Summary Prepareb for 2004 AIB Farmer Dissertation Award

STRATEGIC MODULARIZATION AND PERFORMANCE IMPLICATIONS IN THE BRAZILIAN AUTOMOTIVE INDUSTRY Dissertation Advisor: Masaaki Kotabe

Ronaldo Parente Temple University Dissertation Defended: June 26th , 2003 Ph.D. Degree Granted: August 29th, 2003 27962 Craven Ct. Salisbury, MD – 21801 Phone: +1(410) 341-0128 Email: Ronaldo@Parente.com

In-depth interviews were conducted and a conceptual framework to explain the dynamics of modular strategy in a global manufacturing industry was developed. Our findings indicate that strategic modularization will improve firm’s positional advantage by reducing the cost of managing tacit knowledge. The adoption of modularization also influences the nature of relationships with major suppliers. In addition. further blurring the boundaries of the firm. supplier’s physical proximity and the degree of face-to-face communication seem to have a moderating effect on the relationship between modularization and firm performance. this study provides important theoretical contributions while offering guidelines to executives in making the right decisions on modularization and providing managers a better understanding for implementing modular production in today’s global business context. In addition. . Finally. The focus revolves around strategy implications of modular production—a production method that has been increasingly adopted by global manufacturing firms. the conceptual framework was tested using data from questionnaire survey of the automobile industry in Brazil.STRATEGIC MODULARIZATION AND PERFORMANCE IMPLICATIONS IN THE BRAZILIAN AUTOMOTIVE INDUSTRY Abstract The present research examines the trend toward modularization and the evolution of sourcing strategies.

Consequently. The purpose of this study is to examine modularization as a competitive strategy in the global manufacturing industry. such as: Honda. The objective is to examine how foreign automobile manufacturers operating in Brazil have implemented and benefited from strategic modularization. and Iveco.1 STRATEGIC MODULARIZATION AND PERFORMANCE IMPLICATIONS IN THE BRAZILIAN AUTOMOTIVE INDUSTRY This research deals with a very important topic in international management and strategy. Europe. which revolves around strategy implications of modular production – a production method that has been increasingly adopted by global manufacturing firms. Brazil provides an excellent environment in which to examine the determinants and outcomes of strategic modularization in the design and production of automobiles. it was important to explore a wide range of approaches and perspectives in the context of implementing modularization. Being the only country that hosts all the global car manufacturers in the world. Kia. In the first phase of empirical investigation. elaboration of constructs and propositions). Chrysler. The existence of so many new factories and investments in Brazil reflect its importance for its local market potential and as an export platform to other international markets.e. Global automakers and suppliers—from the United States. and Japan— setting up factories in Brazil have emphasized the concept of modularity in the design and production of their cars since 1996. Audi. In addition. Peugeot. Since the focus was theory construction (i. Renault. the Brazilian auto industry has received investments from new entrants. Rover. through rigorous analysis and coding of concepts conveyed in interviews (Strauss and Corbin. a grounded theory1 approach was used to develop the conceptual framework based on case studies 1 Grounded theory is invaluable when conducting theoretical research as this qualitative analysis approach allows the data to communicate. Recently. when Volkswagen opened its modular truck-manufacturing facility. Nissan.. Brazil has been identified by automakers as an environment offering the right conditions for the applications of alternative and innovative methods of production. early entrants have opened or are building new factories. . Navi Star. 1990).

It is a method of production that goes beyond the physical and functional dimensions of the module2 in that it is a competitive strategy used to reduce the cost of managing tacit knowledge in the assembly process.2 and in-depth interviews with executives from several automobile manufacturers in Brazil. but that do not necessarily comply with a standard interface. the theoretical model described in Figure 1. strategic modularization helps assemblers of final products remain Modules are subassemblies that reduce complexity and time taken in the plant for assembly. Then. Figure 1: Strategic Modularization Conceptual Framework Level of Supplier Involveme nt & Codesign Customer Requireme nts Stage of Product Developme nt Supplier Physical Proximity & Collocation Strategic Positional Advantage STRATEGIC MODULARIZATION Mutual Partial Ownership Supply Chain Integration Tacit Knowledge Isolation Modular product Architecture Face-to-Face Communicatio n for Knowledge Sharing Market Economic Performan ce Collaborati ve Experience Strategic modularization was defined as a multidimensional construct. 2 Therefore. and components are the building blocks of modules. in the second phase. It can be defined in the context of the auto industry as a physically proximate ‘chunk’ of components. which simultaneously incorporates the antecedent conditions leading to modular production as well as the performance implications of various dimensions of strategic modularization. . was tested with data collected through a large sample survey. which can be assembled into the vehicle as one unit where common interfaces and standardization of specifications are not mandatory.

