Saïd Business School, University of Oxford
At a juncture when the outsourcing of modules has become a panacea for all sorts of problems in the car industry, it is worthwhile taking a sober look at what can, and cannot, be expected from it. Recently, both original equipment manufacturers (OEMs) and suppliers have been interested in capturing value from vertical dis-integration of a modular sort, but neither side appears to know fully what costs and gains are involved in pursuing a specific path to outsourcing modules. Baldwin and Clark (1997 , 2000) clearly laid out the 'power of modularity' using the US computer industry and its one-time, near-monopolist IBM as evidence. But in many other sectors where the industry structure has been more fragmented from the start, such as the car industry, there is a choice of paths to be taken in order to 'go modular'. Depending on the path chosen, as this chapter will show, technological know-how and capabilities end up being distributed quite differently between OEMs and suppliers. While the scope for choice of different paths is limited to an extent by the existing industry structure and initial conditions in organizational capabilities, much of it is in the hands of the companies involved in the supply chain. As Starr noted over three decades ago, 'turning to the modular approach produces a great deal of unplanned obsolescence' and 'the design and engineering costs of entering into such production configurations can be exceptionally high' (Starr 1965 : 139). The question is whether there is enough will power within leading car companies to incur this necessarily high set-up cost of going modular. This strategic choice, in turn, will determine the future of the industry structure, and in particular the power dynamics between the OEMs and suppliers. This chapter analyses how strategic considerations moderate the way product architecture affects organization architecture and vice versa.
The chapter is structured as follows. The first section provides a definition of modularity in product architecture and organization architecture. Three