27/06/01 08:57 SPRU - Science and Technology Policy Research

University of Sussex Brighton, BN1 9RF

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KNOWLEDGE SPECIALISATION AND THE BOUNDARIES OF THE FIRM:

WHY DO FIRMS KNOW MORE THAN THEY DO?

Stefano Brusoni*, Andrea Prencipe* and Keith Pavitt

* To be considered joint first authors with names reported in alphabetical order.

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KNOWLEDGE SPECIALISATION AND THE BOUNDARIES OF THE FIRM:

WHY DO FIRMS KNOW MORE THAN THEY DO?

Abstract

This paper explores the implications of specialisation in knowledge production for the

organisation and the boundaries of the firm. It argues that the definition of boundaries of the firm

in terms of the activities performed in-house does not recognise that decisions to outsource

production and other functions are different from decisions to outsource technological knowledge.

In particular, multitechnology firms need to ‘know more than they do’, in order to cope with

uneven rates of development in the technologies they rely on, and with complex product-level

interdependencies. By knowing more than they do, multitechnology firms co-ordinate loosely

coupled networks of suppliers of equipment, components and specialised knowledge, and

maintain a capability for systems integration. The networks enable them to benefit from the

advantages of both integration and specialisation. Developments in aircraft engine control

systems confirm these propositions.

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Introduction

Since the Industrial Revolution, the production of useful knowledge has become increasingly

specialised and professionalised, with the continuous emergence of new and useful disciplines and

sub-disciplines. Knowledge specialisation has profound implications for the boundaries of the

firm. This paper explores these implications, focusing on the evolution of firms’ cognitive and co-

ordination mechanisms rather than their incentive systems. We build upon the evolutionary

theory of the firm (Nelson and Winter, 1982), which conceptualises firms as hierarchical sets of

routines that embody firms’ problem-solving capabilities, in order to explore the relationship

between firms’ production and knowledge boundaries. This paper contends that the definition of

the boundaries of the firm in terms of activities performed in-house does not recognise that

decisions to outsource production and other functions are different from those to outsource

technological knowledge. The organisational implications of such a difference are explored and

compared to traditional explanations of firms’ boundaries, and particularly to those that rely on

transaction costs analysis.

Empirical studies suggested that the knowledge boundaries of firms stretch beyond their

production boundaries and that the evolution of the knowledge and product domains unfolds

according to different principles (Cohen and Levinthal, 1990). In particular, Prencipe (1997)

found that firms retain technological knowledge about components whose production is fully

outsourced. This lack of a perfect overlap between knowledge and production boundaries reflects

corporate policies to reconcile desirable - but apparently conflicting - objectives. On the one

hand, firms aim to exploit flexibility and to cut costs by outsourcing the production and detailed

design of modular components and subsystems, i.e. they should buy. On the other, firms’

competitive positions may depend upon the capability to introduce radical product and component

innovations by building upon in-house technological capabilities, i.e. they should make.

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In this paper we develop a conceptual framework that explains how firms reconcile these

conflicting objectives. In order to analyse the nature of the boundaries of the firm, our analysis

focuses on the linkages among firms that interact to develop, design and manufacture

multitechnology products. Multitechnology settings lend themselves well to the analysis of firms’

boundaries and their relationship with specialised suppliers of equipment and knowledge. The

number of technologies for the design, development, and manufacturing of multitechnology

products are now too many to be managed entirely within a single-firm organisation: external

sources of technology must be integrated in one way or another. Consequently, firms compete also

in terms of their ability to manage the external relationships they need to develop and foster in

order to monitor and be involved in the development of new, specialised bodies of knowledge

(Coombs and Metcalfe, 2000). It is therefore important to understand which are the technologies

and the components that are developed and kept in-house and which are those that are instead

contracted out. It is also important to understand the characteristics of inter-firm relationships,

and the nature of the co-ordinating mechanisms, that enable firms to compete successfully.

Our analysis uses the following definitions. A product is understood as an artefact that is made up

of components and embodies a number of technologies, i.e. a multicomponent, multitechnology

product. Components are physically distinct portions of the product that carry out specific

functions and are linked to each other through a set of interfaces defined by the product

architecture (Henderson and Clark, 1990). Technologies are understood as the bodies of

knowledge or, more precisely, the bodies of understanding and practice that underpin product

design and manufacturing (Pavitt, 1998). By organisation, we mean the network of firms that co-

operate to design the whole product, manufacture its components, assemble and market it.

We study the relationships among firms within networks and how these relationships and the

boundaries of firms jointly adapt to accommodate both technological and product-level changes.

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Inter-firm linkages may exhibit different degrees of coupling. The concept of coupling captures

how two or more firms interact with each other. In particular, different degrees of coupling

describe the extent to which change in one firm within the network affects another. Our focus

here is on coupling among firms involved in the development of products and their components.

The framework we propose builds upon and develops the concept of loosely coupled organisations

- in contrast to tightly coupled or decoupled organisations (Orton and Weick, 1990). We test this

conceptual framework in the case of the development of control systems for aircraft engines over

the past thirty years. We further argue that loosely coupled organisations are long established,

pervasive and likely to grow in importance in future.

On products, organisation, and knowledge

The notion that there are different types of innovation which call for different organisational forms

was highlighted by Henderson and Clark (1990). Besides the traditional distinction between

radical and incremental innovations, they introduced the notion of modular and architectural

innovations. They defined an architectural innovation as a change in the relationships between a

product’s components that leaves untouched the core design concepts of components. They

argued that the product's architecture defines key intra-firm functional relationships, information

processing capabilities, communication channels, and information filters. Because product

architecture becomes embedded in a firm’s organisational set-up, an architectural innovation

represents a dangerous challenge for incumbent firms: they may neither be able to recognise

architectural innovations nor develop new architectural knowledge effectively. The emergence of

architectural innovations thus provides a fertile environment for new entrants.

Henderson and Clark focused their analysis on the case in which the product is “designed,

engineered, and manufactured by a single product-development organisation” (1990: 10).

Empirical evidence has shown that the design, engineering and manufacturing of products is

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carried out by networks of specialised designers, equipment suppliers, and manufacturers (von

Hippel, 1987; Kogut, 2000). On more theoretical grounds, Richardson (1972: 895) argued that

“Firms are not islands but are linked together in patterns of co-operation and affiliation. Planned

co-ordination does not stop at the boundaries of the individual firm but can be effected through

co-operation between firms”. The related issues of the changing boundaries of the firm and the co-

ordination mechanisms put in place to manage disintegrated innovation processes has attracted

increasing attention.

Established explanations of the boundaries of the firm: from transaction costs to modularity

The transaction cost approach pioneered by Coase (1937) and continued by Williamson (1975,

1985) has inspired much of the research on the boundaries of the firm. Williamson’s contribution

stressed that there are limits to the efficient size of firms set by the interaction of production and

transaction costs. Assuming that “at the beginning there were markets”, Williamson’s analysis

focused on the conditions under which markets fail to deliver optimal solutions and hierarchies

(i.e. firms) are likely to emerge. Williamson (1985) pointed out that in situations characterised by

uncertainty, opportunism and bounded rationality, the presence of asset specificity (i.e. of assets

that can be meaningfully deployed within a certain organisation, but not in others unless

substantial investments are made) causes the market system to fail and firms to emerge.

Hierarchies are better suited than markets to control opportunistic behaviour in the presence of

asset specificity.

