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Journal of International Business Studies (2007) 38, 84–106

& 2007 Academy of International Business All rights reserved 0047-2506 $30.00 www.jibs.net

Antecedents and outcomes of modular production in the Brazilian automobile industry: a grounded theory approach Masaaki Kotabe1, Ronaldo Parente2 and Janet Y Murray3 1 Temple University, The Institute of Global Management Studies, Philadelphia, USA; 2 Rutgers University, School of Business Camden; 3 College of Business Administration, University of Missouri-St Louis, St Louis, USA

Correspondence: M Kotabe, The Washburn Chair of International Business and Marketing, Temple University, The Institute of Global Management Studies, 349 Speakman Hall (006-00), Philadelphia, PA 19122, USA. Tel: þ 1 215 204 7704; Fax: þ 1 215 204 8029; E-mail: [email protected]

Received: 20 April 2004 Revised: 14 August 2006 Accepted: 14 September 2006 Online publication date: 3 January 2007

Abstract Our paper focuses on how foreign automobile manufacturers in Brazil have implemented and benefited from strategic modularization. Based on our case studies and in-depth interviews, we developed a theoretical framework to examine the antecedents and outcomes of strategic modularization. Our theoretical framework suggests that strategic modularization may help improve a firm’s positional advantage by reducing the cost of managing tacit knowledge. In addition, the adoption of strategic modularization influences the nature of relationships with major suppliers, further blurring the boundaries of the firm. Journal of International Business Studies (2007) 38, 84–106. doi:10.1057/palgrave.jibs.8400244 Keywords: outsourcing; modularization; modular production; tacit knowledge; supply chain management; global sourcing

Introduction In an era of globalization characterized by accelerated technological change and complexity, products are becoming more intricate, while powerful customers are demanding a much wider range of products at lower prices with immediate availability. Indeed, many technology-based firms (e.g., Microsoft, General Motors, Swatch, Motorola, and Sun Microsystems) operating in dynamic environments have embraced modularization as a competitive strategy that helps them respond to customers’ heterogeneous demands, manage complexity, gain flexibility, and share risk and investments with partners in their supply chain. By utilizing modular systems, firms are integrating more state-of-the-art technology in products, such as computer chips in cars, home appliances, and communication devices that can perform a diverse set of functions. According to Langlois (2000), modularity is a general set of principles for managing complexity. Sako (2003) defined modules in the context of the auto industry as a physically proximate ‘chunk’ of components, which can be assembled into the vehicle as one unit where common interfaces and standardization of specifications are not mandatory, and components are the building blocks of modules. Therefore, modules are subassemblies that reduce complexity and time taken in the plant for assembly. The concept of modularization has gained increased attention, because it has been linked more specifically to the design and/or

Antecedents and outcomes of modular production

Masaaki Kotabe et al

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assembly strategies of large multinationals and as an approach for introducing successful new products. This study examines modularization as a competitive strategy in the manufacturing industry. The emergence of modularization is being accompanied by new knowledge management strategies (Grant, 1996), which allow firms to develop products more effectively through flexible, ‘modular’ organization structures (Sanchez and Mahoney, 1996). Thus, modularization goes beyond the idea of subassembly delivery practiced in lean manufacturing with integral product architecture popularized by Japanese automakers in the 1980s. Lean production is characterized by highlevel flexibility to coordinate component and subassembly development between an automaker and its suppliers after a project gets under way. On the other hand, a modular approach emphasizes development of the ability to make selection of needed components and subassemblies before a project starts. In other words, modularization does not require much design adjustment among components and subassemblies in order to achieve the product functions that customers want, and success comes from the ability to cautiously select predesigned components (Fujimoto and Nobeoka, 2004). In this study, we define strategic modularization (or simply modularization) as a strategic option that goes beyond the physical and functional dimensions of the module that includes an organizational and managerial system linking module integrators and module suppliers to reduce the cost of managing tacit knowledge in the assembly process. Thus, modularization helps assemblers of final products remain competitive by providing a structured approach to dealing with complexity, technology, and information flow (O’Grady, 1999; Graziadio and Zilbovicius, 2003). Consequently, these firms are able to satisfy increasing customer demands by learning and adapting quickly, responding flexibly, transferring knowledge across firm boundaries effectively, and reducing the cost of managing tacit knowledge significantly (Doran, 2003; Lara et al., 2005). Thus, firms that adopt strategic modularization should realize a higher firm performance. Although strategic modularization’s benefits are many, there may also be some potential negative implications when a localized view of assembly operations is taken, because the modular assembly will always take an extra number of assembly operations. In addition, firms may experience a reduction in product

distinctiveness.1 In our study, we examined strategic modularization as the degree to which firms implement the concept of modularity at both the product and process levels throughout the supply chain. The purpose of this paper is to examine the antecedents of modularization and its implications for firm performance at the firm level in the global automotive industry of Brazil. Although much research has been conducted on modularization in the personal computer and automobile industry, most of this research has focused on examining specific modules. Fixson et al. (2005) examine the vehicle cockpit to explore the interactions between modularity and outsourcing. Others examine modular technological upgrading in the supply of interior systems (Lara et al., 2005). However, to our knowledge, research has yet to explore the implications of modularization in the context of global supply chain strategy. Thus, our primary contribution is to uncover those factors that contribute to successful strategic modularization in the manufacturing industry, and understand how the implementation of strategic modularization leads to the firm strategic positional advantage. The underlying logic of our research is grounded theory building (i.e., elaboration of constructs and propositions), which involves inducting insights from field-based, interview and case data. Therefore, it is important to explore a wide range of approaches and perspectives in the context of implementing modularization. Following Eisenhardt’s (1989) theory-building approach, we collected data using case studies and interviews with executives and developed a ‘grounded’ theory of strategic modularization. We chose this methodology because there is limited extant theory examining the rarely explored phenomenon of strategic modularization. In such situations, this approach is useful in generating novel and accurate insights into the phenomenon under study (Glaser and Strauss, 1967; Brown and Eisenhardt, 1997). In addition, grounded theory building is invaluable when conducting theoretical research, as this qualitative approach allows the data to communicate, through rigorous analysis and coding of concepts conveyed in interviews (Yin, 1984; Strauss and Corbin, 1990). The setting is the automotive industry of Brazil,2 where our research focuses on a theoretical sampling for selecting useful cases from a specified population that have the potential to replicate or extend theory. This approach constrains extraneous

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variations and sharpens external validity (Eisenhardt, 1989). The automobile industry of Brazil was chosen as subjects of our study because it provided an excellent setting for various reasons. Brazil has an expanding local market, inexpensive labor costs, relatively weak bargaining power of labor unions, and access to other developing markets through the Mercosur (the Common Market of South America). All these are important contextual factors influencing the strategy of modularization. For our study, the unit of analysis is at the strategic business unit level; the data were collected at foreign automakers’ manufacturing facilities in Brazil where modularization has been introduced. In other words, we validated our theoretical model through qualitative data collected from firms in the automobile industry that have adopted modularization in their production activities.

Conceptual background and literature review Many manufacturing industries, including the auto industry, have been moving toward a new method of production: modular assembly. Our literature review on modularity in the last decade indicates the importance of this production method in several industries. Recently, several researchers have studied modularity in many different fields, ranging from technological design (Baldwin and Clark, 1997, 2000; Schilling, 2000) to industrial economics (Langlois, 1992, 2000) and organization design (Garud and Kumaraswamy, 1995; Sanchez and Mahoney, 1996; Lei et al., 1996). In addition, researchers have conducted several case studies describing the application of modularization in various industries, such as automobiles (Cusumano and Nobeoka, 1998), computers (Baldwin and Clark, 1997), software (Meyer and Seliger, 1998), and air cargo (Hoogeweegen et al., 1999). Some industry-specific empirical research has examined the determinants of modularization in the home appliance industry (Worren et al., 2002) and the impact of technological change on the formation of loosely coupled organizational forms (Schilling and Vasco, 2000). Our fieldwork indicated that one major problem with extensive outsourcing3 is that the cost of managing the tacit knowledge residing in the product interfaces may outweigh the benefits from outsourcing. In order to illustrate the importance of the tacit knowledge component in supply chain management and outsourcing, let us look at a hypothetical example of an automaker designing


and implementing an outsourcing strategy for its cooling system. The automaker designs all the technical specifications for the system and publishes the blueprints on its corporate online procurement system web page. Suppliers will determine whether they can comply with the specifications, and send in their bids. The automaker then chooses and contracts with several different suppliers for the components. Initially, this seems like a very efficient system, where all the information is transferred to a firm’s suppliers, and each supplier is allowed to apply its own production capabilities and methods as long as it meets the assembler’s specifications. At the final stage, the automaker receives the components and assembles them together to make the cooling system. After the automaker has installed the cooling system in the cars, in some instances problems may start to develop, thus, affecting the relative performance and functionality of the system. In this case, one may assume that the automaker’s engineers had failed to completely understand and fully specify all the interactions between the components during the design phase. In addition, as different suppliers are responsible for producing the various components, they would not have communicated with one another. Although all the individual components have met the automaker’s respective design specifications, they may not work properly together. Under certain environmental conditions, the materials used in different components may perform differently because of their physical attributes and characteristics, thus, causing some leak to occur. The inability of the automaker and its different suppliers’ network to integrate or transfer tacit knowledge through available communication and coordination mechanisms can result in a costly and unsuccessful outsourcing strategy. The shift from traditional outsourcing to a more sophisticated modular production strategy is based on an automaker’s and its suppliers’ mutual experiential learning over time. Initially, outsourcing increased because the automaker believed/ assumed that certain production tasks were divisible, and therefore, subjected to outsourcing. It failed to fully account for the communication and coordination problems that would arise from the inability to transfer tacit knowledge to its suppliers. Over time, the automaker learned that there were some components that required quite a bit of modification in-house in order for them to work in unison as a ‘module’. Thus, the automaker began