a major theoretical contribution of this research is that it advances the existing theories of strategy and international management to incorporate modularity as an efficient method of production in manufacturing. which help these “extended enterprises” to achieve competitive advantage. Thus. reduced order lead-time. simplified control mechanisms. the degree of strategic modularization was measured as the degree to which the concept of modularity was implemented at both the product. increased feasibility of product/component change. technology. . lower overall costs. Moreover.3 competitive by managing complexity. and are finding easy to perform product upgrade.and process-levels throughout the supply chain in all of its three dimensions: modular product architecture. In addition. and satisfying increasing customer demands. maintenance. achieved economies of scale. and knowledge flow. becoming more flexible. supply chain integration. firms that adopted modularity as an strategic approach have increased product variety and strategic flexibility. and tacit knowledge isolation. lower capital costs. leveraging capabilities through the integration of the supply chain facilitates the diffusion of technology and expertise among buyers and suppliers. repair and disposal. reducing capital investments. Therefore. According to O’ Grady (1999). Research findings suggest that strategic modularization may help improve a firm’s positional advantage by reducing the cost of managing tacit knowledge. the adoption of modularization seems to influence the nature of relationships with major suppliers. further blurring the boundaries of the firm.

costs . Worren. and Cardona (2002). For example. since it has been linked more specifically to the design and/or assembly strategies of large multinationals. “modular” organization structures (Sanchez & Mahoney 1996). Recently. 1991) suggests that it is important to consider complex sets of organizational resources in understanding how strategic flexibility may result in competitive advantage. and efficient collaborative relationships that allow for effective knowledge exchange. the strategic value of modular production may be linked to the presence of other organizational resources such as the firm’s ability to develop flexible structures. It includes an organizational and managerial system linking module integrators and module suppliers to reduce fixed costs. the concept of modularization has gained much attention. modularization goes beyond the idea of subassembly delivery practiced in lean manufacturing. The emergence of modularization is being accompanied by new knowledge management strategies (Grant. processes. the adoption of strategic modularization implies having or acquiring advanced “architectural knowledge” about relevant components and/or activities and their interactions and interdependencies (Sanchez & Mahoney. which focuses on eliminating waste and inventory from the supply chain and aggregates value in every step of the production process. Thus. In addition.4 Theoretical Foundation and Literature Review Resource-based theory (Teece. Moore. which allow firms to develop products more effectively through flexible. 1990). 1987. Barney. 1996). 1996). Jones. & Roos. suggested that strategic modularization can be seen as a set of principles involving modular product and process architectures that provide the organization with strategic flexibility and the ability to manage complexities. In the 1980s Toyota brought a revolution to manufacturing that moved away from Ford’s mass production and toward the adoption of a production method based on the concept of “lean” production (Womack.

The literature suggests that there are no empirical studies at the firm level of how the adoption of modularization affects performance outcomes with the exception of a recent study by Worren. and their vulnerability to external factors. speed technological change. and Cardona (2002). According to O’Grady (1999). Of the 34 individuals interviewed. DaimlerChrysler (Sao Bernardo do Campo. but at mass-market prices (O’Grady 1999). Therefore. Research Methodology The first phase of the research consisted of plant visits and in-depth interviews with several plant managers.5 of managing tacit knowledge. there seems to be a theoretical gap in the management literature on modularization that can be filled by developing and testing a normative framework integrating the antecedents of the decision to adopt modularization and its impact to performance outcome at the firm level. São Paulo). each one of which adds value. manufacturing supervisors. . In addition.” Clearly. and have delivered quickly. and lower costs. supply-chain managers. The sample selection was decided by making sure that it included strategy as well as manufacturing managers of several automakers adopting innovative modular arrangements in the Brazilian market. and purchasing managers working in the automobile industry in Brazil. modularity is argued to help organizations to achieve mass customization3. we need to better understand the recent developments in manufacturing. 19 were either plant managers or manufacturing supervisors from Ford (Sao Bernardo do Campo. São Paulo). Moore. the assembler gains flexibility and cuts costs. which examined the impact of product modularity to strategic flexibility in the home appliance industry. shorten product development cycles. mass customization is the process by which consumers can order. Baldwin & Clark (1997) suggested that “by delegating the manufacturing process to many separate suppliers. Rio Grande 3 Mass customization (Pine 1993 and Kotha 1995) emphasizes the need to provide outstanding service to customers in providing products that meet customer’s needs (through maximizing individual customization) at a low cost (through modular components). General Motors (Gravatai. custom-designed products.

