Richard PJ Devinney TM Modular Strategies

8/8/2019 Richard PJ Devinney TM Modular Strategies

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Modular Strategies:B2B TECHNOLOGY ANDARCHITECTURAL KNOWLEDGE

Pierre J. RichardTimothy M. Devinn ey

BLisiness-to-business information technology systems (B2B tecfi-nologies) seek to create value for customers by intensifying marketcompetition, providing information to coordinate the supply chain,and leveraging capabilities across organizations. Business journalismhas claimed again and again that these technology-enabled systems have thepotential to alter the face of modern industrial activity.' Building upon the con-cept of modularity,^ this anicie makes a qualitative assessment of the capacity ofB2B technologies to recast supply chains.

The plethora of B2B technologies makes developing a comprehensivecategorization difficult. Most B2B initiatives are somewhat erroneously labeledas "exchanges," even though they encompass many distinct formsfrome-marketplaces that match buyers and sellers, to private vertical exchanges thatfacilitate just-in-time manufacturing through information sharing. Once oneappreciates that the goal of these initiatives can be represented as seeking effi-ciency in asset utilization and enhancing the innovative use and creation of newasset structureswhich are traditionally discussed as "Ricardian" and "Schum-peterian" rentsa simple framework can characterize these diverse initiatives.

B2B technologies can be used to pursue differing modular strategies.Two generic B2B strategies are: "m odularization," wh ich allows a firm to rentout its internal capabilities to others in its industry; and "architectural entre-preneurship" that alters how the supply chain is arranged by allowing a central


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Mo dula r Strategies; B2B Technology and Arch itectur al Know ledge

coordinating firm to overcome problems associated with trust and informationasymmetry. These strategies provide significant opportunities for the generationof extra economic rents by leveraging capabilities across multiple supply chains(Ricardian) and designing improved supply chain systems (Schumpeterian).In order to decompose these strategies and develop a general framework,we investigated several archetypal organizations: Cem ex, Li & Fung, EastmanChemical, Agribuys, and Dell. Together these firms cover a diverse range ofindustries from building materials to apparel, groceries, and computers andrepresent both established firms and a start-up (Agribuys). Our findings placearchitectural knowledgethat is, knowledge of how the different activities inthe supply chain interactat the center of B2B-driven change. Our researchsuggests three managerial implications:

Prescription I: Only firms with extensive architectural knowledge canachieve the higher-order collaborative benefits of B2B supply chaintechnologies. Firms lacking extensive knowledge are limited to smallerefficiency-driven benefits. Learning and codification are central tobuilding and harnessing the required architectural knowledge. Prescription 2: The form that collaborative B2B initiatives take depends

on the indispensability of the focal firm in the supply chain. Indispensablefirms, such as those undertaking capital-intensive activities, should adopttechnologies that radiate outwards,offering their capabilities to a wider Pierre Richard is an Associate Lecturer in them a rk e t. W e descn be s uc h a st ra te gy school of Economics at the University of Newas m o du la ri za ti o n. Disp ensa ble firms South Wales and a Doctoral Candidate at thes h o u ld use te ch n o lo g y to d ra w Australian Graduate School of Management.to g et he r n e w c o m b in a ti o n s of firms, Timothy M, Devinney is Professor of Managementto crea te n e w supp ly ch a in s . Th is ^"'^ ^^^^ ^^^ '^^"^^^ f^ Corporate Changeat the Australian Graduate School of Management.Strategy is one of ar ch ite ct ura lentrepreneurship.

Prescription 3: Over time, industry evolution puts pressure on rents earnedfrom asset utilization. To continue to earn rents, firms must increasinglyturn towards the Schumpeterian rents that can be earned from creatingnew supply chain structures. This suggests that building architecturalknowledge should be a key strategic activity.

B2B TechnologyFirms are being offered a proliferation of information technology systemsthat address their interactions with supply chain participants. Recent interest has

focused on B2B "exchan ges." B2B exchanges are sites hosted on electronic net-works that perform business functions. The common element of these functions


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Modular Strategies: B2BTechnology and Architectural Knowledge

T A B L E I . B2B Initiatives (Modal Combinations)ExchangeAttributesUsersOwnership

OwnerTransactionParticipationFocus

Functional fty

OtherFeatures

Private VerticalExchangesOne-to-ManyFocal Firm(the "one " above)Yes

Vertical (single industry)

Highalt includingcollaborationGenerally customizableto users' needs, limited tocurrent trading partners

Independente-MarketplacesMany-to-ManyIndependent Intermediary(distributor or start-up)N o

(a) H orizontal (indirect goodsacross sectors), or(b) Vertical, or(c) Niche (single product,service or process)Variedtrading and services,very little collaborationIntermed iary is unbiased, alsoopen to all potentialparticipants

Industry ConsortiaSome-to-ManyFounding Firms(the "some" above)No, owners transactseparately on the ir ownbehalfVertical

Medium -HTiost services,some collaborationParticipants includepartners of owners plusscope for additional users

providing back-end services (such as order processing), providing business tools(such as design and planning support services) and enabling supply chain "col-laboration." In general, the benefits of B2B exchange initiatives are increasedinformation sharing, gaining the capacity to serve new segments of the marketprofitably, and dynamic pricing that identifies low-cost suppliers more effec-tively.* B2B exchanges follow on from earlier supply chain initiatives. Forinstance, just-in-time inventory m anagemen t has sought to optimize productionby coordinating activities across the supply chain. Similarly, the con tinuo usreplenishment system pioneered by Procter & Gamble in the early 1990simproved supply chain operation by linking point-of-sale scanner panel datadirectly to m anufacturers. This enabled Procter & Gamble to anticipate andaccommodate demand fluctuations more effectively.'' Increasingly, these supplychain initiatives are also being deployed in the form of "exchanges" althoughthey differ significantly from the e-marketplaces that originally typified B2Bexchange initiatives. Consistent with this terminology we will use "B2Bexchange" and "B2B technology" interchangeably.

There are a number of exchange models currently being pursued (see


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Modular Strategies; B2BTechnology and Architectural Knowledge

Private Vertical Exchangessites set up by large organizations to providea wide range of services to their existing suppliers and customers. Suc-cessful examples include sites run by Wal-Mart, Dell, Cisco, and Cemex.Independent e-Marketplacesexchanges offering tools and coordination tosupport user transactions. FreeMarkets is the most noted example of anindependent exchange.' 'Industry Consortiaexchanges jointly established by leading companieswithin an industry. The classic example is Covisint, an exchange foundedby GM, Ford, Renault-Nissan, an d DaimlerChrysler as a joint ve ntu re(www.covisint.com). Covisint facilitates trade between its member firmsand their existing suppliers. It is also important to note that although theowners of the exchange do transact on these networks, they do so inde-pendently of the consortia's own activities. Consortia do not trade ontheir own behalf, but merely oversee transactions and provide the infra-struaure to execute them.

