technological and organizational dynamics (tinkering with firm...

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DIMETIC March 26, 2009 - Strasbourg, BETA

Stefano Brusoni

KITeS-CESPRI, Bocconi [email protected]

www.cespri.unibocconi.it/brusoni

Technological and Organizational Dynamics

(tinkering with firm theory)

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• 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

Table of Contents(AM and PM)

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Motivation

Explain the (very) unlikely

New trajectories and paradigmsBreakthrough innovations

Change in business models

New architectures � modularity and (de)modularization

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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): 203-223.– Henderson R. and K. Clark 1990. 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. 1992 “Networks and Innovation in a Modular System: lessons from the

microcomputer and stereo component industries.” Research Policy, 21: 297-313.– Chesbrough, H., and K. Kusunoki. 2001. “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. 1996 “Modularity, Flexibility, and Knowledge Management in Product and

Organisation Design.” Strategic Management Journal, 17, Winter Special Issue: 63-76.– 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): 597-621.

– Nickerson J. and T. R. Zanger (2004) A knowledge-based theory of the firm – The problem solving perspective. Organization Science 15 (6): 617-632

• Session 2– Nickerson J. and T. R. Zanger (2004) A knowledge-based theory of the firm – The problem solving

perspective. Organization Science 15 (6): 617-632– Brusoni, S. and A. Prencipe (2006) 'Making Design Rules: A multi-domain perspective' Organization

Science, 17 (2): 179-189.

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

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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)

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1. A framework for comparisons

Problems

Exceptions

Engineering (heavy

machinery)

Routines

(steel mills)Analyzable

Nonroutine(aerospace)

Craft Industries(film industry)

Unanalyzable

ManyFew

Source: Perrow. 1967: 196 (adapted)

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• Starting point: opportunism vs. knowledge generation– Zingales vs. Simon. – Do organizations emerge when markets fail? Or do

organizations exist because they can do something b etter 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!

1. A framework for comparisons

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What is a problem?

Hora

System 1 … … System 10

Subsystem 1 … Subsystem 10

…Component 1 Component 10

TEMPUS

Component 1 … Component 1,000………

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High interaction problem

Moderate interaction problem

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• 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

Hora and Tempus, and beyond

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2. Search

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2. Search

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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

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NK (N= 3, K=0)

0.700.50.90.7111

0.800.80.90.7110

0.600.50.60.7101

0.700.80.60.7100

0.530.50.90.2011

0.630.80.90.2010

0.430.50.60.2001

0.530.80.60.2000

fxyzf..zf.y.fx..

001(0.43) 101

(0.60)

100(0.70)

011(0.53)

010(0.63)

111(0.70)

110(0.80)

000(0.53)

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NK (N= 3, K=2)

0.430.10.80.4111

0.630.60.70.6110

0.400.30.20.7101

0.830.70.90.9100

0.530.80.50.3011

0.700.50.90.7010

0.500.90.50.1001

0.470.50.30.6000

fxyzf..zf.y.fx..

001(0.50) 101

(0.40)

100(0.83)

011(0.53)

010(0.70)

111(0.43)

110(0.63)

000(0.47)

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ELECTRICALENGINE

ICE

Control Box

Cables

Converter

Inverter

BATTERIES PACK

FUEL TANK

Data Gathering.

Control box

Sensor System

HMI

DigitalSignal

Processor

CommutationSystem Data Gathering

SystemData

TransmissionSystem

Display

ELECTRICALENGINE

ICE ELECTRICTRANSMISSION

SYSTEM

BATTERIES PACK

FUEL TANK CONTROL SYSTEM

Hybrid propulsion system �� N=6, low K

Hybrid propulsion system �� N=14, higher K

NK … for real

Source: Vaccaro, Brusoni and Veloso, 2008

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NK and search … for real

TECHNICAL COMPETENCIES

COMPLEMENTARY ASSETS

STRATEGIC OBJECTIVES

GRANULARIZATION OF THE DESIGN

SPACE

ARCHITECTURAL REPLICATION

FUNCTIONAL REPLICATION

ARCHITECTURAL REPLICATION

REPLICATION INPROJECT M

PRODUCTINNOVATION

REPLICATION INPROJECT T

Source: Vaccaro, Brusoni and Veloso, 2008

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3. Empirically observable relationships(aka hypotheses)

• Modularity

– A literature which identifies a set of candidate relationships between ‘organization’ and ‘technology’

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Baldwin and Clark: ‘ Modularity creates options’

System before Modularization System after Modulariza tion

System DesignOption Rules

Option Option

Option Option

Option Option

Option

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Linkages between core concepts and components

Core concepts

Radical innovation

Architectural innovation

Changed

Modular innovation

Incremental innovation

Unchanged

OverturnedReinforced

Source: Henderson and Clark, 1990: 12

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Linkages between core concepts and components

Core concepts

Radical innovation

Photolithographic equipmentChanged

Litiumbatteries in

laptops

Incremental innovation

Unchanged

OverturnedReinforced

Source: Henderson and Clark, 1990: 12

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Modular Products …

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The Old Vertical Computer Industry- Circa 1980

The New Horizontal Computer Industry- Circa 1995

SperryUnivac

Wang

Retail Stores

Superstores Dealers Mail Order

Word Word Perfect Lotus

DOS and Windows OS/2 Mac UNIX

Compaq Dell IBM EtcPackard

BellHP

Intel Architecture Motorola RISC

Source: Adaptation from Only the Paranoid Survive by Andrew Grove, 1996.