Rio de Janeiro). Volkswagen (Resende. including manufacturers of cars. so they have not yet fully established modular structure in their plants. no Japanese company was interviewed. At this stage of this research. In addition. The construct validation followed the usual steps in exploratory factor analysis and created indices summarizing the items.e. General Motors. The final sample was composed of 493 business units. Volkswagen. Japanese companies are newer entrants than U. or the general question format from existing scales was maintained. After the initial mailing and two follow-up letters a total of 103 valid questionnaires were received with a final response rate of 23 percent.. Ford. and multiple individuals were interviewed. which included semistructured interviews.S. trucks. A total of five automakers (i. one professor at the University of São Paulo who is currently studying the recent developments of the automobile industry in Brazil was also interviewed. who were asked to respond based on the products and characteristics of their division. motorcycles. including one Brazilian. Four of those interviewed were executives at Anfavea and Sindipecas. The survey was mailed to managers at the plant/divisional level. Wherever possible. DaimlerChrysler. buses. When necessary the development of the new items was informed by the field studies. and Troller) were included in the sample. and European firms in the Brazilian auto industry. The companies interviewed were from different countries. and two from the United States. firms were chosen from the automobile industry in Brazil to test the conceptual model.6 do Sul). A questionnaire was developed with Likert-type measurement scales for the constructs described in the strategic modularization normative framework. 4 . and tractors and their suppliers. items were reused. two Europeans.4 In the second phase of the study. and Troller (Maracanau. Fortaleza).

Hypothesis 2 states that in industries where there is a high level of unpredictability of product specifications (i. and quality) discussed in this study has begun to diminish (Lanctot. Research Results & Analysis Hypothesis 1 states that where the level of customer requirement is high. speed. Our data also confirmed this. The initial correlation coefficients among these three factors (supply chain integration. 1995.e. The coefficients were all statistically significant justifying the use of the mean strategic modularization index (MODULAR) as the dependent variable in the GLM procedures. This indicates that the greater the level of customer requirements. Moreover. and product modular architecture) were all above 0.5. Lanctot & Swan. Therefore.7 Hypotheses were developed based on literature review and supported by qualitative findings from the fieldwork in Brazil. QUALITY. The hypothesized relationships indicated in the conceptual framework were tested with the General Linear Model (GLM) procedure. tacit knowledge isolation. the assemblers will be more likely to adopt a high degree of strategic modularization.. relative strategic positional advantage construct (POS_ADV) was calculated by collapsing SPEED. The results of the GLM procedure strongly support this hypothesis. An important point is that the distinction among the three dimensions of strategic positional advantages (low cost. assemblers will be more likely to adopt a high degree of strategic modularization. markets where products are still in the earlier stages of product development). and LOW COST into one product performance index. strategic modularization is a multidimensional construct calculated as the mean of its three dimensions identified in the factor analysis. 2000). Results of the GLM did not support this hypothesis indicating that the stage of . the more likely a firm is to adopt a higher level of strategic modularization.