Modular Systems and Architectural KnowledgeAs noted, B2B technology can have a significant impact on firm bound-aries and the structure of the supply chain. However, despite much hype, therehas been relatively little research attempting to explain the changes being ob-served. One notable exception is the application of transaction cost perspectives.^Transaction cost theory places primary emphasis on asset specificity, whichdetermines the relative benefits of vertically integrated structures or marketcoordination. However, changes in asset specificity are often attributed to tech-nology, which is itself exogenous to transaction cost theory. To gain a betterunderstanding of the competitive impact of B2B technology, we examine therole of knowledge in driving B2B initiatives and draw on the wide-reachingconcepts of architectural knowledge and modular systems. These conceptsallow us to link technological change to the structure of the supply chain.This is because the "loose coupling" at the center of modular systems is defined

according to knowledge fiows," the same fiows that determine technologicalchange. Indeed, modularity has been invoked extensively in research on productinnovation, but has been expanded to cover economic activity in general; that is,organizational forms themselves.^ This makes a modular perspective particularlypowerful in explaining B2B initiatives, as it provides a deeper appreciation ofthe technology-driven dynamics involved in the evolution of the supply chain.Moreover, by linking firm boundaries to innovation, we provide firms withinsight into how they should respond to the challenges posed by supply chaincompetition.Modular Systems


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Modular Strategies; B2BTechnoiogy and Ai Jge

of a system to be separated and combined with much greater flexibility." Bald-win and Clark have attributed this added flexibility to two closely related effects:one from splitting components and the other from the substitutability betweenthem.''^ By splitting systems up, designers can partially modify components thatwere previously treated as a single unitary activity by altering individual mod-ules (that is, smaller parts of the system). This opens up new, potentially bene-ficial, combinations of attributes by signiflcantly reducing the cost of makingalterations. Substitutability takes this further because participants can evaluateand alter each module separately without having to evaluate the entire systemin a holistic way. This enables them to test many more variations of each com-pon ent and thereby im prove the overall design. Therefore, design flexibilityadds value by making it possible to develop a greater number of components(through splitting design) and evaluate more combinations of them (throughsubstitutability).Under traditional arrangements, supply chains are composed of firms andmarkets. Activities with extensive interdependencies are placed inside a singlefirm, to ensure that these aspects are coordinated effectively and not subject tothe hazards of opportunism.'^ These firms are linked by markets that enablethe efflcient coordination of activities through the price mechanism. Modularapproaches start by putting in place standardized component interfaces to coor-dinate activities. These interfaces define the functional and spatial relationshipsbetwe en modu les. This allows each m odule to operate independe ntly of theothers, as long as they all conform to the standardized interface requ irem entsthat ensure that the system is synchronized. Activities can then be distributedbetween several parties, because coordination is embedded in the standardizedinterfaces and occurs automatically. Further, other alternate modules may beeasily substituted and integrated into the loosely coupled chain as long as theytoo meet the requirements of the interface.

A modular system has three generic elemen ts. First, there are the mod-ules, the discrete functional activities that work on inputs to create distinct out-puts.'* Then there are the interfaces. These set out strict requirements that theinputs and outputs of each module must adhere to. In doing so, they standard-ize the boundaries of the modules. This standardization allows any module tobecome part of the system, irrespective of its internal arrangement or operationas long as it fulfils the interface requirements.'^ Finally, there are the interac-tions that pass over the interfaces, including communication or the exchangeof material goods. Figure 1 illustrates how these are arranged.

These three elements can be considered from two perspectives: one phy-sical and the other informational. On the physical level, a modular system mani-fests itself in the form of technology, including hardware such as computers andcables as well as the code that makes it opera te. We term the physical techno l-ogy of a system the "infrastructure." On the inform ational level, a mo dular sys-


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cturdl Knowledge

F I G U R E I. The Elements of aModular System

Key: Interface y Module Q Interaction

sets out what a purchase order needs toachieve can be implemented usingseveral different technological alternatives including EDI, facsimile, e-mail,and post.Architectural Knowledge

The role of knowledge in facilitating the division of a supply chain into itsmodu lar com ponents is clarified by considering the distinction betw een differenttypes of product knowledge and innovation. The terms "incremental" and "radi-cal" categorized innovation by its effects on a product, contrasting innovationthat improves on an existing design and maintained the existing market struc-tures with innovation that fundamentally reshapes market and product charac-teristics. Henderson and Clark's influential work suggests a more discerningapproach by defining the two forms of knowledge that firms use as "architec-tural" and "modular.""^ Architectural knowledge is knowledge about the link-ages between components: il says how components relate to each other. Thisarchitectural knowledge constitutes the superstructure embodied within themodular system. Modular knowledge covers the content of components: theirindividual characteristics and func tions. To avoid confusion, wewill refer tothis "modular" know ledge as com ponent knowledge. Innovation that coversthe arrangement of compo nents is termed "architectural" innov ation, w hilethat impacting the content of the components only is called "modular" innova-tion. "Radical" innovation can then be seen as innovation that alters both com-ponents and the linkages between them, while "incremental" innovation ismuch more evolutionary; neither the architecture nor modules are changedsignificantly, confirming existing arrangements.

Supply Chains as Knowledge StructuresThe concept of architectural knowledge and the flexible "loose coupling"


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Mo dular Strategies: B2BTec hnology and Arch itectura l Kn owledge

distributed, what communication is necessary between participants, and eventhe heuristics that employees use.^' Over time, all these elements becomeentrenched in organizations and their routines, such that the knowledgebecomes implicit in structures and processes. Modularity provides firms withan a lternate way to coordinate activities. Essentially, instituting a m odula r sys-tem takes the architectural knowledge embedded in an organizational arrange-ment and decomposes it to create an assortment of smaller units connected bystandardized interfaces. This enables firms to ma nage their arch itectures explic-itly because they are able to perceive what requirements are built into theirinterfaces and to consciously address them, independently of component knowl-edge. Indeed, modularity allows firms to break out activities from their supplychains based on the characteristics of the knowledge flows inherent in the activ-ity. In this way, the establishment of standardized interfaces traces the bound-aries of effective vertical and horizontal integration.Modular control over architectural knowledge provides important bene-fits over traditional em bedded architectures. Not only can the a rchitecture bealtered, but also firms can distribute tasks in ne w ways as the interfaces ensu reeffective communication and coordination. This offers the potential to add newcomponents that draw on knowledge held outside the firm and also to improvequality by sourcing from specialist firms with deeper component knowledge.Moreover, the ability to manipulate architectural knowledge allows firms toisolate, and respond to, architectural innov ation far m ore easily. A classic ex-ample of the strategic salience of architectural knowledge is the failure of Britishand U.S. motorcycle manufacturers to mount a credible defense against Honda'sentry into their markets during the 1980s. Honda's entry displaced these incum-bents, driving them into small niche ma rkets or o ut of business. However, it Isclear that the incumbent manufacturers possessed considerable knowledge, asthey had been active in the industry for a long time. This makes it unlikely thatit was Honda's competence in engine design per se that undermined them.'^Rather, they were unable to respond due to the inaccessibility of their embeddedarchitectural knowledge. Organizationally, their systems could not even compre-hend the innovation of small bikes, let alone respond effectively. Some com-mentators argue that the splitting of component and architectural innovationleads to synergies being lost because it reduces the flow of knowledge betweenthese two activities.''' Nevertheless, in comparing setting interfaces at the outset(the modular approach) against accepting whatever structures occur naturally(the traditional approach), modularity at least allows managerial choice ratherthan environmental chance to determine the arrangement.

The relationship between architectural knowledge and modularity sug-gests that firms must possess sufficient architectural knowledge and be able toaccess this in an explicit form in order to adopt modular approaches. Archi-tectural knowledge is generated by the learning that supports the evolution of


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Modular Strategies: B2BTechnology and Architectural Knowledge

T A B L E 2. Benefits of B2B "Exchange" Initiatives

ImplicationsExchangeIndependente-Markets

ModularityLow

Standard-ization

Low

Source ofCompetitiveAdvantage

NoMain BenefitImprove marketcompe tition andtransaction efTictency

CompetitiveRisks

None

IndustryConsortiaPrivateVerticalExchanges

Medium High N o Standardizationacross industryHigh Medium Yes Enable modularsupply chains

Low, may pronnoteindustry inertiaLow. partners mayreject system changes

and organizational structures. In order to define the standardized interfacesrequired for a modular system, firms must transform this knowledge into anexplicit form that can be used to develop network structures and computersoftware. This process hasbeen described as one of "externalization."" Exter-naiization examines tacitly held shared understandings through a process ofrepeated dialogue. It uses trial-and-error tests of hypotheses and assumptionsand techniques such as metaphor and analogy to tease out the causal linkages,implicit in the tacit knowledge and put them into an explicit form. Externali-zation is closely related to articulation and codification. Articulation also refersto the process of explicating thecause-effect linkages between actions and out-comes; codification takes this further by placing the articulated knowledge intoa more rigorous framework (such aswritten manuals, computer systems, orblueprints). In doing so, it requires the exposure of underlying assumptionsand the strict definition of logical connections.^*

