and K. Ulrich, Plan-ning for product platforms, Sloan Management Review 39,19–31 (Summer 1998).

3. Some product strategy implications of modular architecturesare discussed in R. Sanchez, Strategic flexibility in productcompetition, Strategic Management Journal 16, 135–159

(1995). C. Y. Baldwin and K. B. Clark, Managing in an ageof modularity, Harvard Business Review 84–93 (1997). R.Sanchez, Modular architectures in the marketing process,Journal of Marketing 63, 92–111 (1999).

4. Sony’s “mixing and matching” of components in modulararchitectures for the Walkman and other product familiesis discussed in S.W. Sanderson and M. Uzumeri, ManagingProduct Families, Irwin, Chicago (1997).

5. In some cases, the product architecture of a dominant firmmay establish a de facto industry standard architecture, muchas Intel’s Pentium microprocessors defined the de facto stan-dard architecture of personal computers in the 1990s.

6. The enabling role of modular architectures in real-time mar-ket research is explained in R. Sanchez and D. Sudharshan,Real-time market research: learning-by-doing in the develop-ment of new products, Marketing Intelligence and Planning11(7), 29–38 (1993), and Sanchez (1999) (see Reference 3).

7. Sanderson and Uzumeri (1997) (see Reference 4).8. Meyer and Utterback (1993) (see Reference 2).9. The Volkswagen Golf and New Beetle, the Audi A3 and TT,

and several Seat and Skoda models are based on Volkswa-gen’s “A4” platform architecture.

10. Examples of modular architectures in these industries arediscussed in Sanchez (1999) (see Reference 3).

11. The power of modularity to leverage large numbers ofcomponent variations can be illustrated with the simpleexample of a 10-component product with 10 available vari-ations for each type of component. This modular architec-ture can leverage 1010=10,000,000,000 individual productvariations. See Sanchez (1999) (see Reference 3) for a generaldiscussion of the ability of modular architectures to leverageproduct variations.

12. The impact of modular architectures on innovation pro-cesses of firms and industries is discussed more fully in R.Sanchez, Product and process architectures in the manage-ment of knowledge resources, in P. Robertson and N. Foss(eds), Resources, Technology and Strategy, Routledge, London(2000). R. Sanchez, Modular architectures, knowledge assetsand organizational learning: new management processes forproduct creation, International Journal of Technology Man-agement 19(6), 610–629 (2000). See also J. Farrell and G.Saloner, Standardization, compatibility and innovation,Rand Journal of Economics 16, 70–83 (1985).

13. In a similar vein, Von Hippel observes that many firmsdevelop “sticky” knowledge during one product develop-ment project that is difficult to transfer to another develop-ment project. E. von Hippel, Sticky information and thelocus of problem solving, Management Science 40(4), 429–439 (1994). See Sanchez (2000) (see Reference 12) for afurther discussion of how the modular way of working over-comes this problem.

14. For a more complete discussion of these and other principles


Modular Markets666

in the new strategic logic of modularity, see R. Sanchez,Modularity, Strategic Flexibility and Knowledge Management,Oxford University Press (forthcoming).

15. The impact of product designs on organisation designs isdiscussed further in R. Sanchez and J. T. Mahoney, Modu-larity, flexibility and knowledge management in product andorganization design, Strategic Management Journal 17, 63–76 (1996).

16. P. A. David, Some new standards for the economics of stan-dardization in the information age, in P. Dasgupta and P.Stoneman (eds), Economic Policy and Technological Perform-ance, Cambridge University Press, Cambridge (1987). P. A.David and S. Greenstein, The economics of compatibilitystandards: an introduction to recent research, EconomicInnovation and New Technology 1(1), 3–41 (1990). N. Econo-mides, The economics of networks, International Journal ofIndustrial Organization 14(6), 673–699 (1996). C. Shapiroand H. R. Varian, The art of standards wars, California Man-agement Review (1999).

17. R. N. Langlois and P. L. Robertson, Networks and inno-vation in a modular system: lessons from the microcomputerand stereo component industries, Research Policy 21, 297–313 (1992).

18. R. Garud and A. Kumaraswamy, Changing competitivedynamics in network industries: an exploration of SunMicrosystems open systems strategy, Strategic ManagementJournal 14(5), 351–369 (1993). R. Garud and A. Kumaras-wamy, Technological and organizational designs to achieveeconomies of substitution, Strategic Management Journal 16,93–110 (1995).

19. Sanchez and Sudharshan (1993) (see Reference 6).20. G. Shirley, Models for managing the redesign and manufac-

ture of product sets, Journal of Manufacturing OperationsManagement 3, 85–104 (1990).

21. K. Ulrich, The role of product architecture in the manufac-turing firm, Research Policy 24, 419–440 (1995).

22. Sanchez (1995) (see Reference 3).23. Sanderson and Uzumeri (1997) (see Reference 4).24. Sanchez (1999) (see Reference 3).25. Sanchez and Mahoney (1996) (See Reference 15).26. Meyer and Utterback (1993) (see Reference 2)27. Meyer, Tertzakian and Utterback (1997) (see Reference 2).28. M. L. Tushman and J. P. Murmann, J.P. (1998) Dominant

designs, technological cycles and organizational outcomes, inB. Staw and L. L. Cummings (eds), Research in Organiza-tional Behavior, p. 20. JAI Press, Greenwich, CT.

29. J. Wade, Dynamics of organizational communities and tech-nological bandwagons: an empirical investigation of com-munity evolution in the microprocessor market, StrategicManagement Journal 16, 111–133 (1995).

30. Sanchez (2000) (see Reference 12).

31. C. Y. Baldwin and K. B. Clark, Design Rules: The Power ofModularity., MIT Press, Cambridge, MA (2000).

32. M. A. Schilling, Towards a general modular systems theoryand its application to interfirm product modularity, Academyof Management Review 25, 312–334 (2000).


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