1. 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):
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

2. 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

3. Nearly Decomposable Systems01
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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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