The Impact of B2BTechnologies on Supply ChainsThe Role of Architectural Know ledge

Exchange-enabled collaboration is a process based on harnessing B2Btechnology to facilitate increased modularity. Table 2 summarizes the benefitsof common B2B initiatives. The patterns thai emerge from this analysis are con-sistent with architectural knowledge playing a key role in establishing modularsystems.The tools currently supplied by independent e-marketplaces fall short ofenabling modular systems. Most independent markets do not alter the informa-tion flows within a system or change the underlying superstructure associated


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Mo dular Strategies: B2BT echnology and Arc hitectu ral Know ledge

Examples of Consortia-Fostered CollaborationConsortia aggregate and share the knowledge of their founding owners.This gives memberfirms a more complete view of their industry and its participants, and particularly of the archi-tecture that is embedded within it. By making this information available, firms are better ableto appreciate the knowledge structures operating around them , opening up the p otential tomodularize that architecture. Cons ortia are also developing tools t o supp ort collaboration.Aeroxchange (a consortia of 32 airlines, including Air Canada, America West KLM, and Singa-pore Airlines ww w.aeroxch ange.com ) is developing a to ol t o allow com panies in the airlineindustry to disclose spare parts Inventory information in real-time, minimizing the time andadministrative costs required to find parts, while also opening up opportunities to share inven-to ry Inventory sharing v\/ill am ount to a change in the way business is don e, as it promises tosystematically transform rivals fro m being a source o f last reso rt to a mo re regular quasi-sup-plien SimilarlyTransora (wwv/.transora.com), a consortium for the consumer packaged goodsindustry, is developing too ls t o solve the interlocking problems of planning, forecasting, andreplenishment Covisint has also made significant progress with tools that allov^/ virtual teamsto collaborate on product development, inventory visibility, and functionality allowing a firm tomonitor quality throughout the supply chain.These tools allow firms to work together and toshare decision making actively

exchanges reflects their relative dearth of architectural knowledge. The majorityof independent exchanges were established by start-up firms. These firms wereable to adopt new B2B technologies quickly because they were unfettered byexisting structures, routines, and processes. Ironically, these sources of organi-zational inertia are also critical sources of the architectural knowledge that isneeded to alter the supply chain radically. Without extensive architecturalknowledge, the codification and standardization that enable modular approachesare almost impossible to achieve.

Current consortia initiatives go further than those of independente-marketplaces, often providing tools that allow firms to collaborate. The sidebarabove outlines just a few examples of consortia B2B initiatives. The only signifi-cant disadvantage consortia face is that they generally have a narrower user base(of suppliers) than independent e-markets, because as they tend to favor theexisting trading partners of their members. However, this actually supports theintroduction of modular systems by making standardization simpler by narrow-ing the diversity of participants. More importantly, consortia also act as an insti-tutional structure that can actively negotiate and champion communicationstandards, using their market power to encourage adoption. The B2B initiativespursued by consortia are consistent with their architectural knowledge andclearly benefit from the accumulated experience of their members. However,competition between members also limits each consortium's access to propri-


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Mo dula r Strategies; B2BTe chnology and Arc hitectu ral K nowled ge

differentiate offerings and protea proprietary knowledge in order to attempt togain a competitive edge.Private excfiange initiatives are similar in scope to those of consortia.However, private exchanges are not as effective at promoting information

sharing across industry participants. This is because private exchanges lackthe broadly based market power that consortia use to promote the adoptionof standards. Nevertheless, private exchanges do offer some additional benefitsover consortia models. First, private exchanges give firms full discretion over thedesign and functionality of the exchange, allowing them to target specific areaswh ere potential competitive advantages may arise. Further, these exchangesallow firms to actively manage risks hy giving them control over the transactionsof the exchange and what company information is disclosed to partners. Theseare advantages over the consortia model where this control is ceded to theexchange (in the faith that it will not he abused).'^'* However, perhaps the mostsignificant advantage of private initiatives is that they allow firms to compete notonly over the content of any single module, but over how their supply chainsare arranged. For instance, the users of Covisint have the same collaborativeopportunities, but DaimlerChrysler has the option of casting its chain in a dif-ferent manner; indeed its e-husiness mission is to do just that and "makeDaimlerChrysler the first networked automotive company across its entire valuechain."^^ That private exchanges go further is no surprise, as they have full ac-cess to the experience of their parent, providing deep architectural knowledge ofthe industry. Generally, private exchanges show the most promise for effectivemodularity because they possess similar characteristics to consortia approachesbut with significant benefits in terms of focus, control, and competition.The Role of Supply Chain Indispensability

Although this analysis suggests that organizations with high architecturalknow ledge can apply B2B technologies to imp lement mo dular systems, there areobvious differences in th e form that these initiatives are taking. One key driver ishow deeply embedded in the supply chain the activity is.^" B2B initiatives willlook different depending on the role the focal firm plays in the supply chain, andhow essential the firm's activities are to it. We define the degree of importanceto the supply chain's activities as the firm's "supply chain indispensability." Thedegree of indispensability turns on the nature of the activity, including its capitalintensity and scalability. The exchanges being developed by Eastman Chemicalprovide insight into these differences. Eastman, based in Tennessee, is a multi-national chemical company employing over 15,000 people in more than 30countries and possessing sales of $6.58 billion in 2004. It is a market leader inpolyester plastics, coatings, and specialty chemicals. The chemical indus try ismarked by fluctuating dem and as its main customers include the autom obile,housing, and manufacturing sectors, each of which is characterized by highly


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Mo dular Strategies: B2BTech nology and Arch itectu ral Know ledge

production, there is often a sequence in which the different processes must berun in order to optimize production.

Eastman is adopting B2B technology to improve the utilization of itsindispensable chemical production activities. These processes are very hard tosupplant due to high fixed costs, the long lead-time required to build plants, andstrict produ ction sequence s. Eastman is increasing information sharing by usingB2B technology to connect its central enterprise resou rce p lanning (ERP) systemto those of other firms in its supply chain. It has deployed integration serversprovided by the specialist system integration software firm webMethods, toallow information to move directly between its internal systems and tradingpartn ers. Having access to information earlier gives Eastman better co ntrol overhow it structures its business and allows it to draw on a wider range of suppliersin any given situation. Eastman is also continuing to lay the foundations formore extensive initiatives. For example, it is participating in the Chemical Indus-try Data Exchange (www.cidx.org), an industry association that seeks to estab-lish XML standards to "[improve] the ease, speed, and cost of transactingbusiness electronically between chemical companies and their trading part-ners."^' These standards promise to simplify the task of integrating systemsacross organizationsopening the way for further application of B2B tech-nology. These B2B initiatives place primary emphasis on Eastman's existingcapacity and how it can be utilized more effectively. They are targeted inwardsand aim to improve the flexibility and performance of Eastman's internal supplychain activities.Eastman also has several B2B initiatives that address dispensable activi-ties. These include initiatives that are aimed at leveraging Eastman's knowledge-based activities, such as logistics coordination, and its wider understanding of thechemical market. First, it established Cendian (www.Cendian.com), a subsidiarythat offers logistics coordination. Drawing on Eastman's expertise, Cendian canplan and optimize logistics for its clients, which include Eastman and its com-petitors. More importantly, because chemicals react with each other, it is impor-tant that transport sequences do not bring certain chemicals (and the residuesthey leave behind in containers) into contact with each other. Cendian is able tocoordinate transport activities across firms and carriers to manage this need. Itcan also track shipm ents, chase problems, and has facilities to h and le ad minis-trative tasks such as payments and customs requirements. Eastman also estab-lished PaintandCoatings.com (www.PaintandCoatings.com) a B2B exchangethat allows customers to browse through an array of chemical alternatives andprovides buyers with detailed information through access to a database onsolvents. PaintandCoatings.com permitted Eastman's competitors to list theirproducts, and included links to industry associations and events, providing chan-nels for industry communication. Although a more limited initiative, Paintand-Coatings.com provides a central point to bring together buyers and suppliers to