Results of the GLM marginally support this hypothesis. Hypothesis 7a states that the positive relationship between the degree of strategic modularization and relative strategic positional advantage becomes stronger as the level of . The GLM results. these relationships seem to have a slight significant effect on the firm’s degree of adoption of strategic modularization. the assemblers will be more likely to adopt a high degree of strategic modularization. Hypothesis 4 states that in industries where firms possess a high level of experience in collaborative buyer-supplier network relationships. the more likely a firm is to adopt a higher level of strategic modularization. shows support for this hypothesis.8 product development does not have any implication in the degree of adoption of strategic modularization. assemblers will be more likely to adopt a high degree of strategic modularization. This indicates that to the extent to which there are mutual ownership (MUT_OWN) relationships between assembler and suppliers. Hypothesis 6 states that a higher degree of strategic modularization will be positively related to a higher level of relative market performance. shows strong support for this hypothesis. The GLM results. Hypothesis 5 state that a higher degree of strategic modularization will be positively related to a higher level of relative strategic positional advantage. This indicates that the greater the firm’s experience in collaborative relationships. This positive significant relationship indicates that the degree of strategic modularization is positively associated with relative market performance. Results of the GLM strongly support this hypothesis. This positive significant relationship indicates that the degree of strategic modularization is positively associated with relative strategic positional advantage. Hypothesis 3 states that in industries where there is a high degree of mutual partial ownership within the buyer-supplier relationship.

there will be a positive effect on the relationship between the degree of strategic modularization and market performance. This indicates that. Hypothesis 8b states that the positive relationship between the degree of strategic modularization and relative market performance becomes stronger as physical proximity increases. This moderator hypothesis is not supported. and Contributions Management literature suggests that organizations must be able to predict the shift of customer preferences toward higher product variation and customization requirements. This moderator hypothesis is not supported. This moderator hypothesis is marginally supported. Research Findings. Implications. at the same time . Hypothesis 7b states that the positive relationship between the degree of strategic modularization and relative market performance becomes stronger as the level of codesign and early involvement increases. Hypothesis 8a states that the positive relationship between the degree of strategic modularization and relative strategic positional advantage becomes stronger as physical proximity increases. This moderator hypothesis is not supported.9 codesign and early involvement increases. This moderator hypothesis is strongly supported. as the degree of physical proximity increases. Hypothesis 9a states that the positive relationship between the degree of strategic modularization and relative strategic positional advantage becomes stronger as the level of faceto-face communication increases. Hypothesis 9b states that the positive relationship between the degree of strategic modularization and relative market performance becomes stronger as the level of face-to-face communication increases. This indicates that as the degree of face-to-face communication between assembler and suppliers increases. there will be some positive effect on the relationship between the degree of strategic modularization and market performance. This hypothesis is not supported.

firms must respond to the environment’s demands—and must do so quickly in order to survive. 2000). In essence. In general the findings indicate that the degree of adoption of strategic modularization has positive effect on firm success. Moreover. 2000). Miles.10 managers must develop innovative marketing and supply-chain management strategies to ensure proper commercialization and distribution of their products (Mikkola. Research results support the idea that manufacturing firms can avoid rigidity and obsolescence by adopting a strategy based on the concept of modularization. Empirical findings support the above argument and the hypotheses that the degree of customer requirements and the extent of the firm’s experience in collaborative relationships are positively related to the degree of adoption of strategic modularization. Schilling & Steensma. enhancing firms’ need for quick response to the demands of their environments. 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 (Harbison & Pekar. Powell. & Smith-Doerr. a high degree of competitive intensity will increase the likelihood that the industry will be characterized by greater use of strategic modularization. 2000. In highly competitive environments. 1998. & Coleman. Thus. enabling it to adapt to changes on a continuous basis. 1992). Heinsl. which in turn will allow the organization to build a high degree of flexibility. Although the moderating effects did not come . Several authors have speculated that the globalization of markets has encouraged organizational disaggregation (Snow. physical proximity and the degree of face-to-face communication seem to enhance the positive relationship between strategic modularization and relative market performance. This line of reasoning is consistent with recent conventional wisdom regarding globalization and changing organizational forms. 1996. globalization increases the level of customer requirements. Koput. in an industry with strong pressures for flexibility.

