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5.4 Business Models That Are Difficult to Be Imitated

Products with highly modularized architectures are difficult to technologically differentiate, making it difficult for Japanese companies to compete against low-cost strategies adopted by companies in developing countries. Thus, we stated that, in developing countries, companies must consider a profit model at the modular level at which products are comprised. Is there any other way for Japanese companies to survive this environment? This section discusses shifting to an integration service that provides systems of one product combined with others, rather than standalone products.

First, we review the characteristics of business models by product architecture, as shown in Fig. 5.1. As previously stated, PCs are highly modularized products, though before their era, computers were products with integral structures. When IBM developed the System 360 in the 1960s, the design of computers became more

Modular

Product Architecture

Integral

Low

Functionality/quality/price

High

Fast

Innovation speed

Slow

Fig. 5.1 Product architectures and business models

modular, with components such as a CPU, input/output device, memory storage, and other components created to be less interdependent. This enabled the development of large-scale computers in a short period of time. This increase in system development efficiency paid big dividends for IBM (Baldwin and Clark 2000). However, the modularization of product architecture spurred the appearance of companies that specialized in each type of module, including IBM spinoffs, causing the downfall of IBM's vertical integration model used in mainframe computers. On the other hand, Intel developed a CPU for use in PCs—an act of destructive innovation for mainframe computers. The progress in modular PC technology has been dramatic, with mainframes currently being used only in applications that require high-speed processing of large volumes of data. Many information systems have been replaced by servers that have modular architecture.

On the other hand, as stated in the previous paragraph, automobiles continue to be products with an integrated architecture. However, in electric vehicles, many of the components required in traditional vehicles, such as fuel, gasoline engines, and transmission systems, will become obsolete and the number of parts will drastically decrease. In addition, interdependency between parts will also reduce, making electric vehicles modularized. As shown in Fig. 5.1, modularization triggers a horizontal division of labor in industry structures, with finished goods being made by assembling components. As a result, these products lack in performance shown by products that have an integral architecture, but having lower costs as market competition increases. Further, assembling finished goods becomes labor intensive; therefore, the increase of developing countries often spurs further cost reduction. On the other hand, with modular innovation, the pace of technological innovation in finished products becomes faster (Baldwin and Clark 1997). This results in reduced time requirement for product performance to exceed the level demanded by customers, increasing the likelihood of destructive innovation and further price erosion.

Product modularization results in a more competitive marketplace for companies from developed countries, including Japan. However, modularization in some types of products, such as airplanes, is unheard of. An airplane may have between one and two million different parts, making them more complicated than automobiles in terms of the order of magnitude. The process of developing new airplanes is of high duration. Airplane manufacturers procure parts from vendors only after completely thoroughly analyzing their technological characteristics. Airplane product technologies have matured to a certain extent, with interfaces that divide the parts, more or less fixed. However, the pace of performance improvements for each part differs, requiring an overall balance in the assembly of an optimized product (Brusoni et al. 2001). Greater modularization allows a faster pace of technological innovation because the modules encapsulate information inside and enable technological progress regardless of the status of other modules. However, internal encapsulation of information is not performed in airplane manufacturing, which requires manufacturers to consider the overall product composition after first understanding the technology of products procured from external sources. Therefore, airplane manufacturers and their parts vendors are loosely coupled. Airplane manufacturers are known as systems integrators because of their role in coordinating the overall system in all its scale and complexity (Brusoni et al. 2001).

Even within industries where modularization has progressed, Japanese companies may be able to sustain by playing the role of a system integrator. With the modularization of large computers with integral architectures, IBM's share prices fell drastically; however, IBM did not attempt to compete in the market with standalone products. Instead, they paved the way for a new path as a system integrator. Computer users have various IT systems needs. For example, a bank may wish to implement a high security accounting system that can quickly process large amounts of financial information. In this case, a system integrator will combine appropriate hardware and software catering to the needs of the bank to provide a suitable IT system to customers, thereby increasing the value of their products. IT systems are industry-specific, and with its large customer base, analyzing the appropriate system to meet an industry's needs is one of IBM's strengths. Know-how is a rare management resource absent among young companies. Corporations from developed countries, including those from Japan, have better business experience than companies from developing countries; similar management resources should exist from such business experiences. By moving from a business model based on outright sale of products to one based on customer service as system integrators, will enable these companies to build competitive advantage over companies from developing countries.

 
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