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Modular St- . .ind Architectural Knowledge

F I G U R E 1. Strategic Outcomes of B2BTechnology

IQ.

c' ( 5"5.a.3(A

A r c h i t e c t u r a l K n o w le d g eLow High

Efficiency Gains(e-marketplaces)

Efficiency Gains(just-in-time)

ArchitecturalEntrepreneurship

Modularization

Eastm an's application of B2B technology is pulling in two directions:streamlining internal operations and reaching out to new participants. Thesetwo directions, which are a result of applying B2B technology to indispensableand dispensable activities, suggest two distinct B2B strategies. We term theinward focused strategy "m odularization" as it seeks to broaden the scope ofapplication of an indispensable supply chain activity. The outward focusedstrategy is one of "architectural entrepreneurship" as the focal firm reaches outto coordinate participants into new supply chain arrangements. Figure 2 sum-marizes the framework and how architectural knowledge and supply chainindispensability influence the outcomes of the application of B2B technologies.

Applying B2B Technology: The Two Modular StrategiesTVvo companies, Cemex and Li & Fung, have applied modular strategiesextensively. By using modularity to break discrete components out of its supplychain and then renting these out to other firms, Cemex provides a powerfulexample of the modularization strategy. Although the content of the module isdraw n from existing knowledgein this case, Cem ex's IT and con struction ma n-agement capabilitiesthe capabilities that support delivery in this form can bequite different. In mo ving to the delivery of construction and IT know ledge,

Cemex had to learn how to interact with customers in a more complex way andrelied heavily on the service capability it had developed through the operation of


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Modular Strategies; B2BTechnology and Aichrteclural Knowledge

T A B L E 3 . Two Distinct B2B StrategiesStrategy Attribu tes Modularization Architectural EntrepreneurAim

Key Benefrts

Key Oiatlenges

RiskLessons forImplementation

To Lrtilize existing knowledgeresources over a w ider domain To replace the "invisible hand" as themarket coordinatorKnowledge becomes productavoiding comm oditizationLow overhead reduces overallcapital intensity

More efficient productionBetter expectation fulfillment

Adding sufficient service capabilityTake up; Encouraging adjacentfirms to adopt module

Maintaining market power balancewrthin the supply chainAvoiding dilution of firm's advantageas knowledge leaks into infrastructureTake up; Encouraging adjacent firmsto accept entrepreneur role

Low MediumModularized skill should beprovided through a subsidiary toallow it to optimize its servicecapability, and avoid damaging thefirm's own specialized culture.

Unless external system is open itwill be very hard to encouragepartners to connectInternal IT system must beproprietary to protect knowledge

own limited knowledge rather than pay for bad service. Li & Fung is using itsarchitectural knowledge very differently: to change the architecture of thesupply chain. This architectural entrepreneurship strategy draws upon the firm'sarchitectural knowledge to cast the supply chain more efficiently than would beachieved through the price-driven market. By permeating all of the linkageswithin the network that forms the chain, Li & Fung is able to improve informa-tion flows and co-ordinate transactions more efficiently than the 'invisible hand'of the price mechanism . D etails of th e tw o strategies are o utlined in Table 3.The Modu larization Strategy

Cemex uses its architectural knowledge to draw out the capabilities foundwithin the firm, distilling them into a module that can then be rented out toothe r pa rties. It has long possessed extensive construction and IT knowledge,developed to manage cement deliveries under the environmental pressureimposed by traffic in Mexico City, but B2B technology is allowing it to leveragethese skills more widely. This is achieved through two discrete initiatives: usingmodularization of construction knowledge (through its subsidiary Arkio) to


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Mo dula r 5t ' " " . . ind Arc hiter tura l Know ledge

Ceme x: Value Adding in Ce ment Productionthrough ModularizationCemex is a highly successful cement company and has a history of excellent utilization of ITW it h its base in M exico, it has expanded to become a global player in cement, with extensiveoperations th roug hou t w or ld. Global sales were US$7.8 billion in 2004 , Cemex's subsidiaryCxNetworks is pursuing several B2B initiatives including construction e-marketplaces, an e-procurement alliance, and a supply chain consuftancy. Chairman and CEO Lorenzo Zambrano,in launching CxN etw orks , described its aim as to "leverage Cemex's assets on to th e Intern et"and "beco me the leading provider of Internet-based business solutions for the cons tructionindustry."* The supply chain consulting business, called Ne oris, is focused on optimizing a cus-tomer's supply chain by streamlining how they interact with their suppliers and partners. JuanPablo San Agustin, CE O of C xNe twork s, has noted th at in the opinion o f senior management,the "d eco nstru ction " of existing supply chains to com pete on th e basis o f individual activitiesrepresented the future for "our" enterprises.**Cemex's exchange initiatives fall into three major categories. First, construction vertical market-places run by Cx Ne tw ork s' subsidiary Arkio (www .arkio.com) th at facilitate online purchasingfrom extensive prod uct catalogues, provide industry informa tion and financial tools, as well asoperating "w ork centers" that low er the cost of accessing the technology for smallbusinessesthereby leveraging Cemex's expertise across more customers. Second, building e-procu reme nt marketplaces though Latinexus. an industry con sortium of which C emex was afound ing m ember, which specialized in ind irect goods (such as maintenance, repair; and ope ra-tions supplies).Third, supply chain integration consultancy services delivered through theCx Ne tw ork s subsidiary N eoris (wv\A/v.neoris.com), which was Cemex's form er IT d ep artm en tOverall, the picture of Cem ex tha t emerges is com plex and dynamic. Although , traditionalbuilding material supply remains their core activity, Cemex is increasing the importance of itsmanagement, industrial, and IT knowledge to its ongoing perform ance , It is strategically direc t-ing Itself away fro m th e p rodu ction of a com mo dity t o value-adding using its knowledgeresources.* L Z am bra no "Serving Global Bui lding Needs," (Septen^iber 2000). available at


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Mod uiaj- Strategies: B2B Technology and Arch itectu ral Know ledge

domain. However, this extension does not require the tight linkages of tradi-tional vertical integration, where Cemex would have to use ownership to buy itsway into those supply chains. Instead, technology enabled modularity allows theactivity to remain independent and loosely coupled from the firm's other activi-ties. Firms are then tightly bound to the interfaces that connect modules, ratherthan being bound directly to the adjacent modules themselves.The Architectural En trepreneurship Strategy

Li & Fung uses its architectural knowledge to substitute an optimizedsuperstructure for the embedded architecture that exists in its markets. This rolehas been described as being a network "orchestrator."" However, this goes fur-ther than merely coordinating the network as Li Fr Fung also adds importantinformation and guarantees to the interactions between modules. One impor-tant advantage that an architectural entrepreneur like Li & Fung offers overmarket coordination is that it can customize the supply chain to suit eachretailer's individual needs. It is able to impose the optimal structure for eachtransaction, rather than allowing the market to provide the most efficientgeneric structure. Further, while markets reach an efficient aggregate equilib-rium, this process takes time, and in the interim inefficiency can result. This isparticularly important in industries where demand can change quickly, such asfashion, because these markets will often move out of equilibrium. Even whenmarkets are out of equilibrium, Li & Fung can adjust arrangements long beforemarket forces stabilize.Li & Fung also uses its knowledge to orient and mo nitor the performanceof many of the modules that it selects for the network. For instance, they use