Within this approach, knowledge is seen as an input to production activities whose idiosyncrasies

increase asset specificity: hence, the emergence of hierarchies to manage knowledge-intensive

activities like corporate R&D (Mowery, 1983). Monteverde and Teece (1982: 209) argued that

components that are “specific to a company” and that exhibit “systemic effects” were most likely

to be manufactured in house, since their production process generated specialised and non-

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patentable know-how. Pisano (1990) analysed the evolving governance structures of

biotechnology R&D and argued that, despite the advantages of collaboration, both specialised

biotechnology firms and established pharmaceutical firms face transactional problems due to the

weak appropriability conditions of knowledge. These problems led them towards increasing

vertical integration.

More recently, empirical and theoretical studies on modularity have also attempted to explain the

organisational implications of technological change. These studies, we argue, follow a logic that is

consistent with previous work inspired by considerations of transaction costs. Modularity is a

product design strategy aimed at enhancing the interchangeability of components within a given

architecture. Ulrich (1995) defined a modular architecture as a scheme that defines a one-to-one

mapping between physical components and functional elements. Components’ interfaces are

standardised and interdependencies among components are de-coupled in the sense that changes

in the key functional concept of each component do not affect the behaviour of others. Modular

strategies have important implications for the definition of the boundaries of, and the relationships

across, organisational units dedicated to the development of a product. Sanchez and Mahoney

(1996) argued that a modular product would make possible the adoption of a modular

organisation, whereby each module would be developed by a dedicated organisational unit.

Moreover, Arora and Gambardella (1994: 524) argued that “relevant information for innovation,

whatever its source, can now be cast in frameworks and categories that are more universal”. In

other words, as knowledge becomes less context-dependent, they contended that asset specificity

would decrease, property rights would become easier to define and enforce, and the use of markets

would increase even in knowledge-intensive transactions.

Whether one wishes to stress the considerations raised by Pisano (1990) and Monteverde and

Teece (1982), or those raised by the advocates of modularity, there is no gap between what firms

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do and what they know. For instance, Monteverde and Teece (1982) stated that “company-

specific” components with “systemic effects” should be kept in house in order to retain the

relevant know-how. On the other hand, advocates of modularity argued that, as products are

decomposed in modular components that embody all relevant knowledge, then organisations too

can be decomposed in such a way that each firm concentrates its learning and manufacturing

processes on a specific module. These studies consequently accepted that what firms do is a good

proxy for what firms know and thus focussed their analysis on the two extreme cases of

decentralised market vs. integrated hierarchies.

The emergence of multicomponent multitechnology products

The relationship between what firms do and what they know is made problematic by the

increasing specialisation of knowledge. In particular, as the range of potentially useful, specialised

technologies increases, firms find it increasingly difficult to rely entirely on in-house learning

processes. At the same time, actual and potential interdependencies among specialised learning

processes may cause “the costs of negotiations and the time required to bring the system into

adjustment by exclusive reliance on market (price) signals” to be greater that the costs and time

required should “successive stages [be] integrated” (Williamson, 1971: 120-1).

Empirical studies found that products and the firms that develop and manufacture them are

increasingly multitechnological, reflecting the development of new pervasive fields of useful

knowledge - like information technology (Granstrand, Patel and Pavitt, 1997). Wang and von

Tunzelmann (2000) stressed that the range of disciplines relevant to firms’ innovative processes is

expanding in both breadth, i.e. the number of relevant disciplines increases, and depth, i.e. their

sophistication and specialisation increase. The emergence of multitechnology firms that deliver

increasingly complex products would not be a cause for analytical concern should specific bodies

of technological knowledge be mapped tidily on to well identified components and sub-systems.

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This appears not to be the case, however. In a number of sectors, technologies and products have

been shown to follow interconnected, yet different, dynamics. More precisely, firms maintain and

develop capabilities over a wider number of technological fields than those in which they actually

produce, and this number is increasing over time. For example, Gambardella and Torrisi (1998)

showed that in the electronic industry firms are narrowing the range of products they offer, while

extending the range of technologies on which they rely. Von Tunzelmann (1998) discussed

similar findings in the food industry. Brusoni and Prencipe (2001) compared the case of the

aircraft engine with mature chemical engineering design and construction activities and reached

similar conclusions.

In order to make sense of these apparently diverging trends between firms’ production- and

technological-boundaries, in the next section we develop a conceptual framework based upon the

distinction between product complexity (measured in terms of interdependencies amongst

components) and technological imbalances (measured in terms of differential rates of

improvement in technologies). Subsequently, the notion of systems integration will be introduced

and discussed, in order to explain how the conflicting objectives that multitechnology firms

pursue can be reconciled.

Organising for innovation

The aim of innovating organisations developing multitechnology, multicomponent products, is

twofold. They generate variety by developing specialised bodies of knowledge in order to foster

the process of discovery of novel solutions. They also co-ordinate dispersed learning processes

carried out within specialised ‘communities of practices’ (Brown and Duguid, 1996). The

generation of variety calls for some degrees of specialisation among organisational sub-units (e.g.

firms, divisions, R&D labs), based on the different scientific and technological disciplines these

units master and on the idiosyncratic learning processes and search paths they pursue. The

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achievement of co-ordination requires some degrees of integration among organisational sub-

units, in order to identify and actively manage the relevant technological and organisational

interfaces (Lawrence and Lorsch, 1967).

Orton and Weick (1990) used the interaction of specialisation and integration (which they named

as distinctiveness and responsiveness respectively) to determine the extent of coupling across

organisational units. According to Orton and Weick (1990: 205):

“If there is neither responsiveness nor distinctiveness, the system is not really a system and it can

be defined as a noncoupled system. If there is responsiveness without distinctiveness, the system

is tightly coupled. If there is distinctiveness without responsiveness, the system is decoupled. If

there is both distinctiveness and responsiveness, the system is loosely coupled”.

Knowledge specialisation per se plays a major role in explaining the emergence of loose coupling.

Clark (1983) focused on changes in university structures. As quoted in Orton and Weick (1990:

206), Clark stressed that:

“[A]n academic system works with materials that are increasingly specialised and numerous,

knowledge-intensive and knowledge-extensive, with a momentum of autonomy. This

characterisation applies most strongly to advanced systems, but even the most retarded systems

will be based on a half-dozen or more distinct bundles of knowledge that have their own internal

logics and an inherent bent toward autonomy” (Clark, 1983: 16).

Although originally designed for universities, this description fits the situation faced by

multitechnology firms. The increasing number of highly specialised bodies of knowledge

hampers the effectiveness of tightly coupled co-ordination processes and pushes firms to increase

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their reliance on a combination of in-house and contract R&D (Langlois, 1992; Granstrand, Patel

and Pavitt, 1997). We argue that the usefulness of the concept of loose coupling lies in its capacity

to frame within a unified analytical setting the study of two important aspects (specialisation and

integration) of firms developing multicomponent, multitechnology products: loosely coupled

organisations exhibit properties of both decoupled and tightly coupled systems. Relying on this

concept, in the next section we propose two dimensions that identifies the conditions under which

“looseness contributes to successful change” (Weick, 1982: 378). The question we attempt to

address is the conditions under which firms within organisations (i.e. networks) should be loosely

coupled among each other in relation to the evolution of technologies and products they develop

and market. In order to do so, we build upon a strong research tradition in organisation theory that

identifies technology as the key determinant of organisational structure. Besides the already

mentioned work of Lawrence and Lorsch (1967), Perrow (1967) classified organisations in terms

of the type of task they perform, focusing on two key determinants of organisational structure: the

type of problem encountered (i.e. analysable vs. unanalysable) on the one hand, and the type of

work carried out (i.e. routine vs. non-routine) on the other. However, most of this research

focused on intra-firm processes only. The aim of the next section is to extend this line of enquiry

to explore the determinants of inter-firm organisational arrangements and co-ordination

mechanisms.

