2. The formal organizational structure
2.5. Beyond function versus Project: Modular
So far our exposition of formal organization design for NPD has covered a stream of research that is by now well established and agreed. However, recent research focus is shifting. With the rise of the complex systems view of organizations, the importance of interacting microstructures has been rec- ognized. Complex systems are characterized as ‘made up of a large number of parts that interact in non-simple ways, [such that] given the properties
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of the parts and the laws of their interactions, it is not a trivial matter to infer the properties of the whole’ (Simon, 1969: 195). Hence, the minutiae of detail design may affect organizational behavior at the macro level. One of the first studies to uncover the organizational impact of changes in the architecture of the product was carried out by Henderson and Clark (1990). Based on the premise that ‘architectural knowledge tends to become embedded in the structure and information-processing procedures of established organizations’
(p. 9), they suggest that established firms fail to design novel product archi- tectures because their organizational routines and communication patterns are anchored on the architecture of their previous products. By studying several architectural changes in the photolithography equipment industry, they found that subtle shifts in the optimal product architecture, which were not reflected in the organization structure of the respective market leader, could be exploited by new entrants to turn the industry structure around. Such a seminal finding suggested that a strong relationship between the product structure and the formal and informal organizational structure exist.
The most comprehensive conceptualization of product architecture was first introduced by Ulrich (1995), who defines it as the scheme by which the func- tional components of the product map into its physical components. Such a mapping defines the way product components share interfaces. Within the concept of product architecture, the notion ofmodularityis crucial. Modular product architectures are those in which the functions of the product map (almost) entirely to one or few product components. This implies that modular products are formed by modules, which are independent of each other while integral products are formed by highly coupled sets of components (Ulrich and Eppinger, 2004). Because the notion of modularity implies decoupling of components (or sets of components) that form a complex system (Simon, 1969), modularity has been considered as a mechanism to obtain flexibility to manage complexity and uncertainty (Ethiraj and Levinthal, 2004). In the product domain, modularity has been associated with flexibility to adapt and generate product variety (Ulrich, 1995). Bringing product and organization design together, Sanchez and Mahoney (1996) discuss the value of using modular designs both in the product and organizational domain as a way to gain flexibility and handle complexity. They use the term modularity to refer to products and organizations that use standardized interfaces between their physical components and organizational groups, respectively. They suggest that both product and organizational structures need to be considered simul- taneously for the organizational form to take advantage of the coordination mechanisms embedded in the product architecture. Moving the unit of anal- ysis one-step up to the industry level, product, and organizational modularity have been credited with the evolution of platforms used by an entire industry and thus industry structures, which allow teams in different organizations to work independently on loosely coupled problems (Baldwin and Clark, 2000;
Handbook of New Product Development Management
Schilling, 2000). Indeed, Schilling and Steensma (2001) show after analyzing data from 330 US manufacturing firms, that industries with greater pressures for flexibility due to the heterogeneous inputs and demands tend to adopt more modular organizational forms as opposed to integrated hierarchical. Baldwin and Clark (2000) use the personal computer industry to show, how an entire industry can innovate and grow at significantly higher than expected rates by taking advantage of the modularity embedded in PC architectures. They argue that by following established ‘design rules’ in the industry developers of product components could innovate at higher than normal rates without generating design rework to other components of the product. Complementing this line of research, Langlois (2002) discusses the implications of modular organizational forms and the way property rights are partitioned in technology organizations.
These findings emphasize the need to deepen our understanding of how the product and organizational structures map into each other. To this end, Sosa et al. (2004) study how the architecture of complex products map to the formal and informal organizational structure of the organization that designs it. To do this they capture (a) the architecture of a large commercial aircraft engine by documenting how its engine components share technical interfaces, and (b) the actual technical communication patterns of the teams responsible for the design of each engine component. They found that the actual com- munication patterns highly correlate to the interfaces identified in the product architecture. More interestingly, they also found a significant number of cases in which there was a mismatch of technical interfaces and team interactions.
Understanding the sources of these mismatches was critical because many of them were associated with costly design rework and project delays. The occurrences of these mismatches were systematically associated with prod- uct and organizational factors. In particular, they found that interdependences across organizational boundaries exhibit a higher risk of being missed by team interactions and such a risk is even higher between components that belong to different modular systems. Because complex systems are ‘nearly decompos- able’ instead of perfectly modular (Simon, 1969) some interfaces occur across system and organizational boundaries and those interfaces are the ones that are harder to identify and attend during the development of complex products (Ethiraj and Levinthal, 2004).
This interaction of organizational design and product design has an addi- tional dimension. Structuring organizations is one way to handle the inherent complexity of the design process. It has been shown that reduction of design complexity is necessary to avoid problems with excessive design conversion times and even to avoid design instability (overall project failure) (Yassine et al., 2003; Mihm et al., 2003). In that context, Mihm et al. (2006) show that under certain circumstances it may be beneficial to deliberately use organiza- tional boundaries to weaken interdependencies and channel communication.
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Considering too many component interdependencies may lead to system instability and information overload on the team members. Using organiza- tional boundaries to reduce the information flow stabilizes the development process, sacrificing performance for the sake of speed and predictability.
In this section, we sketched the current state of the discussion about formal organization in NPD. We argued that organization in NPD centers around a trade-off between specialization and integration. NPD organizations need to create strong technical expertise on the one hand and show high mar- ket integration on the other hand. Functional organization forms and project organization forms represent the polar points of potential organization imple- mentations. Heavy and light-weight project matrix organizations form the middle ground.
In our discussion, we deliberately neglected that integration can be achieved through many mechanisms other than primary reporting relations or secondary cross-functional team structures. Lateral relations Galbraith’s (1972) such as liaison mangers, task forces, integration personnel and integrating departments are classic. Consistent goal setting as well as a shared culture, rules, and a leadership style play a subtle role in the integration effort. Moreover, the design of the process (Ulrich and Eppinger, 2004) may turn out to be a powerful method.