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Citation: Burton, Nicholas (2015) When does the mirror get misted? How the rate of

component change and product complexity impact the mirroring hypothesis. In: DRUID15

Conference on the Relevance of Innovation, 15th - 17th June 2015, Rome, Italy.

URL:

This version was downloaded from Northumbria Research Link:

http://nrl.northumbria.ac.uk/25571/

Northumbria University has developed Northumbria Research Link (NRL) to enable users to access the University’s research output. Copyright © and moral rights for items on NRL are retained by the individual author(s) and/or other copyright owners. Single copies of full items can be reproduced, displayed or performed, and given to third parties in any format or medium for personal research or study, educational, or not-for-profit purposes without prior permission or charge, provided the authors, title and full bibliographic details are given, as well as a hyperlink and/or URL to the original metadata page. The content must not be changed in any way. Full items must not be sold commercially in any format or medium

without formal permission of the copyright holder. The full policy is available online:

http://nrl.northumbria.ac.uk/policies.html This document may differ from the final, published version of the research and has been made available online in accordance with publisher policies. To read and/or cite from the published version of the research, please visit the publisher’s website (a subscription may be required.) When does the mirror get misted? How the rate of component change and product complexity impact the mirroring hypothesis 1 Abstract The mirroring hypothesis –the assumed architectural mapping between firms’ strategic choices of product architecture and firm architecture, and between firms’ architectural choices and the industry structures – is a central theme within modularity theory. Empirical support for this hypothesis across numerous studies is significant, but mixed – suggesting the need to focus less upon whether the hypothesis holds and more upon the conditions under which it holds. As part of this shift in focus, within this research we utilize an industrial economics perspective to develop a stylised product architecture typology and hypothesise how the combined effects of product architecture type, product complexity and the rate of product component change may be associated with phases of mirroring or misting. Our framework helps to reconcile some existing mixed evidence and provides the foundation for further empirical research.

Keywords: product architecture; modularity; organisation structure; technological change; mirroring hypothesis, product complexity 2

INTRODUCTION

The coordination of complex product development has a long tradition (ie, Galbraith, 1977; Williamson, 1971) and more recently theorists within the modularity tradition have hinted at the potential benefits of a “mirror” between the structure of a product development firm and the technical product it designs (Henderson and Clark, 1990; Sanchez and Mahoney, 1996, Baldwin and Clark, 2000). At its heart, the mirroring hypothesis seeks to examine two important and pervasive relationships: the extent of an architectural mapping between firms’ strategic choices of product architecture and firm architecture – within-firm mirroring - and between firms’ architectural choices and industry structures – across-firm mirroring.

In a recent literature review of empirical studies concerning the mirroring hypothesis, Colfer and Baldwin (2010) find that the hypothesis received uniform support in 68% of ‘within-firm’ cases and 47% of ‘across-firm’ 1 cases, but found notable exceptions. These inconsistent findings concerning the mirroring of product and organization/industry architectures have led to calls for a more nuanced view of the mirroring hypothesis.

Fundamentally, the research needs to shift its attention away from continually revisiting the issue of whether the mirroring hypothesis holds, and instead develop an understanding of those conditions under which is holds versus those conditions under which it becomes ‘misted’. Some initial work that starts to investigate those factors that may limit the clear mapping across different levels suggested by the mirroring hypothesis has occurred in the air-conditioning and motor vehicle industries. Furlan, Cabiguso and Camuffo (2014) examine the across-firm mirroring hypothesis in the air-conditioning industry, and find that the ‘mirror’ becomes misted by high rates of product component change, with firms engaging in rich collaborative relationships, even where the underlying components had modular characteristics. Writing with Zirpoli, Cabigiuso and Camuffo (2013) in a study of the motor vehicle industry, suggest that the mirroring hypothesis may become misted as firms seek to integrate external sources of innovation into complex product development.

We develop similar ideas pertaining to the role of product complexity and incorporating the rate of component change we seek to build a theoretical explanation outlining the status of these two variables that may mist up the mirror in respect of organization architecture. In developing our theoretical arguments, we develop a 1 Colfer and Baldwin (2010) found uniform support for the within-firm mirroring hypothesis in 68% of studies, but 77% supportive when partial or mixed results were incorporated. Similarly, the across-firm mirroring hypothesis found uniform support in 47% of studies, but 74% when partial or mixed results were incorporated.





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understanding of product architecture types. To date, many conceptual contributions to the mirroring hypothesis discussion present architectures as perfectly modular or perfectly integral (ie Sanchez and Mahoney, 1996) – and yet few product architectures exhibit these ‘perfect’ characteristics. Thus we consider how these non-perfect architectural types – specifically hybrid product architectures – may mirror across different architectures.

By doing this, we believe this paper is the first to show how factors at both the product architecture and the underlying component level may influence the degree mirroring and misting. We also draw attention to the potential proxy measures for mirroring or misting used in the extant literature, and highlight the need for uniformity.