Imbalances and technological change: defining organisations’ coupling

We proposed two determinants of the appropriate form of inter-firm relationships and their degree

of coupling: first, the degree to which product and component interdependencies can be predicted;

second, the relative rates of change in component technologies (Brusoni, 2001). We argue that the

combination of these two determinants entail specific organisational requirements (in terms of

degree of coupling) that need to be matched in order to manage change successfully (see Figures 1

and 2).

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First, following Teece (1976), we argue that the degree of coupling between component suppliers

and users depends inversely on the degree of predictability of interdependencies across

components. Interdependencies across components are predictable when a change in the design of

one component entails a well-understood change in the design of other components, and vice

versa. Teece (1976) argued that in the presence of contingencies that cannot be perfectly

predicted, “co-ordinated activity is required to secure agreement about the estimates that will be

used as a basis for action. Vertical integration facilitates such co-ordination” (p. 13). More

recently, Chesbrough and Teece (1996) argued that predictability of interdependencies is likely to

be lower, the greater the frequency of interdependencies between components. Thus, in the

automobile, a radical shift in power source from internal combustion engine to electric batteries

will have greater systemic effects than a shift from drum to disc brakes. The development of

brakes can therefore be outsourced much more easily than that of power generation.

More generally, advocates of modularity argued that the development of modular innovations can

be fully outsourced (Sanchez and Mahoney, 1996). Whilst this may often be the case, it neglects

the second determinant of the nature of inter-firm relations, namely imbalances in the relative

rates of change in the technologies that underlie components. The implications of uneven rates of

change of component technologies for organisational arrangements are not discussed in the

literature. The current account of organisational appropriateness for innovation either does not

explicitly distinguish the knowledge and product dimensions (Sanchez and Mahoney, 1996) or

contends that they are informed by the same principles, as in the literature on modularity (Arora,

Gambardella and Rullani, 1998). The end result is similar since the product and knowledge

dimensions are collapsed together, so that the definition of component interfaces entails the

definition of knowledge interfaces.

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The literature on technological change, however, stressed that different technological fields are

characterised by different degrees of innovative opportunity, e.g. microelectronics and

biotechnology vs. civil engineering and hydromechanics (Malerba and Orsenigo, 1996). As a

consequence, multitechnology products are likely to generate situations characterised by uneven

rates of development in the component technologies on which they rely. When this happens,

organisations developing multicomponent, multitechnology products need to develop integrative

mechanisms capable of increasing the responsiveness across firms to accommodate changes in

fields that have cascade effects on others. A classic example is the introduction of the jet engine

technology. For firms designing and producing aircraft, engines were modular components. But

in the 1950s and 1960s, the introduction of jet engine technology required airframe firms to

develop in-house capabilities to identify the changes in airframe design necessary to correct the

emerging technological imbalances (Mowery and Rosenberg, 1982).

The influences of product interdependencies and technological imbalances on the structure of

firms’ organisational networks are framed in the two-by-two matrix reported in Figure 1. The

horizontal dimension of the matrix captures the product-level interdependencies, while the vertical

captures the technological-level imbalances. The resulting four quadrants identify three network

organisational forms, namely de-coupled, tightly coupled, and loosely coupled. These

organisational forms are characterised by distinct inter-firm co-ordination mechanisms (i.e.

market, vertical integration, and systems integration).

[Figure 1 about here]

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Technological imbalances and product-level interdependencies: examples of decoupled and

tightly coupled organisations

Products characterised by even rates of change among component technologies and predictable

interdependencies at the product level are manageable via decoupled organisations co-ordinated

via arms-length market relationships. This situation is depicted in the top left quadrant in Figure

2. This situation reflects the case of modular products. Modular products are designed and

manufactured within network organisations characterised by the presence of systems assembler

firms that rely on suppliers for the design and manufacturing of components. Within a modular

product, each module can be improved within a predefined range of variation without impacting

on the design of the other modules (Ulrich, 1995).

Specialisation (i.e. distinctiveness) within a modular architecture allows each component producer

to make experiments and thus increase the pace of innovation as it happens, for instance, in the

Personal Computers (PCs) industry (Langlois and Robertson, 1992; Baldwin and Clark, 2000). A

modular architecture, built around standardised interfaces, would enable a process of progressive

specialisation of R&D, production and marketing activities in such a way that each component

(e.g. disk drive, microprocessor, operating system, application software) would define the

boundary of a firm whose relationships with the others would be mediated via decentralised

market transactions (top left quadrant of Figure 2). Responsiveness would not be needed or, more

precisely, it would not require any conscious managerial effort, because it would be achieved just

by respecting the technological and organisational interfaces defined by the modular architecture.

Products characterised by both component technologies changing at uneven rates and by

unpredictable interdependencies across components require tightly coupled organisations, where

large, integrated firms maintain in-house both the knowledge and the activities involved in the

design and production of their final products and component units: co-ordination is achieved via

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vertical integration. This situation is depicted in the bottom right quadrant of Figure 2 and fits the

case of the telecommunication equipment industry. Davies (1999) studied the evolution of

division of labour between equipment suppliers and network operators in the case of mobile phone

systems. Due to the fast rates of change in component technologies, especially software-controlled

switching technologies and electronics, and the impact these changes had on the interdependencies

across physical components, mobile phone systems have become the sole trade of integrated

firms. Firms like Ericsson, Nokia and Motorola can design, manufacture and install the entire

range of phone systems components: radio base stations, switching centres and base station

controllers.

Davies (1999) discussed the complex interaction between advances in component technologies

and changes in physical equipment. The advantage of a “single vendor solution” lies in the

supplier’s experience in delivering “a verified system in which all the components work well

together, and can be integrated, tested and ready for service more rapidly that is possible in

multivendor solutions” (Davies, 1999:120). This experience is required to fine-tune the phone

system to the specific technological, geographical and legal requirements of the network operator.

More specifically, Davies argued that the key advantage of Ericsson, the world leader throughout

the 1990s, was its constant involvement in both architectural and component innovations, as well

as its efforts to control production costs. In terms of Figure 2, through vertical integration Ericsson

achieved technological and organisational responsiveness, while minimising the organisational

distinctiveness that may have hampered its competitive position.

[Figure 2 about here]

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Technological imbalances and product-level interdependencies: Examples of loose coupling

Figure 2 shows a further type of organisational form. Loosely coupled organisations are

appropriate structures when multitechnology products are characterised either by uneven rates of

advance in underlying technologies and predictable product interdependencies (bottom left-hand

quadrant), or by even rates of advance in underlying technologies and unpredictable product

interdependencies (top right-hand quadrant).

The top right quadrant of Figure 2 captures some aspects of the automotive industry. Sako and

Murray (1999) argued that, although the basic architecture of an automobile has become fairly

stable, there are many aspects of the linkages within the electro-mechanical architecture that are

not yet fully understood. Achieving a particular noise/vibration/harshness (NVH) level at different

maximum speeds requires a deep understanding of the “subtle linkage between the body, chassis,

engine, and drive-train” (p. 4). Despite having outsourced the design and manufacture of the

body, chassis, cockpit, drive-train and sometimes even the engine, only car manufacturers have

maintained the integration capabilities necessary to obtain “a workable automobile” (p. 4).