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MODERATORS MARKET-CONTEXT FACTORS •

Customer Requirements (P1)

•

Wage Differentials (P2)

•

Labor Unions (P3)

•

Co-location (P8)

•

Degree of Media Naturalness (P9)

STRATEGIC MODULARIZATION

STRATEGIC POSITIONAL ADVANTAGE (P7)

FIRM-SPECIFIC FACTORS

Figure 1

•

Technology Transfer Capabilities (P4)

•

Entrepreneurial Strategic Intent (P5)

•

Perceived Operational Risk (P6)

Antecedents and moderating effects of strategic modularization on strategic positional advantage.

to learn the hidden/tacit interactive nature of those components in the module. Realizing that, the next stage is to transfer a whole module production to a capable supplier who would have to handle the interactive nature of the components, prior to delivering to the automaker the module that works in a ‘plug and play’ fashion. Therefore, modularization allows for the automaker to isolate tacit knowledge at the supplier level. A solution would be to integrate all the tacit knowledge within independent modules that comply with a standard interface designed by the assembler (module integrator) in conjunction with its suppliers (module providers). For example, the automaker would assign the whole cooling system development to an independent supplier, which will handle radiator, hoses and steel clamps to make sure that the cooling system will work properly as a module. In this case, the design of a modular cooling system will contain all the necessary information required to produce each module at the supplier level, by integrating the tacit knowledge involved in each module. Therefore, the implementation of the three dimensions of strategic modularization – tacit knowledge integration, supply chain integration, and modular product architecture – should prove superior to outsourcing, although it is also primarily driven by lower labor cost. Extant literature shows that modularity has been defined in different ways, and it has been examined in different contexts. For instance, several researchers (Alexander, 1964; Clark, 1985; Langlois, 2000) have stated that modularity refers to the degree to which the system is in fact decomposable into modules, and to which the interfaces among

modules are fixed and invariant. Langlois (2000) simply defines modularity as a general set of principles for managing complexity. Previous research has examined the advantages of modular product design, such as its impact on the production configuration options available to firms and their customers (Langlois, 1992; Garud and Kumaraswamy, 1995; Sanchez, 1995; Sanchez and Mahoney, 1996; Baldwin and Clark, 1997). Other researchers have studied the price effects and market segmentation opportunities of modularity (Bryan and Clark, 1973; Wilson et al., 1990). More recently, we have observed that organizations increasingly adopt modular production in such a way that a strategic organizational arrangement for simultaneously utilizing modular product platforms and modular process architectures4 as the key enablers of strategic flexibility is put in place (Sanchez, 1995).5 According to Worren et al. (2002), modular product and process architecture are important sources of strategic flexibility for firms facing a dynamic market environment, because both are prerequisites for efficient mass customization and cycle time reduction. In our conceptualization, strategic modularization includes product and process innovations, and shares all the benefits associated with lean principles and outsourcing by eliminating waste and inventory through the value chain. We realized the need for a series of in-depth interviews and case studies to help better understand strategic modularization, its driving forces, and its performance implications. Our fieldwork indicates that particular firm characteristics, local conditions, and the operating environment in Brazil have accelerated the convergence of




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modularity and supply chain management, leading to the adoption of modular strategies in the automobile industry. Based on our case studies and fieldwork, and following the guidelines proposed by Eisenhardt (1989) for building theories from case studies, we developed a theoretical framework (see Figure 1) on the antecedents and outcomes of strategic modularization. Data collected from our case studies and fieldwork provided justifications for our proposition development.

started operations with buses and trucks in its modular plant in Resende; Mercedes Benz is now assembling more affordable cars in Brazil; Toyota has started assembling cars after focusing on only one kind of Jeep for 30 years; and GM and Ford have recently opened modular plants. The existence of so many new factories and investments in Brazil reflects its importance for its local market potential and as an export platform to other international markets.

Methods

Data collection Our qualitative data were collected through secondary sources, observations during plant visits, and – most importantly – in-depth interviews with managers and executives of four major automakers in Brazil (i.e., General Motors, Volkswagen, Ford, and DaimlerChrysler). We conducted semi-structured interviews with open-ended questions with plant managers, manufacturing supervisors, supply chain managers, and purchasing managers working in these four foreign automobile manufacturers and their on-site suppliers in Brazil. As mentioned earlier, the purpose of our study was theory construction (i.e., elaboration of constructs and propositions). Consequently, it was important to explore a wide range of approaches and perspectives in the context of supply chain management, production, and design of cars during our qualitative data collection. Therefore, we made sure that we collected data relating to firm strategy from manufacturing managers of several automakers adopting innovative modular arrangements in the Brazilian market. Of the 34 executives interviewed, 19 were at the operational level as either plant managers or manufacturing supervisors from Ford (Sao Bernardo do Campo, Saõ Paulo), DaimlerChrysler (Sao Bernardo do Campo, Saõ Paulo), General Motors (Gravatai, Rio Grande do Sul), and Volkswagen (Resende, Rio de Janeiro). Ten of the respondents worked for six suppliers (i.e., Dana Corporation, Eaton Corporation, Johnson Controls, Lear Corporation, Valeo SA, and Visteon Automotive Systems) operating inside these automakers as module suppliers. In addition, we interviewed one professor at the University of Saõ Paulo who is currently studying the recent developments of the automobile industry in Brazil. Four of those we interviewed were executives at Anfavea and Sindipecas. A total of four automakers (i.e., Volkswagen, Ford, DaimlerChrysler, and General Motors) were included in the sample, and multiple individuals from each automaker and from suppliers were

Research context and design Our multiple case research design allows cases to be treated as a series of independent experiments in order to confirm or disconfirm our theoretical insights emerging from our qualitative data (Yin, 1984; Eisenhardt, 1989; Brown and Eisenhardt, 1997). The automobile industry in Brazil provides an excellent environment in which to examine the antecedents and outcomes of strategic modularization in the design and production of automobiles. As Brazil is the only country that hosts all the global car manufacturers in the world, automakers have identified it as an environment offering the right conditions for the applications of alternative and innovative methods of production. A combination of government incentives and fast-growing market demand has made Brazil the testing ground for automakers to implement their modularization strategies, mostly in greenfield investments but also in old traditional plants. Global automakers and suppliers – from the United States, Europe, and Japan – setting up factories in Brazil have emphasized the concept of modularity in the design and production of their cars since 1996, when Volkswagen opened its truck-manufacturing facility. Since then, automakers and suppliers have implemented modularization to various degrees to gain competitive advantage in this dynamic and uncertain market. For most of the last two decades, the auto industry in Brazil consisted of only eight companies (i.e., Ford, Fiat, General Motors, Mercedes-Benz, Toyota, Scania, Volkswagen, and Volvo), assembling cars, buses, and trucks. Recently, the Brazilian auto industry has received investments from new entrants, such as Honda, Renault, Peugeot, Kia, Audi, Chrysler, Navi Star, Nissan, Rover, and Iveco. In addition, early entrants have opened or are building new factories. Some have even changed their core business. For example, Volkswagen has




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interviewed. The automakers interviewed were from different countries, including one Brazilian, two European, and two American.6 Therefore, our sample reflects a diverse set of companies within the automotive industry regarding the influences these business units may receive from their parent companies. Therefore, our qualitative data, in conjunction with our literature review, secondary data sources, and developed case studies, are well suited for obtaining a rich array of ideas and insights regarding modular production and the antecedents and outcomes of strategic modularization in the automobile industry. We followed a pre-designed interview protocol for our interviews. First, we provided interviewees with a brief description of our research project, along with definitions of the key constructs. Then we asked each interviewee questions relating to the following:7 meaning of the terms modularity and modularization strategy; perceptions regarding competition, future market trends, and customer demands; specific operational arrangements that a firm adopting modularization uses; factors that foster or discourage the adoption of modularization; labor and financial market issues affecting the modularization decision; the positive and negative implications of modularization; the characteristics of the buyer–supplier contracts and relationships; the level of responsibility transfer to suppliers; specific knowledge-management tools used in the modularization arrangement; specific types of organizational arrangement dealing with collocation and codesign; issues related to knowledge management; issues related to the capital investments for modular production. The personal interviews lasted for an average of 60 min and were recorded, unless requested otherwise. All interviews were followed by a tour of the production facilities. The interviews were conducted between 21 October and 4 November 2001 in the states of Saõ Paulo, Rio de Janeiro, Rio Grande do Sul, and Ceara´ in Brazil.

