The tenuous (?) relation between IT, modularity and industrial evolution

1. Geneva, June 1-2, 2006 ‘Digital Transformation in the Information Society’ Parallel session: Industry-level impact of ICTs The tenuous (?) relation between IT, modularity and industrial evolution Stefano Brusoni CESPRI and CRORA (Bocconi University) and Silvio Tronchetti-Provera Foundation

2. Table of content • Background and motivation • The standard ‘modular’ story of industrial evolution • Product • Processes • Industry • The less standard modular story of industrial evolution • Embedded coordination vs. agency • Architectural changes • Recombinant innovation • Conclusions

3. Background • Empirical background • Increasing systemic-ness of the innovation process in multi-tech, multi-product organizations • Innovation and technology strategies • The ‘Pavitt-Teece-Grandstrand’ trajectory • Theoretical background • Organizations as problem-solving devices • Cognitive sciences • The ‘Simon-Levinthal-Marengo’ trajectory

4. Modularity creates options • Modularity literature • Definition of modularity: one-to-one mapping between functions and components + standardised interfaces • Role of ‘design rules’ (Baldwin and Clark, 2000)

5. Motivation • 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.

6. The ‘modular age’ – the product

7. The ‘modular age’ – the industry The Old Vertical Computer Industry - Circa 1980 The New Horizontal Computer Industry - Circa 1995 Sales and distribution Retail Stores Superstores Dealers Mail Order I-net Sales and distribution Application software Word Word Perfect Lotus SAP Application software Operating systems DOS and Windows OS/2 Mac UNIX Linux Compaq Dell Packard Bell HP IBM Etc Computer Operating systems Seagate Quantum Western Digital Maxtor Disk drives Intel Architecture Motorola RISC Computer Chips Contract manufacturers Selectron SCI Flextronics Jabil Celestica Chips HP Epson Printers IBM DEC Sperry Univac Wang • Source: Adaptation from Only the Paranoid Survive by Andrew Grove, 1996.

8. The ‘modular age’ – learning and knowledge Source: Sanchez and Mahoney, SMJ 1996

9. ARCHITECTURAL PROPRIETARINESS OPEN CLOSED ARCHITECTURAL STRUCTURE Minicomputer industry Niche strategy, sophisticated users, in- house development. Challenge from producers of complementary assets Open Source software (some) Strategic choice of key components and capabilities to keep the control of ‘supply chain’. INTEGRAL 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) Networking industries Incumbents maintain competitive position if innovative processes are fast and incremental in nature MODULAR

10. The Dynamics of Product and Industry Structure Source: Fine and Whitney (2003)

11. 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) • Platform-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

12. The Dynamics of Product and Industry Structure • What makes possible the transition (e.g. from modular to integral)? • Systemic knowledge which provide focus and closure to a range of specialists. • It is the evolution of such knowledge which drives –at least during the transition phase- the evolution of firms’ boundaries and industrial structure. • Besides knowledge, fundamental role played by key individuals who have broad and deep expertise about the whole system. • How do you train these sort of people within –IT-enabled- distributed supply chain? • Analysis of career paths …

13. Conclusions • Increasing disconnectedness between the dynamics of ‘products’ and the dynamics of ‘knowledge’ … • … which makes design & manufacturing activities even more critical then before. • Product-level expertise remains fundamental to develop system-level knowledge … • … which is required to manage cycles of integration and disintegration at both the product and industry-level. • Future analysis: from vertical integration to the integrated management of career paths.

14. Thanks!