Li & Fung: Op erating a Modularized Trading NetworkFounded in 1906, LI & Fung is a classical trading intermediary. It draw s on its extensive localknowledge to assist foreign retailers to find manufacturers who can fulfill their specifications atminima l cost, Initially, its assistance was based on being able t o trans late languages betw een theparties and having a broad knowledge of the capabilities of local firms. Over time, this knowl-edge developed to the stage where Li & Fung were able to coordinate the entire supply chain.Li & Fung's major role is to assess retailer needs and then assemble an optima l n etw ork com -posed o f the several modules required t o create these products. Vic tor Fung, the Chairman ofLi & Fung, notes that what the company does "is close to creating a customized value chain foreach custom er."*This capability was developed fro m its involvement in "dispersed manufactur-ing'The company has taken this further by not only selecting modules to lower costs, but alsoto ensure quality and op timize all aspects o f pro du ction . In do ing this it is drawing on its archi-tectural knowledge of how the process modules frt together Li & Fung's coordination allows rtto arrange systems that wo uld not be viable under normal market conditions.


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Mo dula r Strategies: B2BT echnology and Arc hitectura l K nowledge

their own inspectors to check the quality of intermediate products. This moni-toring substitutes for direct trust between the parties, which is often absentbecause the systems are one-off compositions of parties that have never trans-acted togethe r before. Reliance on trust would necessarily restrict parties to amuch smaller pool of suppliers and customers. Further, Li & Fung's deep archi-tectural knowledge of the participating modules enables them to make allow-ances for firm idiosyncrasies. It uses this knowledge to improve matching byaligning expectations; understanding all the stages of production, it can reliablytranslate specifications between them. Importantly, Li & Fung also prevents anyof the firms in the supply chain from taking advantage of the other firms. Forinstance, a link in the supply chain may be subject to moral hazard or monopo-listic tendencies, such as a small manufacturer cutting corners on productionquality or where a large retailer might squeeze small suppliers using their buyingpower. Li & Fung's coordination role prevents these problems from occurring,making the system viable by ensuring that the interfaces and interactions acrossthem are sufficient and accurate. This facilitates the establishment of standard-ized processes, because the ability to intervene allows it to deploy standardprocesses across a broad range of situations.

Li & Fung's central role allows it to add much value, but it also gives itconsiderable market power. As an opt-out system, the selected parties can onlychoose between accepting the offer to join the network being assembled forthis order or rejecting it. Firms cannot participate in this supply chain withoutLi & Fung's invitation and, consequently, do not have much power over howLi & Fung decides to structure it. This creates the risk that Li & Fung couldextract ren ts from the m odu les it selects. To cou nter this problem Li fr Fung,somewhat counter-intuitively, requires that its partners work with its rivals tomaintain balance in its own relationship with them, with Li & Fung only consti-tuting 30-70% of a client's sales. This ensures that suppliers are not dependentand hence vulnerable to Li & Fung itself. This also explains why it has pursuedan open system, rather than attempting to build proprietary network infrastruc-ture. In contrast to its prt)prietary XTS 5 internal trading system, it has adoptedMicrosoft's BizTalk Server to connect to external parties. By adopting the infra-structure product of a neutral provider, Li & Fung is able to customize super-structures without threatening the independence of their partners. So, whilethe addition of modules to each supply chain is under its control, and it receivesSchumpeterian rents for designing these networks, firms still retain the capacityto transact with other parties, reducing the threat of hold-up.

Although necessary to maintain balance in its partner relationships, thesplitting of superstructure from infrastructure creates a risk for Li & Fung: it hasno proprietary claim over the network, its position being maintained purely bythe value that its specialized architectural knowledge adds. However, at the sametime partners are accumulating this knowledge themselves through exposure to


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M odu lar Strategies; B2B Technology and Ar ch itea ura l Know icage

margins were squeezed from 10% to 3% as trading partners developed theknowledge necessary to manage their own sourcing in Hong Kong. Li & Fungresponded by expanding their knowledge beyond the grasp of partners. Thechallenge for Li & Fung is to continu e to huild its architectural k nowledge, stay-ing ahead of participants, such that it is able to structure more-effective supplychains than the firms it coordinates could using their own knowledge.

Challenges for Start-up Firms:Agribuys and Architectu ral KnowledgeAgrihuys' B2B initiative offers a useful contrast to the cases examinedabove. It confirms the role of architectural knowledge. Founded in 1999,Agrihuys is an independent e-marketplace that focuses on the fresh food indus-

try, including, fruits, vegetables, meat, fish, and poultry. It does not trade on itsow n behalf; instead it facilitates trading in the sector hy providing a system thatsupports transactions between the growers, suppliers, wholesalers, and retailerswho make up the industry. Although Agribuys' espoused strategy is to adopt anarchitectural entrepreneurship strategy like Li & Fung, they possess far lessextensive architectural knowledge. Consistent with the theoretical propositions,their B2B initiatives are limited to developing systems that conform to the exist-ing architectural arrangements.Agrihuys' initiatives do not enable modular arrangement or threaten to

recast industry structures. Indeed, its success is based on adhering to existingstructures. Agrihuys' system is based around three software products: Order-Link, Delivery-Link, and Logistics-Link. Order-Link allows a buyer to aggregatetheir demand information and inform and negotiate with suppliers. The systemcan then execute and fulfill transaction processes. Delivery-Link enables a partyto track goods from the supplier to their destination and to generate claimsshould there be any problems with the delivery. Logistics-Link coordinates logis-tics by streamlining the process of building compatible shipments of cargo thatcan then be assigned to carriers. Each of these components is designed to sup-port the idiosyncrasies and specialist requirements of the fresh food industry,such as the need to refrigerate some cargo and the time sensitivity of dehvery.All these transactions take m uch the same form as they do in an offline format.

Established relationships still dominate the fresh food industry, even forparties that use Agribuys' system. The importance of established relationshipsto these firm s is itself a sym ptom of the inability to m easu re q uality effectively.These relationships are developed through ongoing interactions and then usedto ensure quality over repeated transactions. Agribuys has worked around thisneed, by establishing a system that supports both ongoing relationships andreputation building, while providing tools that can support the iterative com-munication needed to transfer accurate quality information. Unfortunately, this


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Mo dula r Strategies: B2B Technology and Architectura l Know ledge

Given this analysis, current B2B offerings in the fresh food industry maybe seen as an intermediate development. One could envisage a mo re radicalmodular intermediary in the fresh food category. This hypothetical firm wouldplace itself between buyers and sellers and be able to match orders with the cor-rect supplier, allowing for both differing reputations and interpretations betweenthe parties. Indeed, Agribuys is engaged in activities that suggest it is buildingtowards more modular B2B initiatives. For ins tance, Agribuys has established analliance with the World Wide Retail Exchange (WWRE)a private consortiumrepresenting 64 leading retailers with combined sales of over US$900 billion.WWRE offers procurement and some limited collaboration tools, but its mostsignificant activity is in setting standards. WWRE is able to use its large size topush forward the standardization central to modular strategies. Agribuys is alsoable to lever off this connection to increase the adoption of its infrastructure.Interestingly, in contrast to Li & Fung, Agribuys is able to run a proprietary net-work. Because it adheres to existing structures it does not control the ability offirms to participate, as they can implement the same processes through alternatemean s. This reduces the threat of hold-up, such that parties are willing to partic-ipate in a proprietary system. Meanwhile, during the course of their infrastruc-ture provision, Agribuys is continuously building its architectural know ledge.This know ledge holds the key to implementing a more radical modular strategy.Indeed, its evolution from a sales-based to consulting-based business model sug-gests Agribuys is moving towards this goal. This recent change reflects a deepen-ing of their knowledge, and the ongo ing expan sion of the role it is playing. Ifthis continues, Agribuys may be able to enact its strategy and become an archi-tectural entrepreneur, moving from providing supporting infrastructure todesigning the superstructure of the market itself.Summary