Surprisingly. reduce cycle time. physical proximity. an important recommendation from this research is that managers need to better understand modular production and relationships to better manage the factors associated with how firms continuously improve internal processes to reduce job turnaround times. Thus. In terms of the managerial implications of this study. the empirical data provided no support for a positive relationship between the degree of strategic modularization and firm’s cost reduction in isolation as suggested by anecdotal evidence and fieldwork. Conversely. The empirical findings in this study offer knowledge that should allow for quick response to customer demand and changes in the market. and how it is likely to affect performance outcomes in global manufacturing firms. whereby the implications of codesign. the results and possible alternative explanations point toward interesting directions for future research. higher product quality. the fieldwork data. Overall. the ways to operationalize it. the findings provide normative guidelines to managers on managing the transition to modular production strategies and . conceptual framework. and relative market performance. and research results provide managers a comprehensive view of what strategic modularization is. and face-to-face communication can be systematically examined and compared in cross-national strategic relationships. the degree of strategic modularization seems to be positively associated with most of the performance indicators such as speed of product development. and cut waste.11 out as expected. relative strategic positional advantage. Many of the factors found to be associated with strategic modularization in the analysis can be controlled or influenced by management decisions and therefore can be altered by managers to improve the probability of success when implementing strategic modularization.

12 relationships. This gives us a competitive edge when biding for large contracts such as the one we just closed for selling 700 trucks to Saudi Arabia. Managers can benefit from the results in this research by developing a set of managerial tools that will help firms become more competitive by offering customers better delivery times. At the VW plant each supplier is expected to behave as a partner and bring improvements and process innovation to the production process. This study can help managers develop a comprehensive understanding of this process and allow them to implement modularization strategically in ways that will lead to firm success. so that suppliers become strategic partners and integrate their businesses. they are always willing to sit with us to renegotiate prices and conditions. 1996). Moreover. the plant manager. As Mr. The complexity of this strategic approach requires managers to develop a good understanding of its antecedents and outcomes to be able to take full advantage of the opportunities. knowledge exchange practices and strategic modularization may help firms switch from a traditional adversarial relationship with suppliers. The goal should be that suppliers start to see a module integrator as a valued partner and not simply as another sale.” Researchers have shown increasing interest in generalizing the principal of modularity from the product level to the context of organizational processes (Sanchez & Mahoney. Because of this close interaction. noted: “Our suppliers working inside our plant can better monitor our production line. Luca. because they can better anticipate the firm’s needs. There seems to be a theoretical gap in the management literature studying modular production in . The research findings suggest that strategic modularization is the current technological trend in designing a more efficient global supply chain in the automobile industry and should have direct managerial implications. Our suppliers can sense demand fluctuations and volatility in the market at the same time we do. Suppliers can then respond faster to product demands. and cost savings. higher quality delivery.

its effect on the relative positional advantage of the firm. The research contributes to the existing body of literature that has examined the concept of modularity by developing and testing a strategic modularization framework. First. because these results are from . This research represents the first effort to build a foundation for systematic development of a strategic modularization framework for the manufacturing industries that will help researchers understand the technological trend currently underway in these industries. and some of the moderating factors of this relationship.13 manufacturing industries that this research filled by developing and testing a normative framework integrating the potential drivers of strategic modularization and determining its effect on performance outcome at the firm level. the conceptual framework and empirical findings of this research provided important managerial and theoretical insights on applying existing strategy and international management theories to the area of strategic modularization. the empirical findings of this research should develop the interest of researchers in the importance of modularization and its role as a strategic approach for competitive advantage. Notwithstanding this. several limitations should be addressed in this study. this study is subject to the usual limitations inherent in cross-sectional research designs employing subjective measures. we must be cautious in drawing conclusions outside the scope of this research. Therefore. As mentioned. a major contribution of this research is that it is broader in scope and takes an in-depth view of the strategic modularization process by looking at its determinants. The discussion of strategic modularization and the empirical analysis of the 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. Second. Thus.

future research is warranted and should extend this conceptual model to address this aspect of modular production from the suppliers’ point of view by trying to understand what suppliers really think about such modular relationships with automakers and how knowledge is exchanged between buyer and supplier and to try to link this modularization trend in the auto sector to supplier performance improvements. with data collected in one specific country. Therefore. Therefore we must be careful in trying to generalize its findings. when controlled for the type of product produced and delivered. suggesting that module suppliers may not be getting all the promised benefits from strategic modularization relationships.14 an industry-specific research. . Finally. Other future research opportunities are also addressed in the study. the study results indicate a consistent significant beta coefficient for this control variable.

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