Data analysis Following typical analysis in inductive research, we analyzed our data by developing four individual

case studies and cross-comparing them to illustrate how these automakers in Brazil have implemented strategic modularization in their plants, and to build our conceptual framework. We transcribed all interview responses into a database organized by individual cases, by keeping track of the questions asked of each respondent. Using data from the interviews and the secondary sources in an interactive process, we prepared our case studies. We continuously revisited our data as important insights about modularization emerged in each case, but leaving further analysis until we had finished the write-ups. We kept going back to our original responses provided during the interview process to make sure that our analysis continued to be consistent with the data. As a result, the first case, DaimlerChrysler’s truck plant in Saõ Bernardo do Campo, illustrates a traditional lean manufacturing plant and serves as a base for comparisons with the other three plants adopting different levels of modularization (i.e., GM, VW, and Ford). The three case studies (GM, VW, and Ford) focus on how each of these firms has gradually shifted from their current integral product architecture8 to strategic modularization by integrating modularity, process improvements, and supply chain management designed to reduce the hidden cost of managing tacit knowledge. This shift took place from one subassembly to another over a few years. Table 1 presents the four cases studies for which we have included information regarding the company’s product line, production strategy, plant activities, and the outcome of the production strategy. After completion of the case studies, we applied a cross-case analysis as suggested by Miles and Huberman (1984) and Eisenhardt (1989). We started our analysis with no prior hypotheses and compared the cases by indexing our responses and creating tables that helped us search for similarities and differences. Similar to Brown and Eisenhardt (1997), this iterative process helped us develop the emerging constructs and theoretical insights that follow in the next section.

Theoretical insights and research propositions Our theoretical framework suggests that strategic modularization is driven by firm-level and marketcontext-level factors. Our review of the literature and fieldwork provided the background for the development of research propositions. We propose that the degree of modularization is associated with a firm’s positional advantage in a competitive




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Table 1

Case studiesa

Name of company

Product line

Type of production strategy

Description of sourcing/plant/production strategies

DaimlerChrysler assembly plant, Sao Bernardo do Campo, Saõ Paulo

Mercedes truck

Traditional lean manufacturing

K

K

K

K

Ford Truck assembly plant, Sao Bernardo do Campo, Saõ Paulo

Four families of trucks, with 216 different configurations in the same line

Strategic modularization

K

K

K

K

K


A traditional manufacturing assembly plant Has implemented lean principles to improve productivity and competitiveness Adapting to a pull manufacturing approach, the plant currently uses a ‘one-piece flow’ system, where only one component/part is available at the assembly line at a time. This process guarantees that each operator works exactly according to the production schedule, and helps keep inventory levels low Using a system of subassembly cells together with what they call ‘inventory buffers’, which hold components and parts for no more than a half work shift Adopts modularization to a greater extent than DaimlerChrysler, but not to the same extent as VW and GM in terms of supply chain integration A high level of integration with its suppliers Does not have its major suppliers located in the same factory campus Contracted out to TNT the assembly of 90 modules, which are produced in a building that uses 11 manufacturing cells and sits right beside the Ford plant. Ford still controls the purchase of the components that are delivered to TNT; TNT then is responsible for assembly of the modules and sequence delivery to the line through a system of line-feed carts that run parallel to the assembly line and which carry all the modules and components needed along the assembly line There is a major module being fully outsourced to a module provider: it is the whole cabin, which is now produced by Usipark in a plant located 280 kilometers from Ford, and sequence-delivered to the plant. Synchronization between Usipark and Ford’s production is accomplished with an on-line system, where Usipark can actually follow Ford’s production schedule in

Outcome

Reducing the size of the final assembly line as well as reducing inventory levels and raising productivity

K

K

The limitations to a fully integrated supply chain at Ford were the physical limitations Respondents at Ford and DaimlerChrysler stated that their results would have been even better if they could have brought suppliers to build their facilities within their plant campus and to work in close integration



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Table 1 Continued Name of company

Product line

Type of production strategy

Description of sourcing/plant/production strategies

K

Volkswagen Truck Assembly Plant, Resende, Rio de Janeiro

Trucks and buses

A system of strategic modularization called ‘modular consortium,’ where they literally brought the suppliers inside the factory

K

K

General Motors Blue Macaw Plant, Gravatai, Rio Grade do Sul

Celta model

A system of strategic modularization called ‘modular condominium’

K

K

K

K

real time. The entire inventory was in transit There is only one supplier located inside the plant: Atlas-Copco is responsible for all torque application The concept of extended enterprise is firmly in place: all the interactions between each link of the production and supply chain occur within the plant, where VW has been able to build a one-plant culture where all employees (from VW and its suppliers) dress in the same uniform, eat in the same cafeteria, and are paid the same wages for the same function VW’s production is divided into seven areas, each operated by a module provider. The module providers in the VW plant are responsible for the actual assembly of the modules, leaving to VW only the final quality inspection and the coordination of production schedule. VW built and owns the plant, but the seven module providers have to pay for their own machinery and installations inside the factory

GM retains the actual final assembly of the modules Sixteen module providers are located inside the GM factory campus, but not necessarily under the same roof; another module provider is located nearby, in the area surrounding the plant Lean objectives such as inventory reduction, low cost, high quality, and effective communication are all visible in the GM plant; the responsibility for each module production and sequence delivery is completely transferred to the suppliers A high level of integration in the supply chain

Outcome

The modular consortium business model has proven to be very efficient so far, and it is serving as a model for other automakers; just as in lean production, VW’s goals are to reduce costs, increase quality, reduce inventory, and enhance productivity, but most of the responsibilities were transferred to suppliers. VW seems to have achieved an effective integration, where it retains control over the final quality approval and the marketing, and coordinates the aggregation of value in each step of the supply chain This business model allows GM and its module providers to leverage individual competences in order to reduce costs and increase profitability

a

The order in which cases are presented does not necessarily reflect their degree of modularization.




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environment. In addition, we propose that the relationship between modularization and performance is moderated by two important factors: physical proximity and the degree of media naturalness.

Market context factors Changing customer needs and heterogeneity Increasing global competition and new technological developments are allowing customers to pressure automakers to customize products at mass-production prices. Moreover, today’s changing business environment is characterized by lower customerswitching costs. Therefore, managers must address individual customers’ needs by offering customized products, with the increased production costs associated with offering customized product offset by efficient production strategies. Mr. Luca, the plant manager at Volkswagen, emphasized the importance of satisfying and responding to individual customer’s needs quickly. He stated: Here at VW we developed a modular consortium that gave us the flexibility to address every individual customer. We build trucks, and every one of our customers has very specific needs for their trucks, y some are in construction, y others in transportation, and so forth. Our modular consortium allows us to effectively build customized models simultaneously in the same line y and at lower cost than our competitors.

We found in our interviews that the traditional push manufacturing system was being replaced by an advanced ‘pull manufacturing system’,9 where the continued evolution of outsourcing strategies and lean production systems was being implemented in conjunction with the concept of modularity based on a new way of making things. Managers interviewed in Brazil suggested that an organization adopting a high degree of strategic modularization should be able to create value for its customers by better meeting their requirements. To quote Mr. Rosetti, the manufacturing supervisor at Ford: Logistics is the most important thing to us here at Ford. It is our way to build our reputation by delivering quality products on time. Our new modular system of production allows us to build 216 different models of trucks in the same production line without interrupting production. Our system involves a third party responsible for all the logistics and for coordinating suppliers’ delivery of modules and components.

As our interview findings indicate, the firm’s competitive advantage seems to be linked to decisions


regarding how the firm arranges its methods of production and supply chain. In turn, these decisions require that the firm develop capabilities on how to manage its supplier network. One Ford executive (Mr. Moraes, corporate logistics), when describing the connection between production and the importance of their customers, said: Today, competition in our market for trucks is based on being able to carry a low cost of production and satisfying individual customer’s needs. Our customers have high expectations for our ability to customize, for quality, and for time delivery because of the nature of our products. This puts a lot of pressure not only on logistics, but also on our whole team to become more efficient and to meet customer expectations. I believe our new plant concepts have given us these capabilities.