The case of the automotive industry well captures the problems raised by Teece (1976), and

Williamson (1971), with reference to the emergence of unexpected contingencies which cannot be

efficiently managed via repeated short-term contracts and thus require explicit organisational co-

ordination “to secure agreement about the estimates that will be used as a basis for action” (Teece,

1976: 13). What Teece’s and Williamson’s frameworks did not capture is, in our view, the fact

that car makers have maintained these capabilities while outsourcing the detailed engineering and

manufacturing activities of the majority of the components that make up a vehicle.

The disjunction between product and technological dynamics is further highlighted by the other

case of loose coupling captured by Figure 2 (bottom left quadrant). This situation can be

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illustrated using the case of Fujitsu, a leading hard-disk drive producer. In a study of the hard-disk

drive industry, Chesbrough and Kusunoki (2000) argued that technologies follow a dynamic cycle

that goes from integral to modular. In the integral phase, in their view usually the first stage of

technological development, the interdependencies between components are fast changing and

poorly understood. Architectural innovations occur at this stage, which requires strict co-

ordination mechanisms typical of the tightly coupled organisation. In the modular phase, when

the components and their interdependencies are better understood, articulated, and modularised,

co-ordination is better achieved through decoupled forms of organisation. Firms that are not ready

to adapt in order to keep their organisation in tune with the technological phase fall into

modularity or integral traps.

Chesbrough and Kusunoki argued that the success of Fujitsu during the shift from a modular to an

integral phase was due to its systems knowledge. During the modular phase, like other firms,

Fujitsu relied on a decoupled network of external suppliers. Unlike the other firms that fell into

the “modularity trap”, however, Fujitsu did not discontinue “its … investments in systems

knowledge and materials and component technology in its R&D labs” (Chesbrough and Kusunoki,

2000: 13). Fujitsu’s systems knowledge enabled the firm to master the new integral technology

(i.e. the magneto-resistive head).

Chesbrough and Kusunoki’s prescriptions about organisational arrangements remain, however,

confined to the two classical ones, namely modular (i.e. decoupled) or integrated (i.e. tightly

coupled). They do not emphasise the analytical importance of their finding that Fujitsu maintained

wide technological capabilities well beyond those needed to perform the design and production

activities tailored to modular architecture. Outsourcing the production of components does not

necessarily entail outsourcing the bodies of knowledge employed to specify, design, integrate,

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manufacture, test, and assemble them. Increasingly, firms maintain and develop knowledge

relying on learning mechanisms other than ‘doing’ (Pisano, 1997).

We argue that the framework presented in Figures 1 and 2, by shifting the unit of analysis from

single firms to the networks that develop, design and manufacture multicomponent

multitechnology products, and by taking into consideration the role played by systems integration

capabilities, can explain how incumbents, such as Fujitsu, can navigate the dangerous waters of

architectural innovations. The next section focuses on the role and notion of systems integration as

the key co-ordination mechanism of loosely coupled networks.

The balance between specialisation and integration: the role of the systems integrators

A distinguishing feature of loosely coupled organisations is the presence of systems integrators:

firms that lead and co-ordinate from a technological and organisational viewpoint the work of

suppliers involved in the network. Systems integrator firms outsource detailed design and

manufacturing to specialised suppliers while maintaining in-house concept design and systems

integration capabilities to co-ordinate the work (R&D, design, and manufacturing) of suppliers.

Systems integration appears therefore to be a particular type of co-ordination mechanism in

between markets and hierarchies. While markets satisfy the need for distinctiveness, and

hierarchies the need for prompt responsiveness, systems integration is an effort to reconcile them

when specific product- and technology-level circumstances occur.

Relying on qualitative and quantitative evidence from the aircraft engine development

programmes, Prencipe (2001) adopted the definition of systems integration as set out by the UK

Office of Science and Technology (1990) and deconstructed it into its elementary constituents. He

argued that systems integration activities entail six different types of skills: understanding of

underlying technological disciplines and the ability to integrate them; understanding of the

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behaviour of the entire system; ability to design the entire system; the ability to design most key

components; the ability to assemble components. He assessed empirically the relative importance

of each element for the world leading producers of aircraft engines. It was found that the ability to

assemble component interfaces and the ability to design most key components of the engine were

ranked lowest by practitioners. The capabilities that received the highest scores were instead

related to the understanding of technological disciplines underpinning the system and the

understanding of the system behaviour in terms of its relevant parameters (Prencipe, 2001).

Thus, the emphasis fell squarely on the “understanding” of the underlying bodies of knowledge

and ensuing system behaviour, rather than on the “activities” of design and assembly. The reliance

of large firms in many engineering industries on extensive networks of suppliers of engineering

services and components does not imply that the relevant knowledge is fully disintegrated and

localised within each firm. Rather, systems integration companies need to maintain an

understanding of the “bodies of knowledge” and “system behaviour” to re-compose what has been

decomposed (Prencipe, 2001).

The relationship between systems integrators and their suppliers is governed by contractual

arrangements, ranging from the typical arms-length contractual relationships and costs-sharing

agreements to joint ventures, and formal alliances. The specific governance structure may vary

with the complexity and criticality of the component or activity considered (Prencipe, 2001), as

well as with appropriability considerations (Teece, 1986). Full vertical integration is not the

answer, however, unless specific product- and technology-level circumstances emerge. This

notion of loosely coupled organisations is similar to that of core networks put forward by

Robertson and Langlois (1995: 550). But systems integrators are more than the assemblers that

operate within core networks.

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Systems integration refers to the technological and organisational capabilities to integrate changes

and improvements in internally and externally designed and produced inputs within an existing

product architecture. This dimension of systems integration capabilities is based upon Henderson

and Clark’s concept of architectural knowledge, i.e. “knowledge about the ways in which the

components are integrated and linked together into a coherent whole” (1990: 11). An example of

this type of systems integration is given by the automotive industry as discussed in Sako and

Murray (1999), whereby car makers need to maintain integration capabilities to effectively

manage the assembling of fully outsourced components.

Systems integration has also a more dynamic role, however. It refers to the capabilities required

to introduce new product architectures (Prencipe, 2001). In multicomponent, multitechnology

products, the periodic introduction of new product architecture requires the co-ordination of

change across a large number of technological fields that may well be developed by an external

source. In turn, such co-ordination requires an all-round knowledgeable firm. For instance,

Fujitsu (as the systems integrator of a hard-disk drive network) was able to benefit from the

insights generated by its suppliers and could recognise and exploit an architectural innovation, i.e.

the magneto-resistive head. Fujitsu’s success was made possible by the systems knowledge that

was maintained in house, even though a temporarily dominant design was established around a

modular architecture. This architecture induced other firms to delegate knowledge generating

activities to third parties. Fujitsu, while relying on its suppliers for the manufacturing of

components, always retained systems knowledge that went well beyond the range of activities that

the company maintained in house (Chesbrough and Kusunoki, 2000). By ‘knowing more than it

did’, Fujitsu managed to avoid potential traps such as those described by Chesbrough and

Kusunoki (2000) and Henderson and Clark (1990).

20

Summary of the theoretical discussion

Building upon our framework, we can elaborate four predictions that are used to organise the

empirical discussion in the next sections. These predictions will be operationalised and explored

(by which we do not mean ‘tested’ in a statistical sense), relying on both qualitative and

quantitative empirical evidence. Qualitative data aim at revealing the changing relationship among

firms within the network we studied when component interdependencies change and technological

imbalances emerge. Patent data are used to assess the development (or lack thereof) of systems

integration capabilities as the degree of organisational coupling changes.