The two distinct strategies of modularization and architectural entrepre-neurship clarify the strategic importance of B2B technology and why architec-tural knowledge is so critical to its successful implementation. Table 4 providesan overview of the four firms discussed and highlights their differences andsimilarities.Evolutionary Perspectives and Rent-Seeking

There are two trends influencing the application of B2B technology.The first reflects the choices firms make to maximize rents, both Ricardian andSchumpeterian. The other is the evolution of industries and products. These twoeffects are closely intertwined, leading to a process of co-evolution betweenindustries and firms.'**The evolution of industries tends to decrease the indispensability of


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Modular Strategies; B2BTechnc' -hitecfural Knowledge

T A B L E 4. Summary of Case Study Firm Characteristics and their B2B InitiativesAttributesArchitecturalKnowledgeStrategic Goal

B2B ExchangeInitiative Risks

Market RoleFirm ProductCharacteristicIndustry

Industry Challenges

Capital IntensityDemandSupplyCustomer

UpstreamTrading PartnersDownstreamTrading Partners

CEMEXDeep*

Become Module

Low (need to enablepartners to connectto their interface)

Active ParticipantPhysical Commodty

Building Products(Cement)

CommoditizatJonof Product

Hgh ~^^^^HFluctuatingStableEnd-User

Few Supplier* 11mMany Buyers

EastmanDeep

Become Moduleand Superstructure

Low{protected by owncapacity)

Active ParticipantPhysical Commodity

Chemicals

InflexibleProduction

FluctuatingStableIntermediary/RetailerMany Suppliers

Many Buyers : ^ ^ ^

Li & FungDeep

BecomeSuperstructure

Medium (possiblethat architecturalknowledge leaksinto infrastructure)IntermediaryKnowledge-Based

Manufacturing(Apparel and Hom eWares)Consumer TastesFHard to Measure

LowFluctuatingStableRetailer

Many Suppliers

I Few Buyers

AgribuysShallow

BecomeInfrastructure thenSuperstructureHigh (need to buildknowledge withou tbecoming threat topartners)IntermediaryKnowledge-Based

Fresh Food

Difficulty MeasuringQuality FoodSpoilageLowStableFluctuatingRetailer

Many Suppliers

Few Buyers

Shading draws at ten ton to charaaeristJcs that corre late w ith the strategies being adop ted by the f irms.

protections such as patents expire.*' This increases the competitive intensity inindustries as growth slows and firms become increasingly homogeneous.'^ Thesepressures lead firms to drift upwards in the framework given in Figure 2i.e.,from being indispensable to dispensablereducing their ability to extractRicardian ren ts. This com mo n occurrence is often described as product com-


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Modular 'y ^ Jnd Arch i tectura l Knowledge

maintain their cost advantage. Yet this is unlikely to be sustainable in the longrun . The ongoing pressures faced by the semicondu ctor man ufacturers, despiteenormous capital investments, reflect this. In the B2B domain, initiatives suchas just-in-time manu facturing and collaborative deman d p lanning suppo rt thisresponse. Another alternative is to innov ate. Innovation, as noted, can addressthe substantive components of a product or their architectural arrangement.Component innovation reduces pressure by creating new knowledge that hasnot been diffused, allowing the firm to shelter from competitive forces.^^ Modu-lar strategies provide the third alternative, accepting the loss of Ricardian rentsbut seeking to shift the firm towards the right-hand side of our frameworkwhere they can collect Schumpeterian rents.Co-Evolution in the Com puter Industry: Dell and Adaptive Strategies

These trends suggest that as industries m ature, firms are required to movebeyond mere efficiency henefits and pursue modular strategies in order to con-tinue to earn rents. This is apparen t in the evo lution of the com puter manu fac-turing industry. Com puter m anufacturing has matured at a rapid rate, quicklyeroding the indispensability of manufacturers and their ability to collect Ricar-dian rents. Pre-assembled computers based-on a number of competing designsstarted to appear in 1975. In 1981, IBM introduced its non-proprietary PCdesign, which quickly became the dominant standard, garnering 85% of themarket by the mid-1990s. By this stage, a mere 20 years from the produa'sintroduction, the industry was mature, and a new entrant could easily establisha generic plant for as little as $1 million to assemble 250,000 computers peryear."* The extent of product commoditization was reflected by the share ofunb randed "white box" sales, making u p 2 3 % of the m arket in the U.S. and50 % in Europe and Asia.'^

A salient example of how B2B strategies can be used to manage rapidmarket evolu tion is the success of Dell Inc. Found ed in 1984, Dell has becom e aglobal computer systems provider offering a broad array of computing productsranging from desktops, laptops, and handhelds to servers and network switches.By 2004, Dell's annual revenue had reached $41.4 billion and the firmemployed 53,000 people. Its eno rm ou s grow th has been reflected by the appre-ciation of its stock price, with raw monthly returns averaging over 4.3% sinceits listing in 1988. This is despite the evolution of the computer industry placingsignificant pressure on firms, with several delivering large annual losses duringthe 1990s, including Dell. An investigation of the initiatives that Dell has used tocomp ete in this challenging env ironm ent places a strong em phasis on architec-tural knowledge and the growing importance of modular strategies.

Dell's success in the face of a highly competitive and turbulent industryhas been supported by its innovative application of B2B technologies. Initiallythese initiatives focused on supply chain efficiencies. Dell's "direct model" is


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Mo dular Strategies: B2BTe chnology and Arch itectural Know ledge

from 55 in the early 1990s; this compared to roughly 20 days for its competitors.With com ponen t prices falling 1% per week, this translated directly into anobjective cost advantage.^'^ However, rival firms have been able to adopt similarinitiatives, overcoming Dell's advantage. For instance, IBM adopted an Autho-rized Assembly Program (APP) to improve its supply chain efficiency. The APPshifts the final stages of production to channel partners, who are better able torespond to customer needs. Compaq adopted a similar approach with its Opti-mized Distribution Model. In this way, competitors increasingly imitated supplychain aspects of Dell's direct model as it became clear that the previous supplychain s tru au re was unsustainable. In order to maintain its position. Dell alsoestablished several B2B exchan ges. In 1999, it launched Gigabuys.com, anonline store that consumers could use to purchase almost anything associatedwith computers, from routers and network cards to software and digitalcameras. In 2000, it also established a B2B e-M arketplace based on Ariba Inc'sIBX software. This B2B exch ange promised access to a broad range of custom ersdelivering benefits in terms of improved matching and low cost electronicprocurement.

However, the confluence of competitor imitation and industry evolutionhas rendered these efficiency-driven initiatives insufficient to support superiorperform ance. More specihcally. Figure 3 show s the m on thly stock retu rns associ-ated w ith efficiency-based B2B initiatives and com pares these with modularinitiatives. The event entries were collected by a review of Dell's archive ofmedia announcements*^ and searches of major U.S. publications in the Factivanews database. Dell's monthly stock returns are adjusted relative to the NAS-DAQ Computer Index. Interestingly, although the earliest efficiency initiative,the adoption of online sales, resulted in positive returns, these types of initiativessoon lost market favor. Indeed, the mean adjusted market return in months inwhich efficiency-driven initiatives were m ade pub lic was -3 .37 % . It is no sur-prise that in this environment Dell subsequently closed its B2B e-marketplace,citing a lack of customer interest. In the face of eroding efficiency advantages.Dell's application of B2B technologies has becom e increasingly mo dular. This hasenabled it to shift towards the right of the framework, pursuing Schumpeterianren ts. This adop tion of m odu lar strategies has been facilitated by Dell's extensivearchitectural knowledge.