In general, our respondents stressed that the need to address individual customers’ demands and reduce response time has pressured managers to develop strategies that help build capabilities in meeting increasing customer requirements, by producing customized products at mass-production costs. Our findings indicate that strategic modularization has played an important role in the Brazilian automobile industry in building this competitive capability. We conclude from our interviews that, at least in part, the degree to which automakers have adopted strategic modularization in Brazil was determined by the competitive pressure to meet customer requirements. Our fieldwork confirms that information technology, the Internet, e-business, and mass customization are popular trends in the Brazilian automobile industry. Customers now have more heterogeneous demands for quality, variety, lower prices, and delivery time. We expect that the more heterogeneous the demands imposed on the firm, the more valuable will be the ability to deliver variety from flexible production configurations, such as modular production. Based on the above arguments, we suggest the following proposition: Proposition 1: The faster the customer needs change and the more heterogeneous those needs are in industries, the higher the extent of strategic modularization the assembler will likely adopt.

Labor unions and wage differentials Intense global competition has pressured assemblers to search constantly for mechanisms to reduce direct costs (e.g., labor costs) and indirect production costs (e.g., union negotiations). Outsourcing is one of the mechanisms that help firms improve



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their performance (Kotabe and Mol, 2004) through cost reduction and improved productivity by capitalizing on suppliers’ capabilities. One of the main reasons for assemblers to outsource is simply to reduce labor cost and the costs associated with complicated negotiations with strong unions. However, Kotabe and Mol (2004) found a negative curvilinear relationship between outsourcing and firm performance in a study of Dutch manufacturing firms with the census data. Their findings point toward some optimal level of outsourcing, beyond which scale diseconomies and operational inflexibility would outweigh the benefit. In other words, although there are potential benefits from outsourcing, there may be additional costs involved in sourcing from independent suppliers. One supplier at the VW plant emphasized that while labor cost can be an important factor in certain outsourcing decisions, its decision to go beyond outsourcing and adopt a modular approach to production allowed VW to achieve benefits beyond and above labor cost savings. Those benefits are primarily the time and money saved by having its suppliers handle complete module development. Mr. Luca, VW plant manager, confirmed to us that indeed the labor cost differentials between the OEM and suppliers was a factor in the decision to adopt modularization in VW’s Resende plant. But he also recognized that if labor costs were the only attraction to adopt modularization, then its long-term position would probably be untenable. As he noted:

Brazil, many automakers and suppliers use alternative ways to get around unionized workers, such as labor cooperatives, outsourcing, and subcontracting services to third parties. We believe that the high unemployment rate has weakened the bargaining power of the unions in Brazil, which is beyond the scope of this study. But in our interview with Mr. Cardoso, the plant manager at Ford, he indicated that there were many rounds of negotiations with the unions before Ford implemented its modular plant but, in the end, the unions did not create any major constraints to the implementation of the project. Although we believe the decision to adopt modularization should be justified also by longer-term factors other than labor costs, it seems clear to us that weak labor unions and labor-cost differentials were important factors behind the decision to adopt strategic modularization. Based on the above arguments, we suggest the following propositions:

There are great wage differentials between the automakers and the component suppliers in Brazily . We have unionized labor, while many of our suppliers do noty . We do business in a very competitive market, and therefore we are always looking for ways to cut costs wherever it is possibley . Transferring the industrialization of whole systems to our suppliers definitely reduced our cost structurey ., allowing for efficient coordination and communication in the supply chain.

Technology transfer capabilities The resource-based view of the firm presents a perspective of competition that portrays the value of a firm’s resources and capabilities as derived from a dynamic interplay of market forces (Wernerfelt, 1984; Barney, 1991). A firm’s response to environmental constraints through resource allocation, along with strategic formulation and implementation, leads to the development of capabilities that can give the firm competitive advantages (Kotabe and Swan, 1995; Allred, 2001; Parente and Gu, 2005). The technology acquisition decision is defined as the choice that firms face between internal technology development and external technology reliance (Noori, 1990). When a firm makes technology-related decisions, it must focus its attention on those capabilities that would give it distinct competitive advantage (Dierickx and Cool, 1989), either by developing and/or by acquiring those capabilities. Consequently, the firm’s ability

Strategic modularization involves transferring part of the responsibility for manufacturing to suppliers, which can be a problem in industries with strong labor unions, such as the UAW in the US automobile industry. Labor unions’ opposition to outsourcing is a major constraint faced by many assemblers (Sako and Warburton, 1999). Unions in Brazil are not very strong and organized, compared with those in the US. UAW members in the US consider supplier-built modules to be just another way of eliminating jobs (McClellan, 2000), and have strongly opposed any attempt at modularization. In

Proposition 2: The higher the assembler’s labor force wages relative to those of its suppliers, the higher the extent of strategic modularization the assembler will likely adopt. Proposition 3: The weaker the labor unions (or where the labor force is not unionized) suppliers have, the higher the extent of strategic modularization the assembler will likely adopt.

Firm-specific factors




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to transfer technology safely and securely between its development team and suppliers should enhance its ability to innovate. This argument is also supported by our interview findings. As mentioned by Mr. Luca: Our suppliers have more flexibility to innovate in the event of major demand shifts. They have a large customer base, and at the same time they learn from their other customers; we learn from them, and they learn from us. This enhances our overall ability to compete.

We asked whether VW was concerned with the possibility of losing competitiveness by diminishing process innovation capabilities. Mr. Luca responded: We develop a type of alliance with our suppliers based on a long-term relationship that lasts at least for the life of the product model. There is a high level of trust involved in our relationshipy . Our competitive advantage lies in our core process, which is the design and development of the cabin. In this business, the most important is not to transfer your competitive advantage to suppliers. In our case, the design of the cabin is crucial. That is why we only design the cabin. All the other modules we are better off letting suppliers to manufacture for us.

Our fieldwork indicated that GM has gone a step further by encouraging suppliers to set production near its assembly lines by designing the plant and the car in conjunction with its suppliers (Burt, 2001). In its modular plant, suppliers must take on more of the engineering and development responsibilities and get involved earlier in the design process. According to Mr. Tinoco, this allows GM to leverage its capabilities with its suppliers’ capabilities. For instance, many module suppliers have set up production facilities inside the GM plant, and have been involved in the project since the design phase. In this case, the ‘module integrator’ (i.e., GM) and the ‘module providers’ (i.e., suppliers) are working together from the project conception. To quote another executive from Ford, Mr. Jorge: In this industry, there is a lot of pressure from competition and from constantly evolving technologies, which requires us to build strong relationships with our suppliers. This is not an option for us. We leverage our capabilities through the codesign of components and systems, and we must be effective in managing and coordinating this flow and the transfer of information and technology back and forward in this relationship.

Both Mr. Jorge at Ford and Mr. Tinoco at GM stressed modularization as a way of simplifying production by giving more responsibility to suppliers regarding the design and engineering of the vehicle. Consequently, the module integrators


must identify and access their own and their suppliers’ capabilities to leverage them within a modular production system. Our fieldwork indicated that auto suppliers in Brazil are currently providing more and more complete systems or modules, and are also taking more of the engineering design and development. In GM, VW, and Ford, key module suppliers worked together with automakers to codesign modules and simplify production processes. Therefore, the capability to transfer technology with module suppliers implies a high level of integration that allows for an efficient definition of the module boundaries and facilitates the adoption of strategic modularization. Based on the above arguments, we suggest the following proposition: Proposition 4: The higher the levels of technology transfer capability, the higher the extent of strategic modularization the assembler will likely adopt.

Entrepreneurial strategic intent Researchers have conceptualized entrepreneurship in broad terms such as the process of pursuing opportunities (Worren et al., 2002). We adopted the narrower definition suggested by Lumpkin and Dess (1996), who define entrepreneurship as new entry, which can be accomplished by entering new or established markets with new or existing products. We asked respondents to indicate whether they had formally developed business plans to use new technologies and product models to enter new markets before they decided to adopt strategic modularization. As mentioned earlier, a firm adopting extensive outsourcing strategies will need to deal with high levels of tacit knowledge that can be better managed by adopting a modular approach to production, which allows for a more effective management of tacit knowledge. This can be a valuable decision when developing new products or entering new markets. Our fieldwork indicated that there was a linkage between the adoption of the modular production strategy and the firm’s articulated strategic intent for developing new products or entering new markets with customized products that better satisfy individual customer’s needs. Mr. Tinoco, GM’s general manager, mentioned that the Blue Macaw10 complex was the result of careful planning, and went on to say: Competition in our industry is about the best product designy . Several issues must be addressed when planning



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the introduction of new products in this industry. It is important to efficiently address customers’ needs as well as to build a responsive manufacturing processy . Our modular approach is a ‘launch-and-learn effort’, where GM launched it in Brazil and then planned to spread ity . GM has innovated in every aspect of production from design to distribution, and has also cut production costs significantly.

