The Firm Beyond the Mirror: The Relation between Product and Organizational Modularities
The idea of management as knowledge and design of complex artefacts finds its roots in Herbert Simon's seminal work and puts together the two genial intuitions of the 1978 Nobel Prize Winner. The first, bounded rationality, is about the limits of rational decision-making and behaviour, and argues that individuals, because of the interaction between limited cognitive ability and environmental uncertainty, make decisions and behave only with bounded, though intentional, rationality.
The second, the architecture of complexity, argues that the fundamental properties of flexible complex systems are hierarchy (the fact that some decisions or structures provide constraints on lower-level decisions or structures) and near-decomposability (the fact that patterns of interactions among elements of a system are not diffuse but will tend to be tightly clustered into nearly isolated subsets of interactions).
One fundamental question managers are faced with in the global hypercompetitive landscape is how, given that hierarchy and near-decomposability may be desirable attributes of a complex system (a product, a technology, an organization), boundedly rational managers can identify and uncover some true, latent structure of hierarchy and near-decomposability. In practice, the situation is typically even more complex, with boundedly rational actors/designers (managers) having to design interdependent complex systems (and artefacts): complex products to solve customers' problems ("how to decompose the overall development task to manage complexity"), complex production systems or "value streams" to deliver those solutions, and complex organizations to design and produce complex products effectively and efficiently ("how to allocate and coordinate tasks to benefit from knowledge specialization").
From this standpoint, the investigation of what architectural properties better allow to cope with bounded rationality in the design of complex systems, is crucial in improving management theory and practice. This is the topic of a research program, originally initiated by Arnaldo Camuffo at the International Motor Vehicle Program of MIT in 2004, which has been developed during the last 3 years at the Department of Management and Technology and within CROMA (Center for Research in Management and Organization) with the aim to increase our understanding about the direction and intensity of the relationship between the degree of coupling of product and organizational architectures (what has come to be known in the literature as "the mirroring hypothesis").
This research program has produced a series of research outputs, culminating in the recent publication, in Organization Science, of the article Beyond the "Mirroring" Hypothesis: Product Modularity and Interorganizational Relations in the Air Conditioning Industry, co-authored by Anna Cabigiosu (Università di Padova) and Arnaldo Camuffo (published online in Articles in Advance, May 17, 2011, doi: 10.1287/orsc.1110.0655).
The research is framed within modularity theory as located at the crossroads of organizational economics, system theory applied to product design, and the theory of relational contracts applied to vertical interfirm relationships. Modularity theory offers a vintage perspective in analyzing the relationship between technological and social systems in complex environments because, differently from mainstream organizational economics, it allows to explicitly include technology in the analysis. Organizational economics is prevalently a theory of relationships (i.e. of actors, interests, contracts, incentives etc.), and less a theory of production (i.e. of technology, information, knowledge and capabilities) and technology is often considered as an exogenous variable. Instead, modularity theory, though rooted in organizational economics, brings technology back into the picture, providing a fine-grained analysis of how technology may constrain (or contribute to shape) the nature of inter-firm relationships.
The research program wishes to make a keystone contribution to the lively debate about the relationship between the degree of product modularity, the nature of vertical inter-organizational supply relationships and organizational performance. The findings show that the conflicting theoretical predictions present in the literature largely depend on the fact that most of the studies underlying them tend to focus on whether the mirroring hypothesis holds, and not on under which conditions it may hold and should be tested. Indeed, the research identifies a number of contextual factors that affect and shape the existence and strength of the mirroring hypothesis; among them, the degree of product architecture stability, the firms' strategies, organizational structures and capabilities, and the rate of product and components' technological change.