Dell's direct model has played an important role in providing the richarchiteaural knowledge that supports modular strategies. Critically, the expo-sure to customers entailed by the company's direct approach has provided abroad scope for experience accumulation and also allowed the development of adeeper understanding of customer needs than many of its rivals.'** Interestingly,although other firms play more extensive roles in other areas, such as Hewlett-Packard's involvement in R&D and design, this exposure has not provided asource of advantage in applying B2B technologies to customer needs. This is


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Modular Strategy

F I G U R E 3. Del! Monthly Return (adjusted for NASDAQ Computer Index)and Modular Initiatives

lan-94

lan-95

|an-96

Averagemonthlyreturn forefficiency-driveninitiatives= -3.57%

Coord inated de l ivery of peripheralslan-97

lan-99

|an-00

lan-01

lan-02

lan-03

lan-04

Unveils GigabuyseMarketplace

Enables ERPintegration

Launches B2BeMarketplace

SME Premier Pages

Onl ine SupportProvide technology out look^ ...Tegrated go ve rnm en t services Personalized in ternet bund led

E-5upport Di rec t & C o mp l e t e C a r eAnba equ i ty

stake

Onl ine suppor t for small clients

Average month lyre turn for modu la rinitiatives ^ 9,25%

KEY:Modular initiativesEfficiency initiatives


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Mo dular Strategies: B2B Technology and Architec tural Know ledge

built around Intel's chipsets and their Instruction Set Architecture, and Micro-soft's Windows software protocols including Application Programming Interfacesand file formats (as supported by strong network externalities). By setting therelationships between system components, these standards have reduced theimportance of design capabilities, restricting their competitive value to internallyaltering co mp onents. In a sense, the standards in the com puter industry haveprevented firms from differentiating themselves based on the product archi-tecture, leaving the way for firms, such as Dell, to distinguish themselves byahering the architecture of business processes. By harnessing architecturalknowledge. Dell's more recent B2B initiatives have concentrated on the modu-larization of its hardware management capabilities and fine-tuning its coordi-nation role.

On the customer-side. Deli is providing tools that customers can embedinto their own supply chains. It initially commenced online sales in 1996, allow-ing customers to access information and to make and track orders over theInternet. Tailored Premier Pages for business and institutional customers soonfollowed. These went beyond efficiency enhancing online ordering and allowedcustomers to manage their hardware needs by integrating their own corporatepolicies into Dell's ordering system. This is part of a larger B2B initiative thataims to package standardized services for customers. Neil Hand, a director ofDell's worldwide enterprise team, descrihes the company's recent moves as"looking for the common denominators that all customers need, so we canwrap standard professional services around those in a pre-packaged but flexibleway."*^ As part of this strategy. Dell also offers to pre-load custom ized softwareand does inventory tagging for customers. It has also expanded Premier Pages byintegrating online B2B services that autom ate system m aintena nce. The Open-Manage Resolution Assistant software automatically detects problems and auto-mates client response policies. The HelpTech offering also makes the company'sown troubleshooting tools and applications, formerly employed by Dell's supportstaff, available to customers directly. Dell's ImageWatch service provides cus-tomers with advanced knowledge of upcoming technological developm ents(subject to a confidentiality agreement). In these ways, it is modularizing itscapabilities and integrating them into their customers' supply chains, in theprocess taking over functions formerly managed by internal IT departments.It has also begun to integrate other services such as regulatory compliance andrecycling into its product offerings, expanding its role. For instance, it has estah-lished online support for the 1998 amendments to the federal Rehabilitation Actof 1973, Section 508.' *' This provides advice and compliance assured bundles forgovernment customers. Dell also offers to coordinate disposal and value recoveryfor its clients. These offerings are supported by B2B technologies that makethem instantly and continuously accessible to clients. These initiatives providecustomers with modularized value-added services that they can easily build intotheir computer-related activities.


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Modular Strate^v - and Atxhitec lura

customers, bypassing Dell completely. For instance, monitors or peripherals godirectly to the customer, bundled with the other components by the 3rd partylogistics provider prior to delivery. This decreases the emphasis on the com pany 'straditional assembly role, making it more an architectural entrepreneur thatdraws together coalitions of firms lo serve customer needs better. The shift inthis direction was supported by also taking an equity investment in Ariba, theB2B software firm, providing closer access to capabilities built around under-standing business processes and the relationships that frame them. However,the most far-reaching development is Dell's expansion into other products, suchas printers and consumer electronics. It has partnered with firms includingLexmark, Samsung, Fuji Xerox, and Kodak to access higb-quality componentknowledge in order to produce its own branded products. Here, Dell is actingin an entrepreneurial role, bringing together new coalitions of technologicalknowledge, manufacturing, and delivery capabilities. For instance, the entry intoprinting has put il into direct competition with Hewlett-Packard, the leader inthe category. Despite having relatively weak R&D capabilities of its own. Dell isrelying on its richer knowledge of customers to coordinate the delivery of prod-ucts that better serve their needs. This pits its command of the architecture ofthe customer side of the computer business directly against Hewlett-Packard'stechnological knowledge, betting th at, in the w ords of Michael Dell, "the days ofengineering-led technology companies are coming to an end.'"" Dell is becomingan architectural entrepreneur, applying its understanding of customer needs tobring together new combinations of skills and resources to serve them moreeffectively.

The announcement of these modular initiatives was strongly associatedwith positive stock returns. The industry adjusted mean monthly return formodular initiatives was 9.25%; this compared positively with the overall indus-try-adjusted mean return for Dell of 3.04% over all months in the entire periodsince the end of 1993."^ An analysis of variance confirmed that this differencewas statistically significant (p


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Modu la r Str -hi tectural Knowledge

F I G U R E 4. B2B Initiatives: Agribuys, Cemex, Dell, and Li & Fung

Archi tec tura l KnowledgeEfficiency Gains

(e-marketplaces) Low HighArchitectural

Entrepreneurship

1IIu(A

\ .

Agribuys

EastmanD e ! l ^ ^ _ . , - -

1984

Fung

^

2004

Cemex \Efficiency Gains(just-in-time) Modularization

Findings and ConclusionsThe references to "collaboration" in the literature onB2B technologyreflect the underlying modularity of these initiatives. However, the terms "col-laboration" and "integration" do not capture the reality of exchange operation,and their application toB2B initiatives borders on paradox. B2B technologyadds value by decoupling tight internal connections and replacing them withmodular interfaces. Parties then operate within the structure set outby the

interfaces. Thereafter, the interaction betw een parties is interme diated hy theinterface and a better term to capture phenomenon is "distant collaboration," anexpression reflecting the fact that although the parties are working together,they are doing so in a relationship that is externalized. Integration is even lessappropriate. Though the supply chain operates as a seamless whole, it is actuallycomposed of standardized interfaces that form strong boundaries between thefirms. Thus, in actuality, th e structure is decoupled and only loosely integrated.The value of modular systems is that they make full vertical integration unnec-essary, because distant collaboration is able to operate in its place. Standardiza-tion is the cornerstone of B2B initiatives. Standardization makes th e tight bond sof traditional vertical integration unnecessary, because it removes the potential


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Mo dular Strategies: B2BTe chnology and Arc hitectu ral Know ledge

but only because of its extensive architectural knowledge. TheAgribuys casesupported this finding, by illustrating how shallow architectural knowledgecould severely curtail the application of B2B initiatives, limiting Agribuys toinfrastructure provision. This lack of specialized architectural knowledgeexplains why so many independent e-marketplace start-ups failed. Consistentwith this explanation is recent evidence suggesting that the proportion of inde-pendent start-ups that ceased operations was statistically greater than the pro-portion of incumbent linked exchanges that closed.'*'' This suggests that firmsshould treat the acquisition of architectural knowledge as a strategic activity.