First, we expect that, as component technologies mature and increasingly predictable

interdependencies across physical components emerge, the organisation of design and

development activities will move towards decoupled firms’ networks. For instance, in terms of

Figure 2, we expect to find that there will be no systems integrator firms, that is firms that span

their capabilities over the whole range of R&D, development, detailed engineering and

production. Rather, firms will specialise on specific components and sub-components, which will

then be plugged into each other by a systems assembler firm to exploit the advantages of a fully

modular architecture.

Second, we expect that under conditions characterised by unpredictable product interdependencies

and fast, uneven technological developments firms will need to rely on tight co-ordination

mechanisms to achieve fast and accurate technological and organisational responsiveness. In

terms of Figure 2, we expect to see the emergence of an integrated, all-round knowledgeable firm

which is engaged in a wide range of manufacturing activities, together with innovative endeavours

that involve the whole range of the product’s physical and technological components.

21

Third, in intermediate situations characterised by either uneven technological developments, or

unpredictable product-level interdependencies, we expect loosely coupled systems to emerge.

These systems will rely on a wide network of specialised suppliers of components and knowledge.

We also expect these networks to be led by systems integrator firms that maintain a broad set of

in-house technological capabilities while at the same time they rely on suppliers for the detailed

engineering and production of individual components and sub-systems.

Fourth, and relatedly, in loosely coupled systems we expect the emergence of systems integration

capabilities, which allows the firms that lead loosely coupled networks to introduce innovations at

both the architectural level and component level. Indeed, it is vital to our argument that systems

integrators maintain capabilities relevant to both architectural and component innovations (at the

same time as being specialised in terms of the engineering design and manufacturing activities

they perform). If, for instance, they were ‘specialised’ in architectural innovation only, one may

interpret this result as signalling that a decoupled network organisation is in place, whereby an

assembling firm embodies the pattern of organisation into the product architecture, leaving

specialised component suppliers free to pursue autonomous innovative processes that will be

accommodated by respecting existing component interfaces. The following sections discuss the

empirical research which substantiates our model and the methodology applied to operationalise

the working hypotheses.

Technological change in the aircraft engine control system

This section explores the validity of our framework through an analysis of the changes of the

network constituted by the world’s three largest aircraft engine manufacturers and their suppliers

in relation to a specific engine subsystem, namely the control system. We chose to study the

development of aircraft engine control systems for three reasons. The first relates to the larger

product which the control system is part of, namely the aircraft engine. Aircraft engines are

22

multitechnology, multicomponent products. Components differ in functions and criticality, and

exhibit patterns of interdependencies of varying complexity. Components also rely on different

and often distant technological fields that advance at different, and not necessarily consistent, rates

of development, hence the possibility of technological imbalances. To name but a few -

thermodynamics, aerodynamics, fluid dynamics, tribology, heat transfer, combustion, structures,

materials, manufacturing processes, instrumentation, and controls (Mattingly, Heiser and Daley,

1987). The multitechnology, multicomponent nature of the aircraft engine allows the analysis of

the boundaries of firms with respect to their network of suppliers in relation to both technological

imbalances and product-level interdependencies within the framework proposed in the previous

section.

The second reason is that over the last thirty years the engine control system has been

characterised by a radical shift in its underlying technologies: from hydromechanics to digital

electronics. The shift was partly due to the technological imbalances occurring between the

hydromechanical control system and the engine power system. This technological imbalance

paved the way to the introduction of digital electronics control systems. Furthermore,

hydromechanical and digital electronic control systems show different degrees of

interdependencies across components: more specifically, digital component technology enables

more predictable, although more numerous, interdependencies.

Thirdly, as a result of the high rate of technological advance of digital electronics, control system

performances have improved dramatically so that the control system has become a pivotal part of

the aircraft engine, generating a new set of imbalances at the level of the engine system. We

argue that aircraft engine manufacturers have adjusted their knowledge and production boundaries

over time in order to manage the uneven rates of change characterising different component

23

technologies as well as the changing degree of predictability of interdependencies across

components.

The data

The paper draws on data collected during a four-year field study of the aircraft engine control

system industry. The study is part of a larger research project designed to explore the distinction

between the knowledge and production boundaries of firms developing complex products such as

aircraft engines (Prencipe, 2001). This study relies on both qualitative and quantitative evidence.

The use of two classes of data helps establish solid construct validity (Eisenhardt, 1989; Yin,

1994). Qualitative data were collected through research in both primary and secondary sources.

Primary sources included on-site interviews with representatives of the world’s three largest

engine manufacturers and four control system suppliers. In the trade literature, these three engine

manufacturers are called the Big Three or the Primes. They dominate the large turbofan industry,

since they hold about 90% of the world market (European Commission, 1997). The names of the

firms have been disguised for confidentiality reasons.

A total of twenty in-depth interviews were conducted with senior technical managers and control

system designers. Interviews were semi-structured and lasted about two hours. Interviewees were

asked to comment upon the managerial implications (in terms of technological capabilities to be

developed and organisational change needed) deriving from the introduction of technological

innovations in the control system. In order to validate our analysis a draft of the empirical part of

the paper was circulated to the key individuals interviewed, and the accuracy of the account was

discussed over the phone in supplementary interviews. The specific aim of the interviews was to

substantiate the relationship between product- and technological-level imbalances and the degree

of organisational coupling between aircraft engine makers and their suppliers.

24

The quantitative analysis builds on US patent data. The US patents were collected using the US

Patent CD-ROM. We then double-checked the list of patents collected with the Legal Offices

within each company. In order to identify those patents related to control system technologies we

relied on the US Patent Classes’ definitions and the help of two US Patent Office primary

examiners. The break-down into ‘Architecture’, ‘Sub-architecture’, ‘Functional’, and

‘Component’ groups was carried out by the Head of Engine Control System of one the world’s

largest engine manufacturers on the basis of the content of the abstract of each patent. These four

groups allow an in-depth analysis of the extent of division of labour between engine

manufacturers and suppliers, and thus reveal the presence (or lack thereof) of systems integration

capabilities. ‘Architecture’ patents are those whose abstract describes how components are

arranged in a system. ‘Sub-architecture’ patents are those whose abstract describes how

components are arranged in a subsystem. If the main content of the patent abstract describes

functional behaviour of a system, i.e. what the system does, we label patents as ‘Functional’.

‘Physical’ patents are those whose abstract concerns the physical description of an item or a

subsystem, i.e. what the system looks like. The abstract of each US patent is available on the web

site of the US Patent Office. By using patent data we aimed at integrating the qualitative analysis

of the emergence of alternative degrees of coupling, with the quantitative analysis of the

development and maintenance of in-house systems integration capabilities.

Limitations of patent data

The use of patent data as a proxy measure of companies’ technological capabilities has its own

limitations as discussed in the literature (Scherer, 1988; Wyatt, Bertin and Pavitt, 1988). First,

patents carry different importance as a means of protection of new products and processes across

industries due to the nature of the technologies used (more or less patentable) and to the

propensity to patent (Klevorick et al., 1995). This leads to inter-industry and inter-sectoral

differences in the likelihood of patenting new products and processes. Second, the propensity to

25

patent can vary across companies within the same sector. Third, as only US patents are used in

this study, there are international differences as US-based companies are more likely to patent in

the US than non-US companies. Finally, patents do not allow measurement of capabilities in

software technologies, as copyright is often used as a means of protection.

On the other hand, viewing patents as indicators of a firm’s technological capabilities does present

a number of advantages such as quantitative accuracy, considerable detail, and accessibility.

Furthermore, companies usually patent in the US soon after patenting in their home country since

the US is the single largest national market (Soete and Wyatt, 1983; Pavitt, 1988). Inter-industry

variation is not a problem in this study since the analysis is a comparison between firms in the

same industry. In addition, we have used qualitative data collected via on-site interviews to

overcome some of the limitations of the patent analysis. Qualitative data have been used to

validate the accuracy of the results and meaning of the patent analysis and to write case histories

of the two technologies which, in turn, enrich and test the findings of the quantitative analysis.