In addition, Mr Kramer, GM’s institutional relation manager, mentioned that: This project incorporates the latest technologies and knowledge that GM learned in terms of production from all their plants around the worldy . This is really a pioneering project for GM.

In summary, our interview findings indicated that firms’ innovation and entrepreneurial intent affect the extent of modularization. Based on the above arguments, we suggest the following proposition: Proposition 5: The higher the assembler’s degree of entrepreneurial strategic intent, the higher the extent of strategic modularization the assembler will likely adopt.

Perceived operational risk The rate of technological change and competitive intensity has pressured organizations to seek greater flexibility (Hitt et al., 1998; Eisenhardt and Brown, 1999; Schilling and Steensma, 2000), which is confirmed by our interview findings. Managers perceived their industry as very risky, and have expressed general concerns regarding the huge specific investments in buildings and machinery needed in the auto industry. Respondents at Ford, GM, and VW indicated that transferring more responsibilities to suppliers frees up resources, which allows the assemblers to focus on their core business while reducing their risk exposure. We found that GM, VW, and Ford incorporated into their modular production specific efforts toward shifting investment risk and sharing investment for specific assets with their suppliers. According to Mr. Jorge at Ford: The major differential in our modular production is that we have identified the suppliers with the right capabilities to produce our modules. Because these suppliers specialize in manufacturing a certain module, they can leverage their capabilities.

To quote another executive at GM: Our ‘systemistas’ [module suppliers] are able to quickly adapt and incorporate any major technological innovation that may affect the module, because they possess the right resources, capabilities, and scale economies.

In addition, Mr. Luca at VW noted: Here every one of our seven partners [module suppliers] made their own investment in machinery and equipment necessary to set up their production facility inside our factory. We provide only the space.

According to Schilling (2000), this line of reasoning is consistent with recent conventional wisdom regarding globalization and changing organizational forms. Researchers have speculated that the globalization of markets has encouraged organizational disaggregation. In response to environmental shift, organizations have begun to adopt strategic approaches that use network configurations to recombine organizational components quickly (Snow et al., 1992; Schilling, 2000). However, organizations may face great uncertainty about the appropriate course of action in response to environmental shifts (Stinchcombe, 1965; Hannan and Freeman, 1984; Greve, 1999). Therefore, certain organizations concentrate their strategic efforts on shifting risk and responsibility to the supplier level. In addition, international borders can no longer protect a firm from increased competition resulting from globalization and information technologies that are reducing tariffs, transportation, and communication costs. In dynamic markets where technology advances fast, both firms and their suppliers require greater flexibility to respond quickly to rapidly changing environmental demands and increasing competition. Hence automakers are increasingly searching for ways to diversify or minimize their risk exposure to sudden shift in environmental conditions. Mr Grossi, an engineer at Ford, stated that: Our suppliers have full responsibility for the quality of the modules they manufacture and for the sequenced delivery. Ford still holds accountability to the customer for any warranty problems that may occur in the vehicle, but we hold the supplier responsible for covering the warranty costs.

It seems that, as a consequence of increasing perceived operational risk of the assembler, not only at Ford, but also at GM and VW, suppliers have been taking drastically more responsibilities for quality, delivery, and innovation of their components and modules. In summary, our fieldwork and literature review seem to support the proposition that the degree of perceived risk puts pressure on the automakers to find strategic approaches that will allow them to reduce investments in specific assets (e.g., plant infrastructure and machinery), develop flexible organizational forms, and transfer more




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responsibilities such as production, quality, innovation, service, and warranty to their suppliers. Therefore, we expect that the increased perceived risk of operations in the Brazilian auto industry may be associated with the extent to which firms adopted strategic modularization. Based on the above arguments, we suggest the following proposition: Proposition 6: The higher the level of perceived operational risk, the higher the extent of strategic modularization the assembler will likely adopt.

Strategic positional advantage Our fieldwork and literature review indicated that strategic modularization is expected to help organizations achieve shorter product development cycles, speed technological change, improve product quality, and reduce costs. More importantly, we argue that modular production is also expected to integrate tacit knowledge at the module-supplier level. This helps reduce the cost associated with managing tacit knowledge, thus, improving a firm’s strategic positional advantage (Day and Wensley, 1988; Quinn, 1999; Lanctot and Swan, 2000). Our qualitative data findings indicate that the key to efficiency in strategic modularization is to develop operational and collaborative arrangements where major suppliers (module providers) invest in their own plants to build customized modules and deliver them in just-in-time sequence to the final assembly line, thereby eliminating needless inventory and costly delivery infrastructure (McClellan, 2000). Therefore, modular production can significantly reduce investment and operational costs. For instance, Mr. Tinoco from the GM’s Blue Macaw plant said that GM’s suppliers invested over US$100 million to set up individual plants, and that the Brazilian government provided additional incentives, leaving GM with an investment of only US$360 million. Moreover, our fieldwork indicated that strategic modularization allowed firms to focus on the manufacturing of components that match their resources and capabilities. As noted by a GM executive, Mr. Kramer: Through specialization, firms benefit from learning by their own experimentation of new technologies and designs over a larger customer base, without having to incur excessive costs when trying alternative configurations.

Mr. Tinoco, GM plant manager, sees modular manufacturing as an opportunity to cut costs, speed up new product development, and bring


new models to the market faster. He noted that ‘GM’s modular assembly plant in Brazil builds a modified version of the Opel Corsa called the Celta, which is the cheapest car in the world today.’ Another GM executive explained: ‘In our new plant workers bolt together large, pre-assembled modules, such as the entire cockpit, reducing the number of parts in each car by 50%, which allows us to operate with fewer line workers.’ Overall, our respondents shared a common view that a manufacturing plant adopting strategic modularization is less expensive to build, and relatively smaller in terms of square footage and the number of employees, than conventional methods of production. In addition, it seems that developing flexible capabilities that translated into lower cost structure and reduced the cost of managing tacit knowledge were major characteristics of their modular production arrangements. Modularity has enabled companies to handle increasingly complex technology (Baldwin and Clark, 1997, 2000). Our fieldwork data support our argument that by disassembling the product into independent modules, different organizations can take responsibilities for separate modules. Consequently, design teams, manufacturers, and final users gain more flexibility. In this process, automakers can be confident that a reliable product will arise from their collective efforts with their module suppliers. In general, our respondents indicated that this process facilitates the production of high-quality products because it leverages suppliers’ capabilities. Mr. Luca at VW noted: ‘When selecting our partners in this project, we were careful to pick those possessing expertise in the areas that we needed.’ Therefore, when a firm adopts modularization, it decentralizes production of modules and allows module providers to be creative. Providers are free to experiment with module design, as long as they stay within the design parameter of the standard interface. Thus, an effective modularization strategy might be associated with high product quality because it provides the firm with the flexibility of mixing and matching components without a loss of performance and the learning advantages of specialization. Firms adopting modularity to coordinate development processes are expected to quickly link the resources and capabilities of many suppliers to form product development ‘resource chains’ that respond flexibly (i.e., quickly, broadly, and efficiently) to environmental change (Sanchez,



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1995; Sanchez and Mahoney, 1996; Mikkola, 2000). Firms reported that modularization significantly speeds new product development. As underscored by Mr. Tinoco at GM: We have significantly reduced the time to put a new model on the market. In the past, we used to take five years to get from the design stage to the new car launch. Now, things have changed. Here, 18 months is enough to launch a new model, including all the types of tests, revisions, and assembly line adaptations.

The new Celta GM model produced in Brazil was designed in GM’s technological park in Saõ Carlos (Saõ Paulo), assembled in Gravatai (Rio Grande do Sul) in the modular plant, and made to order for the Brazilian national market through the Internet and its dealership chain. According to our interviewees at GM and anecdotal evidence, their modular condominium approach, which concentrates planning of the design, engineering, and manufacturing into a single phase, has made the Gravatai plant one of the world’s most productive plants (Burt, 2001). Our fieldwork data indicate that automakers’ products can evolve faster because design teams for each module have greater freedom and less need to communicate with other independent design teams. As noted by one executive at Ford, ‘This parallel design process integrating our engineers and our suppliers’ personnel resulted in faster overall product development.’ In other words, modularization integrates tacit knowledge at the module level and allows the design team to concentrate on the module itself, thus, improving its design and the design of the overall product. In sum, our fieldwork indicated that at all three modular plants – GM, VW, and Ford – module providers were not paid on delivery, but only when the whole vehicle passed final quality check and the shipping order was issued. Overall, we found that automakers had transferred part of the assembly responsibility to the supplier level and retained basically the final quality inspection, which proved to be a more efficient method to control quality and costs while delivering product to the market faster by aligning everyone’s interest in achieving higher strategic positional advantage. Finally, firms consider evaluation of changes in their positional advantage as a measure of performance (Day and Wensley, 1988). Knowledge- and asset-based resources are sources of competitive advantage that can be used to gain positional advantage through (1) a lower relative cost position

or (2) a superior customer value position, which can be achieved along various dimensions, but two of the most salient ways to measure superior customer value are product quality and speed to market (Day and Wensley, 1988; Lanctot and Swan, 2000). For our study, we suggest that, in highly competitive environments, superior product differentiation and lower relative costs may collapse into a single strategic positional advantage. Therefore, following Day and Wensley’s (1988) conceptual work and Lanctot and Swan’s (2000) empirical study, we treat ‘strategic positional advantage’ as a single construct that is achieved from a combination of low cost, speed to market, and high product quality. Based on the above discussion, we suggest the following proposition: Proposition 7: The higher the extent of strategic modularization, the higher the level of strategic positional advantage.