The form that B2B initiatives take depends critically on the indispensa-bility of that firm to the supply chain. Firms that have an active role and whoseposition is protected by cost advantages and high fixed costs should ado pt mo du-larization strategies, leveraging their capabilities more widely to earn Ricardianrents in these new areas. Those that fulfill scalable coordination roles shouldpursue architectural entrepreneurship strategiesbringing together new coali-tions of firms to generate Schumpeterian rents.

The ongoing evolution of industries erodes firm advantages. Evolutionplaces particular pressure on Ricardian rents, as firms reach the limits of theirproductivity frontiers and as products become increasingly commoditizedthrough the diffusion of knowledge. However, the strategic application of mod-ular strategiesin the form of technology-driven B2B initiativesprovides theopportunity to generate new Schumpeterian rents that can replace those thatare eroded away. Architectural know ledge is crucial to this strategic response,making its accumulation and management more than a supporting activity, butrather a strategic priority.

Notes1. T. Cultman, T.M. Devinney. A. Latukefu, and D.F. Midgley, "E-Business: Revolution,

Evolution, or Hype?" California Management Review, 44/1 (Fall 2001): 57-86.2. R. Sanchez and J.T. Mahoney, "Modularity, Flexibility, and Knowledge Management in

Produa and Organizational Design," Strategic Management Journal. 17 (1996): 63-76; M.Schilling, "Toward a General Modular Systems Theory and Its Application to InterfirmProduct Modularity," Academy of Management Review. 25/2 (2000): J12-J34.

3. S. Jap and J. Mohr, "Leveraging Internet Technologies in B2B Relationships," CaliforniaManacjemenl Review. 44/4 (Summer 2002): 24-38.

4. J. West land and T. Clark. Global Electronic Commerce: Theory andCase Studies (Cambr idge MA:MIT Press, 1999).

5. This is a situation further complicated by strategic alliances between exchanges. Forinstance, one of the cases discussed here considers the independent e-marketplace Agribuys.It has entered into an alliance with the Worldwide Retail Exchange (WWRE) consortiumcreating hybrid characteristics.

6. FreeMarkets merged with B2B software provider Ariba Inc. in 2004.7. A. Afuah, "Redefining Firm Boundaries in the Face of the Internet: Are Firms Really Shrink-

ing?" Academy of Management Review, 28/1 (2003): 34-53.8. Sanchez and Mahoney, op. cit.9. D. Galunic and K. Eisenhardt, 'Architectural Innovation and Modular Corporate Forms,'


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Mo dula r Strategies .owledge

11 . C.Y. Baldwin and K. Clark, "Managing in th e Age of Modu larity,' Harvard Business Review,75/5 (1997): 84-93; R. Sanchez, "Strategic Flexibility in Product C om petitio n,' StrategicManagement Journal. 16 (1995): 135-159.12. C.Y. Baldwin and K. Clark, "The Option Value of Modularity in Design: An Example fromDesign Rules, Volume 1: The Power of Modularity," Harvard NOM Working Paper No. 02-13,

Harvard Business School Working Paper No. 02-078, (2002).13. O. Williamson, The Mechanisms of Governance (New York, NY: Oxford University Press, 1996).14. Together one-to-one functional mapping and decoupled component interfaces are two hall-marks of modularity, see K. Ulrich, "The Role of Product Architecture in th e M anu faau ringFirm," Research Policy, 24 (1995): 419-440.15. Ibid.16. R. Henderson and K. Clark. 'Architeaural Innovation: The Reconfiguration of ExistingProduct Technologies and th e Failure of Established F irms ,' Administrative Science Quarterly,35/1 (1990): 9-30.17. Ibid.18. R. Riimelt, "The Many Faces of Honda," California Management Review, 38/4 (Summer 1996):103-111 .19. L. Fleming and O. Sorenson, "The Dangers ol Mo dularity,' Harvard Business Review. 191%(2001): 20-21 .20 . G. Gaveiti, and D.E. Levinthal, 'Looking Forward and Looking Backward: Cognitive andExperiential Search," Administrative Science Quarterly. 45 (March 2000): 113-137.21 . M. Zollo and S. Winter. 'Deliberate Learning and the E volution of Dynamic Cap abilities,'Organization Science, 13/3 (2002): 339-351.22. I. Nonaka, "A Dynamic Theory of Organizational Knowledge Creation," Organization Science,5/1 (1994): 14-37.23. Zollo and Winter, op. cit.24 . The separation of exchange ownership (and control over design) from transaaion partici-pation has important implications for the ability to enforce the exchange's system on users.Obviously, private exchanges can force customers to use its system by having the owner

commit to only transacting through that method. Consortia can also force adoption, but thisis more indirect as control is intermediated by the consortia entity. Independent exchangescannot use this leverage, as they do noi participate in transactions that they can dedicate tothis ch annel.25. DaimlerChrysler web site, available at , last accessedSeptember II, 2002.26 . Supply chain indispensability is distinct from asset specificity as developed in transactioncost economics. Supply chain indispensability looks not at the app ropriation of rents, butrather at their generation. Modular approaches would seem to reduce asset specificity,though that has not been addressed here. For a more detailed discussion on assets specificity,see O, Williamson, "Comparative Economic Organization: The Analysis of Discrete Struc-tural Alternatives," Administrative Science Quarterly, 36 (1991): 269-296 .27 . See Chemical Industry Data Exchange mission statement available at , last accessedSeptember 24, 2003.28 . On July I, 2004, Eastman announced that it had divested PaintandCoatings.com to Spe-cialChem, a broader independent e-marketplace operating in the specialty chemicals seaor.Available at , lastaccessed December 3, 200429. J. Hagel, "Leveraged Growth: Expanding Sales Without Sacrificing Profits," Harvard BusinessReview. 80/10 (2002): 69.30 . C.E. Helfat and R.S. Raubitschek, "Product S equencing: Co-Ev olution of Knowledge, Capa-bilities, and Products," Strategic Management Journal, 21/10 (2000): 961-979.31 . J.M. Utterback and W. Abernathy, "A Dynamic Model of Process and Produa Innovation,'Omega. 33 (1975 ): 639-65 6; D .J. Teece "Profiting from Technological In no va tion ,' ResearchPolicy. 15/6 (1986): 285-3 05.


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Mo dula r Strategies: B2BTe chnology and Arch itectura l K nowledg e

Destroyer? Com petitive L earning and Knowledge Flows in the Technological Strategies ofFirms," Research Policy, 24 (1995): 489-506.34. D.B. Yoffie, "Apple Computer 1992,' Harvard Business School Case 9-792-081 (1994).35. J.W. Rivkin and M.E. Porter, "Matching Dell," Harvard Business School Case 9-799-158

(1999).36. Ibid.37. Available at < ww wl .us.deIl.com/content/topLcs/gIobal.aspx/corp/pressoffice/en/index>. last

accessed August 2, 2005.38. Zollo and Winter, op. cit.39. Quoted in J. Schofield, "Installation with that?' The Guardian, June 17, 2004, p. 16.40. As ame nded by 29 U.S.C. 794 (d),41. Quoted in S. Lohr, "The Distributor vs. the Innovator," The New York Times. May 24, 2004, p. 1.42 . The NASDAQ Computer Index was judged as the most appropriate index to use to removemarket noise. These results are based an analysis ol Dell's monthly return from December31, 1993 to December 31, 2004, as this index was only started at the end of 1993.43. In transaction cost terminology this amounts to a reduction in the asset specificity of themodule in question. See Williamson |1991), op. cit.44. This research found a statistical significance of p=0.06, G.S. Day, A.J. Fein, and G. Ruppers-berger, 'S ha keo uts in Digital M arkets: Lessons from B2B Exchanges," California ManagementReview.A5l2 (Winter 2003): 131 -150.


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Richard PJ Devinney TM Modular Strategies