The technology

In the 1950s, aircraft engine control systems were based on hydromechanical technologies, and

were complex artefacts. They encompassed a large number of components and sub-components

and they were application-specific: that is, a change in the design of the engine required a change

in the design of the control system. In terms of the framework discussed in the previous section,

we expect firms’ network structures to be tightly coupled during the early stage of development of

hydromechanical technology.

Hydromechanical control systems reached a technological ceiling in a relatively short time. The

maturity of the technology enabled engineers to understand, articulate, and modularise the

interfaces between the engine and the hydromechanical control system. Furthermore,

26

performance improvements derived primarily from operational experience rather than from

scientific or technological breakthroughs (Prencipe, 2000). In the mature stage of development

reached in the 1970s, hydromechanical control systems were characterised by a relatively low rate

of change at the technological level and increasingly predictable interdependencies with the other

components. In terms of the model depicted in Figures 1 and 2, we expect firms’ network

structures to move towards a decoupled organisation, as the technological ceiling approaches.

Although hydromechanical control systems had achieved relatively high reliability, they displayed

limitations in coping with the evolving control requirements of aircraft engines. Higher thrust

engines that were being developed during the 1970s were characterised by a larger number of

parameters that needed accurate measurement and computation. The 1970s saw the development

of the turbofan engine, where the thrust is generated by the fan mounted at the front of the engine

and by the core engine. The proportion of thrust generated by the fan depends on the amount of

mass flow bypassing the core engine. This is usually expressed by a ratio, the by-pass ratio,

which is the “ratio of mass flow through the fan or bypass duct to that through the core” (Gunston,

1997: 235). The increasing by-pass ratio that characterised the newly developed engines posed

several problems for the calculation and control of thrust during engine operation. As the thrust

rating of low by-pass engines required limited adjustment of the power lever, engine thrust was

approximately determined by core engine speed and compressor inlet temperature. Higher by-

pass ratio implied that the fan developed a larger percentage of the engine thrust. In order to avoid

over-boost and over-temperature, more frequent adjustments of the power lever were required

(Prencipe, 2000). Traditional hydromechanical control systems could not manage this problem.

The complexity of thrust calculations, the high accuracy and quick-response time required, and the

fact that most parameters (turbine temperature, fan speed, altitude) were available in electronic

form therefore rendered digital electronics more suitable for control systems (Flanders, 1974;

27

Griffiths and Powell, 1974). The introduction of digital electronics progressively enlarged the

role, importance, and functions of the engine control system as well as its interfaces with the other

engine components and the airframe. The radical technological shift led to a functional shift.

Digital electronics is in fact a fast moving technology. This high rate of advance enabled the

embodiment in the control system of a large and increasing number of functionalities previously

carried out by the pilot. The digital control system became the brain of the engine. In addition,

digital control systems’ potentialities created a new set of technological imbalances between the

control system and the engine power system.

Although digital control systems interacted with (in fact, controlled) a higher and enlarging

number of engine components, these interdependencies were governed by the so-called interface

software. Due to this software component, digital control systems were not application-specific

and hardware and software modules could be re-used in different applications. Digital control

systems therefore exhibit predictable product systemic interdependencies, since such

interdependencies were managed by the interface software (Prencipe, 2000). In terms of the

framework discussed above, we expect digital control systems to be increasingly developed by a

loosely coupled network of firms as depicted in the bottom left quadrant in Figures 1 and 2.

In the next section, using the framework described in Figures 1 and 2 we analyse the paths of

adjustments of the knowledge and production boundaries of the three firms under examination, as

well as the changes in the degree of coupling with their suppliers, with respect to the

hydromechanical and digital electronics trajectories. Building upon our framework and the above

discussion of the technology, we expect three key working hypotheses to be corroborated. The

first hypothesis refers to the link between the evolution of the hydromechanical trajectory and the

underlying organisation. The second refers to the link between digital electronics and the

28

underlying organisation. Finally, the third hypothesis refers to the existence of systems integration

capabilities.

First, given the decreasing rate of change of technology and the increasingly predictable

interdependencies across components, we expect the development of hydromechanical control

systems to move towards decoupled firms’ networks. In terms of Figure 2, we therefore expect to

find that aircraft engine makers are decreasing their involvement in the whole range of R&D,

development, detailed engineering and production activities that relate to hydromechanical

components.

Second, we expect digital controls to be developed within loosely coupled network structures,

given its fast changing technology base, but predictable (software-managed) interdependencies.

Third, we expect that aircraft engine makers develop and maintain in-house systems integration

capabilities in digital electronics. This requires that their capabilities be spread across the four

patent categories identified above. As pointed out above, loose coupling is reflected in (a)

systems integrators with capabilities in the architectural, sub-architectural, physical and functional

patent fields; (b) component suppliers with capabilities in the sub-architectural, physical and

functional patent fields. If aircraft engine makers specialise in architectural patents only, then a

decoupled organisation is in place. If aircraft engine makers specialise in patents in all categories,

then a tightly coupled organisation is in place. While the analysis of the first and second working

hypotheses is largely based on interviews, the third one will be analysed from both patent data and

interviews.

29

Evolving networks: the hydromechanical trajectory

Although they competed with similar products in similar markets, the three engine manufacturers

initially had different technology and organisational strategies in the design and production of

engine control systems. Company A and Company B relied on their own captive suppliers for the

development of this subsystem. On the other hand, Company C always relied on external

suppliers. Interviewees stated that the top management of the firm considered as their main

business the development of aircraft engines and their main capabilities in such disciplines as

aerodynamics, thermodynamics, and combustion, and not in control systems and therefore in

hydromechanical and later in digital electronics. The fact that firms’ responses may differ despite

similar technological or market conditions is consistent with the evolutionary approach on which

we rely (Nelson, 1991).

The technological shift and ensuing functional shift that characterised the control system led these

three engine manufacturers to adjust their knowledge, production, and organisational boundaries.

Using the framework proposed above, Figure 3, which focuses on the hydromechanical trajectory,

traces the paths of adjustment of the knowledge and production boundaries of these three

companies in relation to their network of suppliers.

[Figure 3 about here]

In the 1970s, when hydromechanics was the leading technology, Company A was characterised by

a tightly coupled organisational network, since it relied on an internal supplier for the design and

production of control systems (A in the bottom right quadrant in Figure 3). As the product

interdependencies characterising hydromechanical control systems became well understood and

articulated, Company A moved from a tightly coupled to a decoupled set-up via the outsourcing of

30

design and manufacturing activities of hydromechanical components (A’ in the top left quadrant

in Figure 3).

Company B maintained its exclusive engine control systems supplier throughout the life cycle of

the hydromechanical trajectory. Both Company B and the engine control system supplier used to

operate as independent divisions of a larger company. Although their relationship was defined as

typical contractor/subcontractor, the engine control systems for Company B’s engines were

designed and developed jointly with this internal supplier, and the development costs are shared.

Company C followed a different strategy. In the 1970s, when hydromechanics was the leading

technology, Company C did not have any in-house control system supplier (top-right quadrant of

Figure 3). It initially had a loosely coupled network structure, which progressively became de-

coupled as the technology stabilised and the system complexity was more fully understood. (C' in

the top left quadrant in Figure 3).

