Modularity, Flexibility, and Knowledge Management in Product and Organization Design By Ron Sanchez and Joseph Mahoney SMJ (winter 1996) special issue: Knowledge and the Firm

Overview Investigates interrelationships among: ◦Product design ◦Organization design ◦Processes for learning and managing knowledge ◦Competitive strategy Uses the principles of nearly decomposable systems (Simon 1962) ◦In particular, using standardized component interfaces

Overview Organizations design products ◦But I can also be argued that products design organizations  Specific product designs implicitly select coordination tasks  Coordination tasks largely determine the feasible organization designs for developing and producing those products First in modularity literature to suggest the linkage between product design and organization design ◦“mirroring hypothesis”

Nearly Decomposable Systems Complex System ◦Consists of parts that interact and are interdependent to some degree ◦Hierarchy is an organizing principle  Structural conception of hierarchy, as opposed to authority hierarchy  Recursive structure: interrelated subsystems that in turn have their own subsystems Nearly Decomposable Systems ◦Interactions among subsystems are weak (but not trivial); interactions within subsystems are strong

Nearly Decomposable Systems Impacts of environmental disturbances localized within specific subsystems ◦Increases survivability and adaptability ◦Thus Simon argues through evolutionary process most complex systems are nearly decomposable

Modularity in Product & Org Design Degree of coupling: ◦The extent to which a change in the design of one component requires compensating design change in the design of other components Modularity: ◦A special form of design which intentionally creates a high degree of independence or ‘loose coupling’ between component designs ◦By standardizing component interface specifications

Linkage between Product and Org Designs Tightly coupled product system ◦Change within one component likely requires compensating changes in other components ◦Development process consequently requires intensive managerial coordination ◦Thus, requires tightly coupled organization structure  Coordinated by managerial authority hierarchy Loosely coupled product system ◦Similar logic: requires loosely coupled organization structure

Models for Managing Knowledge and Learning in Product Creation Innovation During Product Development Involves: ◦1.) creating new information about the functions components can perform – learning about components per se ◦2.) creating new information about the ways components interact and can be configured – learning about product architecture Four odes of learning – radical, architectural, modular, incremental

Models for Managing Knowledge and Learning in Product Creation 3 Models of Development Processes ◦Sequential  Follows a sequential staging  Information structure of component interface specification is the output of the process ◦ An evolving information structure ◦Overlapping  Some overlapping  Interface still an evolving information structure ◦Modular  Complete specification of interface before development

Models for Managing Knowledge and Learning in Product Creation Sequential / Overlapping ◦Evolving information structure  Requires recursive information flow  Organizationally, requires managerial adjudication of many technical and financial issues ◦ Requires authority hierarchy Modular ◦Stable information structure  Concurrent development possible without overt managerial intervention  Coordination embedded in the interface specification

Conclusion Modular Development enables ◦Improved component-level learning  By insulating disruptions by unexpected changes elsewhere ◦Improved architectural-level learning  By preventing compartmentalization of organization ◦Strategic flexibility  Standardized interface allows a range of variations at component level (so long as they conform to the specifications) ◦ Essentially, range of variations creates option value

Contributions Linking product design, organization design, and competitive strategy ◦Illustrate the linking mechanisms between product design, design process, and organization design Explicitly investigates knowledge specialization beyond content into process