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5.3 Product Architecture and Technological Catch-Up

When the level of quality and functionality of products manufactured by companies in developing countries lag behind Japanese companies in terms of technology, these companies exceed the level of customer demand; Japanese companies cannot compete with them by simple technology differentiation. The previous paragraph noted the effectiveness of shifting from a standalone product model to a customer value model. However, the Innovator's Dilemma is primarily encountered among electronic products with rapid technological innovation, and it is not seen in many other products. Japanese companies maintain a competitive edge through technological dominance in B2B products such as electronics components, high functionality materials, and industrial equipment. These products differ from B2C products in that they do not require conformance to the good-enough markets unique to developing countries and are difficult to commoditize. In addition, they may have unique manufacturing technologies and complex product structures, making it difficult for competitors to catch up. These product features can be summarized by the concept of product architecture (or design concepts). Herein, we examine the relationship between product architecture and technological catch-up by companies in developing nation, and clarify the implications for a global strategy within Japanese corporations.

Slowing the pace of technological catch-up by companies in developing countries requires lengthening the exclusive use of proprietary technology, methods of which include securing patents and intellectual property rights, preventing trade secret leaks, and reverse engineering via complex product structures. The most effective method varies by industry. For example, in the pharmaceutical industry, preserving rights via patents is effective, but in the electronics industry, many companies insist that product complexity works best (National Institute of Science and Technology Policy 2004). This is because pharmaceutical companies are able to protect their patent rights for compounds used in new medicines, while in the electronics industry, multiple patents exists for one product, and the know-how of the best combination of these technologies often becomes important. In addition, business systems are not in place to enforce local intellectual property rights when conducting business in developing countries, and while it may be necessary to acquire intellectual property, acquisition alone does not sufficiently protect technology. Thus, companies must take measures other than leveraging their intellectual property rights to maintain technological advantages. In particular, equipment-related products, such as consumer electronics, computers, automotive, and industrial equipment, can be internally analyzed by disassembling them, thus making them easy targets for imitation through reverse engineering. On the other hand, for manufactured products such as electronics components, high-function plastics, and steel plates, process technology is critical, and technology leakage can be controlled through technology management within factories.

Equipment-related products function as finished goods after being assembled from multiple components. When considering a product strategy with competition from companies in developing countries, the concept of product architecture (i.e., design concepts) is crucial. Product architecture is typically of two types: modular and integral. Modular architecture includes parts with little mutual dependencies and structures that are formed by assembling modules into finished goods. On the other hand, products with integral architecture have highly mutual dependencies among parts, and overall product structures are integrated and cannot be categorized into modules. Products with modular architecture can be manufactured by assembling parts procured from external sources, making it difficult to differentiate the finished goods on the basis of manufacturing technology. Accordingly, competitors are likely to catch up technologically with these products. Conversely, products with integral architecture require calibration between components of optimal assembly for the overall product, thus creating high entry barriers for companies from developing countries.

With the modularization of product architecture, the performance of each component and functionality are concurrently strengthened, resulting in a faster pace of innovation (Baldwin and Clark 1997). On the other hand, for products with integral architecture, groups responsible for each component jointly discuss how to improve the overall product, thereby increasing transaction costs. Thus, the pace of innovations is slower, but the finished product has an affinity to products that call for high quality and performance. This is because the design of each part and its assembly are optimized for the required performance and functionality. Specifically, electronic products, with their short lifecycles and rapid technological progress, have modular architectures, while automobiles, comprising several parts, requiring high quality and performance, are designed with integral architecture (Fujimoto 2005).

As the modularization of product architecture progresses, interfaces between components are made public and specialists emerge who focus on the manufacturing of each component. The value added for each module increases relative to the value of the finished product, thus transforming a vertically integrated process of finished goods manufacturers to a process with horizontal division of labor and specialists for each module (Langlois 2002). Personal computers (PCs) are a typical example. A PC comprises a CPU, memory, a hard disk, a DVD player, a display, and other components, each developed by different companies and then assembled to function as a PC. However, there must be an industry agreement regarding the technological platform of the product we call a PC. For example, Intel, which provides the CPUs used in PCs, has become the primary driver for standardizing interfaces between components, and the technology they have developed is provided free of charge to other companies. Thus, as Intel creates faster CPUs, the overall performance of the PC will also improve (Gawer and Cusumano 2005). Thus, the modularization of product architecture requires the following: (1) a modular architecture for the entire product (as a design concept), (2) interfaces between components (modules), and (3) standardization to measure the performance of the overall module structure (Baldwin and Clark 1997).

