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

Systems integration developed as a formal practice in the United States during the Cold War in response to a need to coordinate the invention, development, production, deployment, and maintenance of increasingly complex and exotic weapons and aerospace systems. Projects to create complex weapons systems such as ballistic missiles, early warning radar systems, and nuclear submarines were so large and interdisciplinary that detailed knowledge required to design and produce all of the subsystems was far beyond the scope of knowledge and expertise contained within any single military branch, firm, university laboratory, or other single organization. Someone had to make sure the systems worked as intended. At first, the task of systems integration fell to a few aerospace contractors, government agencies, and specially created nonprofit agencies, but over time, the approach and methods of systems integration migrated to the private sector as private military contractors gained experience with the approach--thus systems engineering and management became an established engineering discipline by the 1970s. (27) According to Keith Pavitt, systems integration has remained robust in the face of growing complexity and increased product variety because advances in information technology, especially computer simulation technologies, have reduced the cost of experimentation and technological research. (28) In other words, codification and standardization have helped to create simplified and reliable methods for transmitting detailed product and production specifications along the value chain, and for keeping track of large, complex projects with participants in diverse locations and organizations. (29)

Specifically, the key business processes that have been formalized, codified, standardized, and computerized are product design (e.g., computer-aided design) and production planning and inventory and logistic control (e.g., enterprise resource planning), as well as various aspects of the production process itself (e.g., assembly, test and inspection, material handling). Furthermore, because it is "platform independent," the Internet has provided an ideal vehicle for sharing and monitoring the data generated and used by these systems. Such technologies and practices are at the core of value chain modularity. It is the formalization of information and knowledge at the interfirm link, and the relative independence of the participating firms, that give value chain modularity its essential character: flexibility, resiliency, speed, and economies of scale that accrue at the level of the industry rather than the firm. (30)

Value chain modularity introduces risks as well as benefits for participating firms. Responsiveness may suffer as contracts are hammered out. There is potential for intellectual property and other sensitive information about product features, pricing, production forecasts, and customers to leak to competitors through shared suppliers. The ability of lead firms to innovate and design successive product generations may suffer from the atrophying of manufacturing and component knowledge, a problem that has been referred to by Henry Chesbrough and Ken Kusunoki as the "modularity trap." (31) Reliance on standard interfaces may lead to the use of standard components, leading in turn to a loss of product distinctiveness. Shared and overlapping inventory resident in supplier organizations can lead to distortions and tracking problems that introduce waste. One unavoidable issue is that independent firms in buyer-supplier relationships often have competing interests.