Moderating factors Physical proximity and co-location Researchers have argued that physical proximity between suppliers and manufacturers is the key to success of just-in-time systems (Neto and D’Angelo, 2001). At General Motors, suppliers have established their own operations inside GM’s factory grounds and are linked electronically to GM, making it easier to schedule a build-to-order system. In this type of modular production (e.g., GM’s modular condominium), suppliers actively participate in product development and handle much of the engineering work once performed inhouse. Our interview findings indicate that both at Ford and VW modular plants, tier-one suppliers are even responsible for recall and warranty costs arising from their work. GM’s strategic modularization approach was implemented such that major suppliers (e.g., Delphi, VDO, Goodyear, and Valeo) built their own production facilities inside GM’s plants (Burt, 2001). At GM, 16 module providers have set up production facilities inside the plant, and have been involved in the project since the early design phase. According to Mr. Tinoco, the plant manager at GM in Gravatai: The new arrangements allow 85% of the models produced at Gravatai to rely on components and modules assembled on site, while in most auto plants 60% of a car’s components by value are sourced from outside the factory.




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The VW plant in Resende has broken new ground in the relationship between automakers and their suppliers. As Mr. Luca mentioned, ‘If my module supplier is next door, he is already too far.’ At VW Mr. Luca and representatives from all seven major module providers located inside the plant discuss potential problems and solutions first hand for 30 min every morning before the manufacturing shift starts. ‘Everyone in this meeting needs to have the power to make decisions and resolve problems right away. I do not accept a person taking notes and saying he will consult with other managers at his facility. Decisions are to be made on the spot.’ Another important characteristic of the VW modular consortium is that each supplier is expected to bring improvements and process innovation to the production process. As Mr. Luca noted: Our suppliers working inside our plant can better monitor our production line. Our suppliers can sense demand fluctuations and volatility in the market at the same time we do. Because of this close interaction, they are always willing to sit with us to renegotiate prices and conditions. This gives us a competitive edge when bidding for large contracts, such as the one we just closed for selling 700 trucks to Saudi Arabia.

In general, respondents agreed that physical proximity and co-location can facilitate the implementation of modularization, by reducing potential delivery problems and allowing any eventual problem in the production line to be dealt with and solved on the spot. Also, co-location facilitates cooperation and communication. Mr. Jorge at Ford said, ‘The only reason some of our module suppliers are not located inside our plant is because this was a relocation project, and we had space restrictions and could not accommodate everyone here.’ Finally, the case studies also concluded that co-location and physical proximity improve the relationship between strategic modularization and strategic positional advantage. Based on the above arguments, we suggest the following proposition: Proposition 8: The positive association between the extent of strategic modularization and strategic positional advantage becomes stronger as physical proximity and co-location increases.

Degree of media naturalness Researchers have emphasized the importance of both internal and external communication for the performance of product development organizations (Ancona and Caldwell, 1992; Brown and Eisenhardt, 1997). In the case of strategic modularization where


the module provider is involved in product development, effective coordination through frequent communication between a module integrator and a module provider is critical (Dyer, 1996). According to Dyer and Nobeoka (2000), Toyota and Nissan had more frequent face-to-face interactions with their suppliers than their American competitors, which in turn contribute to their ‘short model cycle’. He also found that Toyota and Nissan had more guest engineers at their sites than US automakers, which indicates the importance of extensive communication between co-located engineers. Toyota’s network is able to efficiently transfer information and technology because there is a variety of processes available to transfer both explicit and tacit knowledge in a multilateral setting (Dyer and Nobeoka, 2000). One way of accomplishing efficient knowledge flow is through the use of faceto-face interactions, which is not always possible and sometimes can be very costly. An alternative is the use of e-communication media with a high degree of naturalness (Kock, 2002). Kock and Patnayakuni (1999) broadly defined e-communication technologies as knowledge management tools that enable collaboration among individuals engaged in a common task. Examples of these technologies are e-mail, Internet e-mail listservs, web-based chat tools, web-based asynchronous conferencing tools, collaborative writing tools, group decision support systems, teleconferencing tools, and workflow control tools (Kock, 2002; Kock and Patnayakuni 1999). The modular plants visited in Brazil have adopted several e-communication tools, such as video conferencing and computer-assisted design, in an attempt to facilitate knowledge transfer. At Ford, remote teams located in different parts of the world are designing its new cars and trucks. As noted by Mr. Jorge at Ford: Our design teams use an on-line computer network to share ideas, create the new designs, integrate designs for various parts and components, and build and test prototypes via computer simulations.

GM and VW have their design teams located in Brazil. Mr. Tulio, Ford’s supply chain manager, when discussing the importance of e-communication tools, stated: We have implemented a communication system that allows our suppliers to monitor our production line at real time. Actually, our supplier can see any adjustment we make to our production schedule and react to that accordingly.



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Media richness theory (Daft and Lengel, 1986; Lengel and Daft, 1988) argues that rational individuals favor the use of specific communication media to accomplish certain tasks. According to the theory, different communication media can be classified according to the richness scale, which features the face-to-face medium at the top, presented as possessing more richness than any e-communication medium (Lee, 1994; Markus, 1994). In other words, the theory argues that a richer medium of communication such as face-to-face interaction is better for knowledge sharing and learning, and that personal and more open communication increases the richness of communication channels. Therefore, greater interpersonal familiarity and personal affinity can be expected to increase the openness of communication between interacting parties (Gupta and Govindarajan, 2000). Advances in technology and the trends in the socalled new economy and its e-business capabilities are changing the way businesses relate to their customers and other business partners, making e-collaboration a key to the survival of firms in these dynamic environments. E-business technologies offer huge opportunities to reorganize internal activities by integrating the final customer requirements back to the initial value chain activity of designing and planning. Therefore, we define the degree of media naturalness as the amount of similarity to the face-to-face medium of the communication. Finally, a key hypothesis of media richness theory is that rich media are more appropriate to support ‘equivocal’ communication (which is likely to occur in complex tasks) than lean media. In turn, drawing from our interview findings, we expect that the degree of media naturalness would lead to a decrease in the amount of collaborative communication effort necessary to integrate tacit knowledge in the module interfaces. Therefore, the degree of media naturalness should moderate the relationship between strategic modularization and performance by further integrating tacit knowledge at the module/supplier level. Based on the above arguments, we suggest the following proposition:

Proposition 9: The positive association between the extent of strategic modularization and strategic positional advantage becomes stronger as the degree of media naturalness of communication media becomes higher.

Discussion and implications We observed modularization in the automobile industry in Brazil as it was implemented in two greenfield facilities at GM’s manufacturing facility in Gravatai and at the Volkswagen truck assembly line in Resende. We also examined a brownfield implementation of modularization at the Ford truck plant in Sao Bernardo do Campo. GM named its modular facility a ‘modular condominium’, whereas VW named it a ‘modular consortium’. The two strategies are very similar in most aspects, except that at the VW plant major suppliers were responsible for the actual assembly of the module in the final line. Our qualitative research findings provide an opportunity to explore a comparative analysis among four automobile assembly plants in different stages of modularization. The DaimlerChrysler plant resembled a traditional lean manufacturing in its first attempt to implement modular production within the context of an established plant. The DaimlerChrysler plant attempted to keep inventory levels low by using a system of subassembly cells in conjunction with inventory buffers of half work shift. Our interviews indicated that executives at DaimlerChrysler recognized the importance of modular processes, but seemed to be constrained by the limitations of an old plant: therefore, it had achieved very little integration with its suppliers. On the other hand, the Ford plant in Sao Bernardo do Campo seemed to have achieved a higher degree of supplier integration than DaimlerChrysler was able to, even though it was faced with similar physical constraints. Ford was not able to bring its suppliers inside its plant as GM and VW did, but contracted a company called TNT to take care of the assembly of 90 of its modules. TNT implemented 11 manufacturing cells nearby the Ford plant. Ford still controlled the overall purchases of components, leaving only the assembly for TNT. In addition, Ford subcontracted the whole cabin module to a major supplier, freeing up space in its floor plan and implementing an assembly line with a system of line-feed carts running parallel to the assembly. TNT was responsible for sequence delivery of the modules to the assembly line. This system seemed to be more efficient than the one adopted by DaimlerChrysler, but still had a limited degree of modularization owing to physical constraints. Finally, our case studies show that GM and VW were able to implement a high extent of modularization and supply chain integration by bringing in their module suppliers to work inside or




