Session #7: Real Options UIUC BA545_Fall 2019 Sanchez, R. and J. T. Mahoney (1996). Modularity, flexibility, and knowledge management in product and organization design. Strategic Management Journal, 17 (Winter): 63-76. Session #7: Real Options Sanchez, Ron The University of Western Australia Now Retired Professor Emeritus Department of Strategy and Innovation Copenhagen Business School Joseph T. Mahoney Professor Caterpillar Chair of Business Department of Business Administration University of Illinois at Urbana-Champaign Professor Joseph T. Mahoney Presented by: Fang-Yi Lo

Overview 01 Managing knowledge in product design to improve flexibility in a changing environment. Modularity: “a nearly independent system of ‘loosely coupled’ components.” Standardized component interfaces governing outputs Modularity in product designs becomes an important strategy for achieving modularity in organization designs Introduction

Nearly Decomposable Systems 01 A system in which interactions among subsystems are weak – Simon(1962) Multidivisional firm are intentionally designed to require low levels of coordination “little or no overt exercise of managerial authority” Quasi-independent divisions as loosely coupled subsystems Environmental disturbances can be localized Decomposed product designs Decomposed organization designs Introduction

02 Modular Product  Organization Designs Traditional Constrained optimization Highly integrated Tightly coupled component design Intensive managerial coordination Tightly coupled organization structure Managerial authority hierarchy Alternative (New) Modular product architecture Standardized component interfaces Loosely coupled component design Effective coordination with less Managerial intervention Loosely coupled organization structure Output control Strategic Flexibility Modularity in Product and Organization Designs

02 Modular Design Products Form of modular product design Aircrafts Common wing, nose and tail component Automobiles Engine components, interior parts Consumer Electronics Sony Walkman Household Appliances Motors, wiring harnesses Personal Computers Hard disk, chips Software Modules of codes Test Instruments Philips Power Tools Usage of common components Modularity in Product and Organization Designs

03 1) Modes of learning in product creation processes Learning about Component Functions and Designs Moderate Moderate Significant Incremental Learning at the component level Modular learning at the component level Architectural Learning Radical Learning at Architectural and Component levels Models for managing knowledge and learning in product creation Learning about Component Interactions and Configurations Significant

Models for managing knowledge and learning in product creation 2) Traditional sequential development process 03 Models for managing knowledge and learning in product creation Lose information as development process from one stage to the next Hence tightly coupled organization structure Require managerial adjudication

Models for managing knowledge and learning in product creation 3) Overlapping problem solving process 03 Models for managing knowledge and learning in product creation Possible greater sharing of current info Has an evolving info structure Improves information flow, allowing some inter-related component development to proceed more quickly Requires intensive managerial coordination for incompletely specified tasks

Models for managing knowledge and learning in product creation 4) Modular Product Design Process 03 Models for managing knowledge and learning in product creation Creates complete info structure Learning at the modular or incremental levels A firm must have advanced “Architectural Knowledge” Intentionally separated Improved component-level learning Loosely coupled

Conclusions 04 This paper suggests that modular product architecture creates Flexible product designs Enables the design of loosely coupled, flexible, “Modular” organization structures Reduces need for exercise of managerial authority Gives greater flexibility to undertake large number of projects Discontinuities in product technology Inter-organizational connectivity among broadly de-integrating organization The paper expects to extend the concept of modularity to designing marketing, distribution, and other processes as well to help attain flexibilities Conclusions