Evolving networks: the digital electronics trajectory

In the 1980s, digital electronics emerged as the alternative technology (Figure 4). Company A

was initially characterised by a tightly coupled structure. It moved toward a loosely coupled

network structure that ended up with the sale of its internal supplier in 1996 (A’ in the bottom left

quadrant in Figure 4). As a result of this move, Company A started sourcing control systems

components from its former internal suppliers, but at the same time maintained systems

integration capabilities in order to design the architecture of the control system, integrate the

components back into the engine, and monitor further development in digital electronics.

[Figure 4 about here]

31

Company B continued its policy oriented towards a tight control of the development and

commercialisation activities of control systems (bottom-right quadrant of Figure 4). According to

the supplier’s Marketing Manager “The relationship [between aircraft engine maker and control

system supplier] was exclusive by tradition in the early years and reinforced in the early 1980s

when we started the development of digital electronic engine controls.” Moreover, the possibility

of selling engine controls to competitors (and in particular to Company C) was ruled out.

Company B maintained its internal supplier or, in other words, it remained characterised by a

tightly coupled network structure. Such a strategy was due to the way Company B conceived the

engine control system division, as well as to the importance that such a division had within the

larger company group. Company B is shown as a black square in the bottom right quadrant in

Figure 2. In our view, the peculiarity of Company B’s policy is related to the fact that, unlike the

cases of Companies A and C, Company B’s control system supplier grew as big as the aircraft

engine maker division due to its heavy involvement with the defence business. The strategic role it

came to play in Company B’s overall profitability led the management to reject any possible

loosening of the degree of coupling with the control system division.

In the late 1980s following the introduction of digital electronics and the problems they faced in

the integration of this new fast moving technology, Company C moved towards a loosely coupled

network structure (C’ in the bottom left quadrant in Figure 4). It started developing in-house

systems knowledge through investments in digital electronics as well as links with external

suppliers and universities. The case of Company C is illustrative of the fact that some degree of

integration (at the knowledge level) is required to monitor developments in fast changing,

specialised fields. Company C, characterised by a decoupled pattern of interaction with its

suppliers, took longer than its more integrated rivals to identify the developments of digital

electronics. Interviewees confirmed that it had been harder (in terms of resources to be invested)

for them to catch up with their competitors to reach quality and reliability in their control systems.

32

They also stated that although they had caught up with competitors, they still spent more resources

to develop and integrate control systems (Prencipe, 2000).

The in-house technological capabilities of the systems integrators

The analysis carried out above focused on the relationship between engine makers and their

suppliers of control systems. While the evolution of this relationship is the first step toward

establishing the degree of coupling, the presence of systems integration capabilities is vital to

distinguish between decoupled and loosely coupled networks, because both type of networks rely

on a rather disintegrated pattern of division of labour. This section analyses in depth the evolution

of the division of knowledge and technological capabilities that underpin engine makers’

organisational adjustments as digital electronics became the dominant technology. We used US

patent statistics as a proxy measure of these capabilities. The limitations of the use of US patents

have already been discussed. Table 1 reports on the patent shares related to control systems

technologies (both hydro-mechanical and digital) in the three firms examined. Patent shares were

calculated over the overall number of patents granted to each firm between 1977 and 1996. The

period was divided into four five-year periods. Patent shares provided an approximate indication

of the importance of a firm’s capabilities in control system technologies relative to a firm’s overall

technological capabilities. Table 1 also reports on the rate of growth of the control systems-related

patents as compared to the overall rate of growth of the companies’ patents. This comparison

enabled an assessment of the dynamics of changes in the relative importance of control systems

technologies in each of the firms analysed.

Table 1 shows that the overall rate of growth of Company A’s patent portfolio became positive

between the third and fourth periods registering a sudden increase. As confirmed by interviewees,

this sudden rise was due to the patenting policy adopted by Company A following the advent of

performance-oriented top managers. The rate of growth of control systems technologies followed

33

the same pattern, though did not show the same rise. The last period was characterised by a

positive and higher growth rate than the total. The data, however, did not allow us to speculate

any further, since the sale of the specialised supplier of Company A took place in 1996. Interview

data gathered from the independent supplier confirmed that Company A still maintained the in-

house capability to design the overall architecture and to act as the integrator of the control system

components.

As regards the tightly coupled structure of Company B, Table 1 shows that the share of control

systems technologies increased between 1977 and 1991. Table 1 also shows that the growth rate

of control system was higher than the total in the first two sub-periods. This result is due in our

opinion to the increasingly important role of the control systems division within Company B. The

rate of growth in the last period was negative for control systems, however. This reflects the

emergence of a dominant design in digital control systems, i.e. a centralised architecture governed

by one computer system (Prencipe, 2000).

The most telling case in support of our argument is Company C. Although it did not design or

produce control systems, its patent shares exhibited a sharp rise throughout the first three periods

examined and a slight decrease in the last. The rate of growth of control systems technologies as

compared to the total growth rate showed a similar pattern. The drop in the last period can be

interpreted with the emergence of an industry-dominant design. Extensive interviews confirmed

that this pattern reflected Company C’s efforts to develop technological capabilities to co-ordinate

a loosely coupled network structure in order to cope with the fast rate of change characterising

digital electronics, and to be capable of evaluating design options in the integration of engine

subsystems.

[Table 1 about here]

34

The loosely coupled nature of Company C’s network can be further scrutinised by comparing its

technological profile with those of the world’s two largest independent suppliers of aircraft engine

control systems (one first-tier and one second-tier). The case of Company C is revealing for our

purpose because historically it had never designed or manufactured an engine control system and

used to regard its underlying technologies as outside their core capabilities. In order to build the

firms’ technological profiles, their patents were grouped according to four main categories,

namely ‘Architecture’, ‘Sub-architecture’, ‘Functional’, and ‘Physical’. This grouping allowed a

detailed analysis of the extent of coupling of Company C’s supply structure.

As discussed above:

• A tightly coupled structure is characterised by large integrated firms that maintain in-house

R&D, design and production capabilities so that co-ordination is achieved via vertical

integration. In terms of the grouping used, these firms would be characterised by a much

greater volume of patenting than suppliers, distributed across the four categories.

• In a decoupled structure, systems assembler firms would outsource both design and

manufacturing activities: co-ordination would be achieved via market mechanisms. In this

case, the technological profile of assemblers would be heavily focused on the ‘Architecture’

group, and a considerable volume of patenting would come from first- and second-tier

suppliers.

• A loosely coupled network structure is characterised by a leading firm equipped with systems

integration capabilities. A considerable volume of patenting would still come from suppliers,

but the systems integrator would maintain a wide range of capabilities, spanning not only

‘Architecture’ but also the other categories.

35

[Figure 5 about here]

Figure 5 shows that although Company C had the largest number of architectural patents, it did

not have the largest number across all fields. It was not therefore characterised by a tightly

coupled structure. Furthermore its patenting did not focus solely on the architecture of the control

system. Thus, it was not characterised by a decoupled structure. Rather, Company C took out

patents in the ‘Physical’ and mainly in the ‘Functional’ categories. This confirms our earlier

assertion that, although Company C did not design or manufacture any components of the engine

control system, it developed and maintained an understanding of the functioning of the units in the

engine control system. Such an understanding was a necessary condition to integrate the different

components together and within the engine system. Company C’s in-house technological

capabilities reflected its reliance on a loosely coupled network structure through which the firm

had tried to catch up with its competitors. We argue that the increase in Company C’s share of

control system-related patents and their spread over the four categories analysed reveal that the

company developed capabilities to specify and test externally-produced components as well as to

identify and co-ordinate the integration of new technological developments.