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within their plant complex. Just as it was done at DaimlerChrysler and Ford plants, their goal was to reduce costs, increase quality, reduce inventory, and enhance productivity, but in the case of GM and VW most of the responsibilities and part of the investments were transferred to their suppliers. Our fieldwork indicates that modularization has proven to be very successful so far, and our proposed framework contributes to the strategic management field by exploring the feasibility of modular production with regard to a firm’s willingness or unwillingness to adopt a certain extent of modularization. Consequently, the research findings provide theoretical and managerial insights into achieving organizational objectives in buyer–supplier relationships in the context of strategic modularization. Our analysis of the qualitative data supports the prediction that strategic modularization is a critical development in the global automobile industry. Our theoretical framework and interviews with personnel at automaker plants and their first-tier suppliers in Brazil suggest that modularization is the current technological trend in the automobile industry. Most importantly, it focuses on eliminating the costs associated with managing tacit knowledge embedded in the production interfaces between suppliers and an assembler. Hence modularization is an attempt to reduce complexity by integrating tacit knowledge at the module/supplier level; consequently, independent modules communicate with one another through standardized interfaces (Langlois, 2000), resulting in performance improvements. Following Eisenhardt (1989) and Yin (1984), we defined our constructs and research question a priori to facilitate the initial design of our theorybuilding research. The research question was defined within the context of modularization in the automobile manufacturing industry to examine what factors facilitate the likelihood that a manufacturer/assembler will adopt a high extent of modularization. In turn, we explored the performance implications of a higher extent of modularization. Our research is broader in scope and takes an in-depth view of the modularization process by examining its antecedents, its effect on firms’ strategic positional advantage, and the two moderating factors affecting the modularization–performance relationship. The present study extends the theoretical research on modularity by Schilling (2000), and represents the first effort in developing a strategic modularization theoretical framework based on in-depth interviews and case studies.


Therefore, a central focus of this research is that the theoretical framework captures the forces driving the adoption of modularization as well as its implications for firm performance. Our findings and insights should help both researchers and practitioners understand the technological trend that is currently undergoing in manufacturing industries. In sum, we contribute to the understanding of successful implementation of strategic modularization in manufacturing industries. One important contribution of this study is the development of an integrative framework and specification of links between firm-specific factors, market-context factors, strategic modularization, and firm performance. In general, the qualitative findings lend support to the strategic modularization theoretical framework and the propositions developed in the study. Thus, our research contributes to extant literature on modularization by lending support to some of the hypothesized causal links in the strategic flexibility approach (Sanchez, 1995; Worren et al., 2002). Our interview data indicate that modularization provides flexibility in the assembly line to increase product/model variety by allowing the firm to manufacture different models in the same production line, without having to stop production. Therefore, modularization is positively related to firm performance. This proposition is consistent with previous studies’ findings that firms offering broader product lines have significantly higher market share and profitability (Kekre and Srinivasan, 1990, Worren et al., 2002). Our study also contributes to extant research (Fisher et al., 1995, Worren et al., 2002) by emphasizing modularization as a key competitive strategy in attaining high levels of flexibility and product variety. Product variety capability as the ability to produce different models in the same assembly line sequentially allows the firm to target to diverse customer needs, while at the same time benefiting from low incremental cost of producing new model variations and reducing design and development cost by allowing the reuse of existing components. This research specified constructs a priori. Therefore, customer requirements were defined as a market-context factor and entrepreneurial strategic intent as a firm-specific factor. This helped us shape the initial design of our theory building research. The two constructs – customer requirements and strategic intent – may be correlated according to the definition of the constructs,11 but our fieldwork



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did not reveal that the firm’s intent to enter new markets with new or existing products was being driven by the degree of customer requirements for new products. Therefore, for the scope of this paper we decided to leave these two constructs as independent variables, because the findings indicate that both are associated with the extent of modularization. Moreover, our study should cultivate researchers’ interest in the importance of modularization and its role as a strategic approach for competitive advantage. In view of the findings suggested by the analysis performed, there are important managerial and theoretical implications of this study that need to be discussed. In examining potential managerial implications, our fieldwork indicates that the adoption of modularization has influenced the nature of relationships between an automaker and its major suppliers, further blurring the boundaries of the firm. It is imperative that automakers develop capabilities to manage the extended modular enterprise, which includes the integrated network of module integrators and module suppliers. The ability to build sustainable relationships in the supply chain, develop mutual trust, and monitor concurrent development projects is crucial for global automakers and module suppliers. Managers should understand modular strategies and production methods in greenfield sites, so they can transfer this knowledge across the independent units. Therefore, our theoretical framework and research propositions have direct managerial implications. Our research suggests normative guidelines to managers on managing the transition to modular production strategies and relationships. The complexity of this strategic approach requires managers to develop a good understanding of its antecedents and outcomes in order to take full advantage of the opportunities. This study helps managers develop a comprehensive understanding of this process, and allows them to implement modularization strategically in ways that will lead to firm success. In our analysis, many factors found to be associated with strategic modularization can be controlled or influenced by management decisions. Therefore, managers can manipulate these factors to improve the success rate when implementing strategic modularization, specifically in reducing job turnaround times, cycle time, and waste. Another important managerial implication is that knowledge exchange practices and strategic modularization may help firms switch from a traditional

adversarial relationship with suppliers to a relational one. In having suppliers becoming strategic partners and the two businesses more integrated, suppliers can respond faster to product demands, because they can better anticipate the firm’s needs. Consequently, suppliers would start to see a module integrator as a valued partner and not simply as another sale (Cross, 1999). For example, our field data indicate that suppliers are expected to behave as partners and bring improvements and process innovation to the production process. The close interactions between buyers and suppliers in modular plants may facilitate the development of competitive advantage. Overall, the literature review, fieldwork data, theoretical framework, and research results provide managers with a comprehensive view of what strategic modularization is, the ways to operationalize it, and how it is likely to affect performance outcomes. In addition to managerial implications, the study has important theoretical implications as well. Management literature suggests that organizations must be able to predict the shift of customer preferences toward higher product variations and customization requirements (O’Grady, 1999; Mikkola, 2000). At the same time, managers must develop innovative marketing and supply chain management strategies to ensure proper commercialization and distribution of their products (Mikkola, 2000). In highly competitive environments, firms must not only respond to environmental demands, but must also do so quickly in order to survive. Thus, in an industry with strong pressures for flexibility, a high degree of competitive intensity will increase the likelihood that the industry will be characterized by a greater use of strategic modularization (Schilling, 2000; O’Grady, 1999). In essence, globalization increases the level of customer requirements, enhancing firms’ need for quick response to the demands of their environments. Moreover, there is evidence in the management literature that firms use alliances to gain technologies (or other capabilities) more quickly than they could develop them in-house (Powell et al., 1996; Harbison and Pekar, 1998; Heinsl, 2000; Schilling and Steensma, 2000; Schilling, 2000). Overall, our findings suggest that the adoption of strategic modularization could help firms identify ‘modules’ (i.e., systems, activities, and/or processes) that undergo frequent technological change, and then outsource the development of these to module suppliers with distinctive capabilities. Consequently, the benefits of this




