How globalization drives institutional diversity: the Japanese electronics industry's response to value chain modularity

Journal of East Asian Studies, Jan-April, 2007 by Timothy J. Sturgeon

In the 1990s, outsourcing became extremely popular among managers in the United States. This trend was driven by some of the same motivations that exist in Japan: the search for greater flexibility in the face of increased international competition and market volatility through the transfer of fixed assets and inventory to suppliers. A close lead firm-supplier relationship was a key aspect of the Japanese system. Japanese lead firms are in many cases highly vertically integrated, and when suppliers are heavily used--as they are in the emblematic case of lean production, the automotive industry--they are more likely to be highly dependent on one or a small number of key customer firms. Buyer-supplier relationships have traditionally been canted toward affiliates of the same industrial group, or keiretsu. Because of the expectation that buyer-supplier relationships will be extremely long-term, qualification processes for new suppliers (Japanese and non-Japanese) can be extremely lengthy. Lead firms may make equity investments in their suppliers and can in some cases come to dominate them financially. (22) Lead firms often provide the required technical assistance and financial support to help their main suppliers adopt asset-specific production technologies and systems for improved inventory management, capacity planning, and quality control. These tight linkages between lead firms and suppliers have been identified as a source of competitive advantage for Japanese firms. (23)

While outsourcing in the United States grew, in some industries, beyond anything that had been imagined in Japan, one striking difference was that relationships with suppliers did not change their adversarial tone, but retained much of their arms-length, short-term, and contractual character. (24) Nevertheless, the challenges of transferring and coordinating complex and sensitive information along the supply-chain, reducing in-process inventories, and ensuring quality remained. Here US industry drew on a long engineering tradition of systems integration, "the art of conceiving, designing, and managing the development of large systems involving multiple disciplines and many participating organizations." (25)

Value chain modularity is based on functional specialization, formalization of value chain linkages, and an increase in the scale and geographic reach of each horizontal segment--or "module"--of the value chain. (26) In modular value chains distinct breaks in the sequence of activities tend to form at points where information regarding product and process specifications can be highly formalized. Activities tend to remain tightly integrated and based on tacit linkages within functionally specialized nodes of "relational" activity. Within these relational nodes tacit knowledge is created, exchanged, and processed by workers who tend to be co-located. Between these nodes, however, linkages are eased by the application of widely agreed-upon protocols and standards. Codified linkages allow value chain modules to more easily be located at great distance.