By further developing a contingent view of the mirroring hypothesis that helps uncover when mirroring or misting may emerge or even be beneficial, we highlight the need for managers to understand how these crucial factors may influence the trade-off between high levels of information-exchange to spur innovation and the possible ‘embedded coordination’ benefits of modular structures. This then extends to the industry architecture and fundamentally affects the nature of competition within different industry architectures. Our framework thus helps to reconcile some of the existing mixed evidence for the mirroring hypothesis and provides the foundation for further empirical research.

TYPOLOGY OF PRODUCT ARCHITECTURES

In any given product market, it is possible that a number of different architectures might be strategically feasible, each with different combinations of performance, quality or cost. A more complete understanding of how different product architectures emerge and then establish themselves, as well as how such architectures correspond to firm and industry architectures is therefore a critical issue for academic research. The concept of products having an architecture has been well-established in the literature (Ulrich, 1995; Sanchez and Mahoney, 1996; Baldwin and Clark, 2000). In defining product architecture, many theorists adopt a definition that encompasses the relationship between a product’s functions, its components and its interfaces; Sanchez and Mahoney (1996: 64) suggest that a product architecture is “ a way in which the total functions that a design is intended to achieve have been decomposed into specific functional components, and secondly, it

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components function together as a system – known as the interfaces”. Ulrich (1995) classified product architectures into two ‘ideal types’ – integral or modular. At one end of a continuum, an integral architecture is where the components, interfaces and their relationship is complex, interdependent and non-standardised. At the other end of the continuum, a modular architecture has relationships between components and interfaces that are simple, independent and standardised.

The integrated - modular continuum Modularity theory is based upon the notion of the decomposability of a system into subsystems or

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in such a way that their interdependence with each other is either substantially reduced or fully removed. The characteristics of product architectures, therefore, often differ fundamentally in the degree to which

–  –  –

independence/interdependence depends upon the extent to which a change in the design of one component requires design changes in other components.

Product architectures with significant integrated characteristics are often created to serve a single use or product market (Sanchez, 2008), but often the complexity and interdependence between components in such architectures often means that they cannot be easily adapted without redesigning the entire architecture or many other interdependent components (Ulrich, 1995). Often, an integrated product architecture is one that has been designed for strategic optimisation, such as maximum performance or lowest cost (Sanchez, 2008) resulting in significant interdependencies being ‘designed in’ to the architecture throughout an often sequential product development process (Baldwin and Clark, 2000). There is often, therefore, a trade-off for firms in deciding between architectural choices for product design: integrated architectures may offer performance or cost advantages in the product market, and they may often be instrumental in enabling firms to reap significant rents from investments in ‘specific' assets (Sanchez, 2008; Sanchez, Galvin and Bach, 2013).

However, it is often a decision to forego product variety and collaboration with other external firms that may 2 We will refer, in this paper, to components rather than modules.

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out’ (Schilling, 1998, 2002).

Modular product architectures are a design where components are loosely-coupled – interdependencies exist within components but not across or between components (Simon, 1962; Baldwin and Clark, 2000) - and such architectures can either emerge or be purposely developed through a process of specifying design rules (Baldwin and Clark, 2000, Sanchez, 2008). The design rules establish the ‘blueprint’ of the product architecture as well as the interface specifications between the architecture and its independent components.

The design rules can also determine which properties are ‘hidden’ within components and which are ‘visible’ to other components (Parnas, 1972). If the interface specifications between components are open and standardised in a product market and held constant for a period of time, modular product architectures may permit a large variety of components to ‘plug and play’ (Sanchez, 2008; Sanchez and Mahoney, 2013), such that they are often easily substitutable without compromising the interoperability of other components.

Modularisation often therefore creates ‘thin crossing points’ in the product architecture, breaking up interdependencies that may generate the potential to use market-based transactions without the need for extensive managerial control (Baldwin, 2008). Modular product architectures, therefore, can often provide a form of “embedded coordination” (Sanchez and Mahoney, 1996; Galvin and Morkel, 2001) that supports inparallel component development by loosely-coupled teams or even loosely-coupled organisations (Sanchez and Mahoney, 1996).

The open and closed continuum Product architectures may also be conceptualised along a continuum of being either open or closed (Shibata, Masaharu and Fumio, 2005; Fujimoto, 2007; Sanchez, 2008,). A perfectly closed architecture is one that is not able to be used by other firms; it is proprietary and a firm may hide, encrypt, patent or copyright components and interface specifications (Sanchez, Galvin and Bach, 2013). When a product architecture is both closed and integrated, there is the potential for a firm to extract significant rents and to sponsor its architecture as a potential dominant design by investing in the creation of its own ‘externalities’ through pricing, marketing and branding (Sanchez, 2008; Schilling, 1998, 2002). However, a closed product architecture does not always exhibit integrated characteristics. It may also exhibit closed and modular

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interdependencies within firm boundaries. This process may involve strategically partitioning and decomposing the integrated architecture into modular components and ‘specialised’ (or ‘firm-specific’) interfaces (Schilling, 1998, Fine, Golany and Naseraldin, 2005). Closed and modular product architectures, therefore, may offer a firm the potential to benefit from both rent appropriation, as well as increase product variety through mixing and matching firm-specific or self-manufactured modular components.



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