Sales anddistribution

Applicationsoftware

Operatingsystems

Computer

Chips

Disk drives

Contractmanufacturers

Printers

Sales anddistribution

Applicationsoftware

Operatingsystems

Computer

Chips

IBM DEC

I-net

SAP

Linux

Seagate QuantumWesternDigital Maxtor

Selectron SCI FlextronicsJabil

Celestica

HP Epson

… and Modular Industries

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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

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INTEGRAL

MODULAR

ARCHITECTURALSTRUCTURE

ARCHITECTURALPROPRIETARINESS

Minicomputer industry

Niche strategy, sophisticated users, in-

house development. Challenge from producers of complementary assets

Workstation and PC IndustryConsumer electronics

Short term success in terms of entry into new segments

Loss of control in the long run (e.g. IBM OS/2)

CLOSED OPEN

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’.

Please note, II

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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

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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)

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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

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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.

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Sequential organisation of product development process

Source: Sanchez and Mahoney, SMJ 1996

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Modular organisation of product development process


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Modes of learning

Radical learning at the

architectural and component

levels

Architectural learning

Significant

Modular learning at the

component level

Incremental learning at the

component levelModerate

Learning about component interactions

and configurations

SignificantModerate

Learning about components functions and designs


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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

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Modularity creates papers!

• Modularity as product design strategy– Automotive (Womack et al 1990), mainframes (Langloi s, 1997), bycicles

and trolleys (Ulrich, 1995), micro computers (Langl ois, 1992), work stations (Garud and Kumaraswamy, 1993), personal com puters (Baldwin and Clark, 2000), software design (Cox, 19 86), hard disk drives (Chesbrough and Kusunoki, 2001), aero-engine s (Prencipe, 1997), chemical engineering (Brusoni, 2003), domest ic house appliances (Worren et al, 2002) ….

• Product variety and mass customization - Weelwright an d 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 Eisen hardt, 2001

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Gap

� Long term viability of ‘modular organizations’ depen d upon the ability of introducing new architectures and pl atforms

� BUT: Lack of empirical analysis of processes of mod ularization, or re-modularization, or de-modularization.

� Modularity literature normally accepts the idea tha t architectural and component-level knowledge are ful ly 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’ processe s.

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MODULAR PRODUCTHORIZONTAL INDUSTRY

INTEGRAL PRODUCTVERTICAL INDUSTRY

Fine & Whitney, “Is the Make/Buy Decision Process a Core Competence?”

PRESSURE TOINTEGRATE

PRESSURE TO DIS-INTEGRATEORGANIZATIONAL

RIGIDITIES

HIGH-DIMENSIONALCOMPLEXITY

NICHE COMPETITORS

PROPRIETARY SYSTEM

PROFITABILITY

SUPPLIERMARKET POWER

TECHNICAL ADVANCES

The Dynamics of Product and Industry Structure

Source: Fine 1996

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• 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 (IT-

enabled) strategic outsourcing– Role of systems integrators (broad capabilities, lean activities)

which very actively coordinate transitions

The Dynamics of Product and Industry Structure

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Issue 1Modularity 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?

Now

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Later

Issue 2How 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

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Fujitsu and the HDD

• The case of Fujitsu exemplifies the case of a firm that successfully managed the introduction of a new prod uct architecture, stemming from a major technological breakthrough embodied into the magneto-resistive he ad.

• During the modular phase, Fujitsu like other firms relied on a decoupled network of external suppliers. Unlike its competitors, Fujitsu did not discontinue “its … inve stments in systems knowledge and materials and component techn ology 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 i n house.

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Lessons from Fujitsu

• Modular products – yes• Modular organizations – yes, in terms of the

production and engineering activities carried out i n 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?

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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 dispersedlearning processes

⇓responsiveness

which refers to the capabilities needed to identify

and actively manage changing technological and

organisational interfaces

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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.

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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

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The organisational implications

Uneven

EvenRate of change of component technologies

UnpredictablePredictable

Component interdependencies

Source: Brusoni, Prencipe and Pavitt, 2001

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Uneven

PC IndustryThe modular

networkEven

Rate of change of component technologies




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Mobile Phone Systems

Design, production and R&D in house.

Uneven





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Uneven

Automotive IndustryOutsource production &

detailed engineering. Both contract and in

house R&D.





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Hard-Disk Drive industry

Outsource production & engineering. Both

contract and in house R&D

Uneven

Automotive IndustryOutsource production &

engineering. Both contract and in house

R&D.

Even





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Vertical integrationLoosely coupled

systemsUneven

Loosely coupled systems

Modular networksEvenRate of change of component technologies




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HierarchySystems

integratorsUneven

Systems integrators

Market-based mechanismsEven





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Systems integration (Prencipe, 1997, 2000, 2003)

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

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

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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

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The notion of systems integration:the case of the civil aviation industry

Share of patents by field and company

010203040506070

Architectura

l

Sub-arch

itectu

ral

Physical

Functional

Aero-enginemaker (companyC)First tier supplier

Second tiersupplier

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• 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

Issue 1 - Conclusions

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Later

Issue 2How 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

technological and organizational dynamics (tinkering with firm...

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