Discussion and conclusions

We have argued that, in complex products like aircraft engines, firms are capable of adjusting to

the differing organisational requirements related to integral and modular innovations by

maintaining a loosely coupled network structure. A key characteristic of loosely coupled network

organisations is the presence of a systems integrator firm that outsources detail design and

manufacturing to specialised suppliers while maintaining in-house concept design and systems

integration capabilities to co-ordinate the work (R&D, design, and manufacturing) of suppliers.

Loosely coupled organisations are relevant also to other industrial contexts. For instance, the

analysis by Orsenigo, Pammolli and Riccaboni (2001) of pharmaceutical firms and their linkages

36

with biotechnology firms hints at the existence of loosely coupled networks in drug development.

Similarly, automobile firms establish linkages with their suppliers that exhibit some characteristics

of loosely coupled organisations (Womack, Jones and Roos, 1991). There is also more general

and long-standing evidence of loose coupling between the large-scale manufacturing firms and

suppliers of their production machinery and other inputs (Patel and Pavitt, 1994; Rosenberg,

1976). The empirical part of this paper needs to be extended by systematically applying the

technology and product-level categories of our framework to other sectors that exhibit different

degrees of product and technological complexity.

The framework captures some key aspects of the processes that have characterised the adjustments

of the networks embedding the world’s leading engine manufacturers and their suppliers. We

have assumed that the technological and product dimensions play a key role in affecting the

emergence of different organisational forms. As the case of Company B shows, other variables

are at work that influence the make-buy decision process in multitechnology firms but are not

captured in our analysis. These variables may be related to appropriability conditions as well as to

firms’ perception of specific technologies, in turn linked to past investments in R&D projects,

emergence of organisational coalitions carrying particular interest, and the like. It would be

important to extend this analysis to study how different communities of practices within firms

develop a common perception of the strategic role of specific technologies and components, and

the innovative opportunities they open up.

The framework developed in this paper builds upon a strong research tradition in organisation

theory that identified technology as the key determinant of organisational structures (Perrow,

1967; Lawrence and Lorsch, 1967). Our framework extends this approach and opens up new

avenues of research to understand better the relationship between technological change, products

evolution and organisational design. For example, the paper points out that more effort needs to be

37

devoted to studying what firms know (as opposed to what they do) and how they know it, as

learning processes increasingly rely on mechanisms other than doing. Also, learning processes are

embedded in dense networks that link systems integrators to suppliers of components and

specialised knowledge. The increasing specialisation of knowledge production poses serious

challenges for large integrated firms.

The ideas this paper proposes provide a new perspective within which to interpret the increasing

emphasis that both practitioners and scholars put on the role of networks, virtual forms and other

organisational arrangements that cut across firms’ boundaries. The idiosyncrasies of knowledge as

an input to productive activities are likely to make the market alone an inadequate co-ordination

mechanism. Despite the fact that firms rely more and more on learning mechanisms other than

‘doing’ (Pisano, 1997), the pattern of division of labour envisaged by Arora and Gambardella

(1994) is likely to emerge only in rather specific circumstances, namely when all the relevant

bodies of knowledge change evenly and product interdependencies are predictable.

This paper also suggests that there is no one-to-one mapping between product architecture and

organisational architecture, as put forward by some of the advocates of modularity (Sanchez and

Mahoney, 1996). Our framework provides a first answer to apparent paradoxes such as that

stressed by Langlois (1997: 83), where the adoption of a modular product architecture (i.e. the

IBM S360) led IBM to integrate the production of previously outsourced components. If, as

suggested by Langlois, this is related (among other things) to the shift from vacuum tubes to solid-

state components, one can argue that the imbalance created by two component technologies (one

mature, the other fast moving) led IBM to integrate vertically in order to co-ordinate the new

component into their new, modular system. The adoption of a modular product architecture does

not lead, per se, to a modular pattern of organisation (i.e. decoupled network organisations).

38

The analysis of loosely coupled networks provides the possibility to reconcile the traditional

juxtaposition between component and architectural innovations, and the organisational challenges

they present. Henderson and Clark (1990: 28) pinpointed that “[a]n organisation that is structured

to learn quickly and effectively about new component technology may be ineffective in learning

about changes in product architecture”. By relying on loosely coupled networks, systems

integrators can delegate component level development activities to specialised firms. At the same

time, by maintaining knowledge of the whole product-system they co-ordinate the design and

manufacturing activities within the network. Besides co-ordination, systemic knowledge allows

systems integrators to spot promising new areas of development that may lead to architectural

changes.

To conclude, we believe that loose coupling will become even more important in future. The

continuing growth and specialisation of knowledge production will make firms’ external

knowledge relations even more important. Advances in information and communication

technologies will facilitate exploring design alternatives in loosely coupled structures. Loose

coupling is here to stay, and some firms will continue to know more than they do.

39

Table 1. Patent shares and rate of growth (% over previous period) of control

system-related technologies (source: adapted from Prencipe, 2000)

Company A 1977-81 1982-86 1987-91 1992-96

Share of control systems-related patents

over total patents

11.4 12.7 7.2 8.6

Growth rate (%) of control systems patents -30 60 150

Growth rate (%) of overall patents -40 170 110

Company B

Share of control systems-related patents

over total patents

10.6 12.3 16.7 9.4

Growth rate (%) of control systems patents 50 80 -40

Growth rate (%) of overall patents 30 30 10

Company C

Share of control systems-related patents

over total patents

5.7 7.4 11.3 9.9

Growth rate (%) of control systems patents 60 40 -4

Growth rate (%) of overall patents 30 -10 10

40

Figure 1 Determinants of Organisational Coupling.

Product Interdependencies Predictable Unpredictable

Rate of Change of

Even

Decoupled

Distinctiveness

No Responsiveness

Loosely coupled

Distinctiveness Responsiveness

Component Technologies

Uneven

Loosely coupled

Distinctiveness Responsiveness

Tightly coupled

Responsiveness

No Distinctiveness

41

Figure 2 The Managerial Implications of Organisational Coupling.

Product Interdependencies Predictable Unpredictable

Rate of Change of

Even

Decoupled

e.g. PC industry

Outsource design and production. Focused R&D.

Co-ordination via market mechanisms.

Loosely coupled

e.g. automotive industry

Outsource production and detail engineering. Both contract and in-

house R&D. Co-ordination via systems integration.

Component Technologies

Uneven

Loosely coupled

e.g. hard-disk drive industry

Outsource production and detail engineering. Both contract and in-

house R&D. Co-ordination via systems integration.

Tightly coupled

e.g. mobile phone systems

Design, production and R&D in-house. Co-ordination via vertical

integration.

42

Figure 3 Determinants of Organisational Coupling: the hydro-mechanical trajectory.

Systemic Interdependencies

Predictable Unpredictable

Rate of Change of

Even

De-coupled

Loosely coupled

Component Technologies

Uneven

Loosely coupled

Tightly coupled

A

C

B

C’

A’

43

Figure 4 Determinants of Organisational Coupling: the digital electronics trajectory.

Systemic Interdependencies

Predictable Unpredictable

Rate of Change of

Even

De-coupled

Loosely coupled

Component Technologies

Uneven

Loosely coupled

Tightly coupled

A’

B

C

AC’

44

Figure 5: Comparison of the technological profile of Company C, a first-tier supplier and a

second-tier one between 1977 and 1996 (CC = Company C; FT = first-tier supplier; ST =

second-tier supplier. (Source: Prencipe, 2000)

Control systems patenting activity: 1977-1996

0

20

40

60

80

Architecture Sub-arch Functional Physical

Type of patent

CC

FT

ST

45

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