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more efficient supply chain could apply to the entire industry by helping small- and large-scale automakers and suppliers eliminate process redundancies and production waste. In addition, our research offers some evidence that manufacturing firms can avoid rigidity and obsolescence by adopting a strategy based on the concept of modularization, which in turn will allow the organization to build a high degree of flexibility, thereby enabling it to adapt to market changes on a continual basis. Finally, our research extends the literature on capability building, sourcing strategies, and lean production by filling a theoretical gap in the study of modular production in manufacturing industries. We have achieved this by developing a theoretical framework that integrates the potential drivers of strategic modularization and determines its effect on performance outcome at the firm level. The discussion of strategic modularization and the analysis of the qualitative data allow for a better understanding of the strategy implementation and motivations of the ongoing international expansion of global enterprises investing in foreign markets, and the understanding of how their global supply chain and production decisions are linked to long-term firm performance. Although strategic modularization’s benefits are many, there may be some potential risks and drawbacks involved. Although some collaboration and exchange of general knowledge takes place, the underlying design parameters of each system/ module could become hidden information from the perspective of the assembler (Baldwin and Clark, 2000). Therefore, we cannot disregard potential difficulties associated with coordination of the supply chain and risk of automakers losing their core business capabilities. In addition, the extreme outsourcing observed in some Brazilian automakers can be risky for the assembler as it becomes more dependent on exclusive suppliers and may diminish learning capabilities. On the other hand, module suppliers may face an increase in business risk because they now share investments on dedicated projects. These findings are in line with the Zilbovicius et al. (2002) study, based on the VW truck plant, which discussed the risks of modular arrangements for all players. A similar argument has also been suggested by Graziadio and Zilbovicius (2003). One potential negative implication of modularization may arise in environments where there is a lack of trust between a buyer and its suppliers, and if an efficient communication


mechanism is not in place before the implementation of modular processes. Our study has several limitations. First, our theoretical model was developed with qualitative data from one manufacturing industry in one country. As data based on a large sample have not yet been collected for testing our framework, we should be cautious in drawing conclusions outside the scope of this research. Second, we must be careful in generalizing our findings, as we did not have multiple case observations to confirm our propositions. According to Diesing (1971) a sequence of cases would be needed to provide support and confirm our propositions. Unfortunately, our method did not allow us to fully compare how consistently similar the cases may be, or the ways in which they are not similar. Therefore, we cannot fully disregard potential selection bias, survivor bias, or other results of idiosyncrasy.12 Lastly, our study is based on a single industry, and in a single country context: therefore, we should be careful in generalizing the implications. Although we believe our findings could be generalizable outside the Brazilian context, we must recognize that there is the possibility that Brazil could turn out to be a special case regarding outsourcing and modularization. Future research that collects data in different countries and empirically tests this model using a large-scale survey is warranted. In addition, researchers should investigate the modularization–performance relationship by surveying firms in other manufacturing industries, such as printing, semiconductors, and consumer electronics. Comparative research among these industries should also be conducted. In addition to addressing the limitations of our study, there are several promising avenues for future research. A possible research avenue is to examine the role of strategic modularization in the wave of mergers and acquisitions among suppliers in the global auto industry. We observed that, through mergers and acquisitions, tier-one suppliers attempt to build sufficient capabilities to take on full responsibilities for module design and production. Therefore, modularization can be seen as a driver behind the trend toward new mega-suppliers created by spin-offs, mergers, and acquisitions that are now taking greater responsibilities in the product design and production of modules. Another opportunity for future research is to explore path dependence and the evolutionary pattern of strategic modularization, as it seems to move from lean production to the outsourcing of



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production by large automakers to their suppliers. Future research could also address the importance of continuous real-time information about customer needs as it compares with periodic sales forecasts.13 The potential benefits of this were mentioned by Mr. Luca from Volkswagen when explaining how modularization gave VW the flexibility to address every individual customer’s need, by effectively building customized models simultaneously in the same assembly line. There is evidence from the qualitative data suggesting that module suppliers may not be getting all the promised benefits from strategic modularization relationships. Future research should extend our theoretical model to address this aspect of modular production from the supplier’s perspective (cf. Kotabe et al., 2003). In doing so, we will understand what suppliers really think about modular relationships with automakers, how knowledge is exchanged between a buyer and a supplier, and what contributes to supplier performance improvements. Finally, without a research focus, one can easily become overwhelmed by the volume of data, as suggested by Eisenhardt (1989). Therefore, after broadly defining our research question in terms of modularization within the automobile industry of Brazil, we specified our constructs a priori, which helped us shape the initial design of our theorybuilding research. By adopting this approach, we did not include other important constructs, such as computerized design, manufacturing technology, and degree of trust, which could be antecedents of modularization in our framework. Future research should examine the relationships of these constructs in the context of modularization.

Acknowledgements We acknowledge the three anonymous reviewers and Arie Lewin for their constructive comments and encouragement during the review process. Notes 1 Modular strategy may reduce product distinctiveness. To the extent that product distinctiveness helps product differentiation and thus adds value to the consumer, modular design may inadvertently sacrifice overall product performance (Robertson and Ulrich, 1998).At the same time, modular strategy may improve product design flexibility by enabling firms to deal more flexibly with which components to select and how to assemble them when market needs are uncertain. Market uncertainty represents a situation

where there is a wide range of business lines, products and technologies from which to choose, and where it is difficult to know which to select. One study shows that, when faced with a high degree of market uncertainty around 2000, Japanese companies that relied on modular architecture performed better (in terms of return on sales) than those that relied on integral product architecture (i.e., lean production) (Fujimoto and Nobeoka, 2004). It is beyond the scope of our study to examine the net effect of the disadvantage of the loss of product distinctness and the advantage of product design flexibility on firm performance over time. In other words, selection capability is vital for modular production, as the level of uncertainty is high. The empirical research outlined in the second part of the paper shows that, faced with a high degree of business uncertainty, most Japanese firms produce disappointing results because they lack selection capability. The poor performance of household electrical appliance and IT manufacturers around 2000 is symbolic of this phenomenon. 2 In the 1990s, the Brazilian automotive sector stated that it gained momentum mainly due to the Sectoral Chamber Agreement among the government, industry, and trade unions (Marx et al., 1997). Zilbovicius et al. (2002) noted that the stabilization of the economy with a rapid drop in inflation rates in 1994 played a major role in this industry by attracting many new investments. The industry has experienced a broader transformation and restructuring in global terms. The traditional vertical structures began to give way to smaller and more flexible units with fewer suppliers. In addition, new global competitors entered the Brazilian market by establishing new operations and/or by acquiring Brazilian companies (Zilbovicius et al., 2002). As we concluded from our interviews, this transformation made Brazil the test bed for new organizational design and production technology. Today, Brazil is the country with the largest range of automobile brands produced in a single country. 3 The American Heritage Dictionary defines outsourcing as ‘The procuring of services or products, such as the parts used in manufacturing a motor vehicle, from an outside supplier or manufacturer in order to cut costs’. Therefore, outsourcing can be defined as the delegation of non-core activities from in-house production to an external supplier that usually has more competencies and can supply at a lower cost. 4 A modular product platform is created by designing the product in ways in which it can be decomposed into independent components and/or modules in a way that they can be reassembled together without any loss of functionality. In addition, standard




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interfaces must be specified in order to manage the flow of inputs and outputs between interacting components and/or modules. Modular process architecture describes the decomposition of a firm’s activities (or modules) into specific routines, tasks, and interactions that allow frequent reconfiguration of processes through mixing and matching. For a more detailed explanation and definitions, see Sanchez and Mahoney (1996) and Worren et al. (2002). 5 Strategic flexibility has two basic dimensions: adaptability and versatility. Adaptability is defined as the ability to change the course of action quickly to take advantage of an opportunity or to avoid a threat. Versatility is the ability to apply different resources and capabilities according to specific situations. This involves the ability to mix and match components to deliver product variety to customers. 6 At this stage of our research, we did not interview any Japanese company. Japanese companies are newer entrants than US and European firms in the Brazilian auto industry, so they have not yet fully established modular structure in their plants. 7 A complete list of questions used in the interviews can be obtained from the authors.

8

Integral product architecture was popularized by Japanese automakers with a high level of flexibility in coordinating component and subassembly development between an automaker and its suppliers after a project gets under way (Kotabe et al., 2003; Parente and Gu, 2005). 9 A pull approach to manufacturing production is driven by real-time information about the customer’s requirements. In other words, design and production are defined based on what customers need. An example is Dell’s built-to-order manufacturing system, which requires a high level of flexibility. 10 Blue Macaw is the name of GM’s new modular small-car assembly complex in Gravatai, Brazil, which cost US$554 million to build. The goal of the top-secret project was to build profitable small cars using supplier modules pre-assembled within a multimanufacturing complex that functions as a single plant. 11 We thank one of the reviewers for drawing our attention to this potential correlation. 12 We thank an anonymous reviewer for calling our attention to this potential limitation. 13 We thank one of the reviewers for suggesting this extension of our research.

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About the authors Masaaki Kotabe holds the Washburn Chair of International Business and Marketing and is the director of research at the Institute of Global Management Studies at the Fox School of Business

and Management, Temple University. His research interest includes international marketing, global sourcing strategies, international alliances, and issues related to product and process innovations. Ronaldo Parente is an Assistant Professor of Management at Rutgers University. His research interest includes global sourcing strategies, modularization, international strategy, supply chain management, and issues related to new product development. Janet Y Murray is the E. Desmond Lee Professor for Developing Women Leaders and Entrepreneurs in International Business at the Department of Marketing, University of Missouri-St Louis. Her research interest includes global sourcing strategies, international marketing, international alliances, and international knowledge transfer. Her research has appeared in JIBS, Journal of Marketing, Strategic Management Journal, and other journals. This article is Professor Murray’s fourth contribution to JIBS.

Accepted by Arie Y Lewin, Editor-in-Chief, 20 April 2004. This paper has been with the authors for three revisions.