The reason behind the progress in modularization within electronics-related products is because a product comprises many components and requires a combination of multiple technologies, making it difficult for one company to supply all necessary components and technologies. An industrial structure based on a horizontal division of labor increases the speed of innovation and rapidly improves product functionality and complexity. Despite the increasing product complexity, since the finished products can be assembled from components procured from external vendors, entry barriers for end-product manufacturers are low. Further, finished goods manufacturers have primarily labor-intensive work, such as processing and assembly, putting companies from developing countries at an advantage owing to the low worker wages in these countries. Taiwanese manufacturers, such as Acer, began as PC-assembly original equipment manufacturers (OEMs) for US companies; they then began designing products as original design manufacturers (ODMs), and finally moved on to supplying PCs to the market under their own brand names as original brand manufacturers (OBMs). In this manner, as finished goods manufacturers grew over time, electronic component manufacturers surfaced as supporting industries. As a result, Taiwan has become a large production region for electronic products (Sturgeon and Lee 2005). The progress of modularization in electronic products has given rise to electronic manufacturing services (EMS), which specialize in manufacturing. An electronic product can be completed by procuring components from external vendors and utilizing services provided by EMS for manufacturing, causing vertically integrated Japanese corporations to quickly lose competitiveness. On the other hand, cost competitive corporations from China and elsewhere have experienced astounding growth.

In industries where modularization has taken hold, strategies must be devised on a modular basis, rather than on a product basis, thereby making it difficult for companies in developing countries to catch up. Many electronic products have highly complex core components. In the case of PCs, Intel supplies the logic element, which is the core component. Similarly, Japanese companies have technologies such as optical pickup modules (a device that reads information stored on a DVD via a laser) in DVD players and inverter control devices in air conditioners. Many companies in developing countries are unable to easily copy these technologies. International competitiveness on a product-specific basis can be measured using external trade statistics and examining metrics of Japan's international competitiveness (exports – imports (trade balance) / exports + imports (total trade volume)). Finished goods, such as electronic equipment for consumer use and computers, have decreased across the board since the latter half of the 1990s, while metrics for electronics components have risen. In addition, Japanese electronic components manufacturers have increased their global market share (Motohashi 2010).

On the other hand, with regard to a product with an integrated architecture, an automobile is a prime example. The impact of the automakers is large among the value-added activities of the overall product (Fujimoto 2005). Automobiles are complex products comprising several parts that may be custom-made to the end manufacturers' specifications, which is contrary to electronic products, where completed products are made by assembling standardized components. New model development is accomplished by automakers collaborating with parts manufacturers on parts design. Entry barriers in this arena are high for companies in developing countries. In Europe and the US, parts suppliers' wages are relatively low compared with those of automakers, and the ratio of external sourcing of parts among vehicle manufacturers is said to be high to keep costs low (Takeishi et al. 2001). Nonetheless, overall product design is carefully managed by automakers, and as such, product architecture is not modular. However, new Chinese automakers Geely and Cherry began by assembling vehicles using parts bought from foreign automakers (a case of pseudo-open production) and gradually began their own development, technologically catching up with other automakers (Li et al. 2005). Still, the Chinese domestic market is dominated by foreign automakers, and vehicles manufactured by domestic automakers continue to demonstrate low quality and performance.

When considering competition strategies against companies in developing countries at a product level, companies must understand the characteristics of their products' architectures. Particularly in industries with a high degree of modularization, companies must choose strategies to build competitive advantage by focusing on modules that are technologically difficult to copy. However, modules that can be manufactured with a certain degree of quality by local companies are subject to cost competition, resulting in a quick price decrease. Among these are components, such as solar panels, for which manufacturing technology has been integrated into production equipment, enabling the implementation of production lines as turnkey systems. In industries with rapid technological innovation, companies must analyze not only the actions of competitors but also of related companies, such as materials and equipment suppliers.

In contrast, products with an integrated architecture make it difficult for companies in developing countries to catch up, giving Japanese corporations the luxury of time. However, companies in China and India are gaining strength, making it critical for Japanese companies to continually pioneer new technology. In addition, from the perspective of architecture theory, the emergence of electric vehicles poses a significant threat to the current automotive industry. Electric vehicles replace engines and transmission systems of traditional vehicles with motors and have a more modularized structure. There are various theories as to the potential ubiquity of these electric vehicles, but manufacturers must increase their competitiveness in core components (i.e., modules) in preparation for such a future.

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