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Governance implications of modularity in sourcing relationships

  • Original Empirical Research
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Abstract

Modularization, an important trend in innovation markets, allows for recombination of product components into multiple end-product configurations. Although modularization has consequences for how firms manage their relationships with upstream component suppliers, the governance implications of modularity for innovation sourcing relationships have not been adequately examined in the prior literature. We intend to bridge this gap. We argue that (i) buyer firms employ governance mechanisms (monitoring and socialization) to cope with the strategic hazards of innovation sourcing relationships (knowledge specificity, knowledge asymmetry, and knowledge spillover) and (ii) the consequences of deploying these mechanisms in response to the strategic hazards on relationship performance are contingent upon the degree of modularity of the system in which they are deployed. We provide empirical support for the developed moderated mediation model through an analysis of 194 innovation projects. The developed theory and findings contribute to the governance and modularity literatures. In addition, our findings may help change managers’ behaviors: we observe that managers do not consider modularity when selecting governance mechanisms, while our model findings suggest they should.

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Notes

  1. Once this industry precondition is fulfilled, firms have the managerial discretion to use either modular or integrated systems. For long, companies like Apple have been strategically outsourcing their production to companies such as SCI and other contract manufacturers in order to reduce Apple’s manufacturing overhead and inventory carrying costs while concentrating resources more intensively on product design and marketing (Electronics Buyers News, 1996). The customers of SCI included not only Apple, but also more than 50 firms including Hewlett Packard and IBM, companies that compete directly with Apple in the personal computer market. Likewise, the use of modular product architectures in manufacturing has shifted industries from supply on consignment basis to widespread automation of manufacturing processes. This shift was initially observed in electronics manufacturing, but later became prevalent in many of industries such as apparel and footwear, toys, data processing, offshore oil drilling, home furnishings and lighting, semiconductor fabrication, food processing, automotive parts, brewing, enterprise networking, and pharmaceutical production.

  2. We focus on (operational) task interdependence. We do not associate modularity with relational, economic, or technological dependence, which are likely driven by other factors including firm size, market power, market structure, and knowledge dispersion in the industry.

  3. Prior marketing research has taken this even one step further and examined the impact of governance mechanisms on firm financial performance (e.g., Raassens et al. 2012).

  4. The remaining 18 respondents did not report their functional affiliation.

  5. Australia, Austria, Canada, China, Colombia, France, Germany, Hong Kong, Hungary, India, Iran, Iraq, Israel, Japan, Malaysia, Mexico, Netherlands, New Zealand, Russia, Spain, Switzerland, Taiwan, Thailand, UK, and Vietnam.

  6. Foreign-market operations create operational difficulties and outcome uncertainty because of spatial separation and a lack of understanding of formal and informal institutions (Boeh and Beamish 2012; Zaheer 1995). Such value-claiming risks may be more intense when collaboration occurs on a global scale, because there are international differences in the protection of intellectual property.

  7. Following previous work in marketing strategy (e.g., Özturan et al. 2014), we use source item averages rather than parcels in the path analysis. Even though parceling is not uncommon for the purpose of measure validation, we prefer to use the original source items in path analysis to ensure construct validity and consistency with previous work.

  8. We verified if the results were sensitive to the choice of a 30% threshold. We used alternative thresholds within the 30%–50% range and found that the reported results are robust when using higher threshold values.

  9. Also governance mechanisms and their interaction terms with modularity are moderately correlated with dependent variables (e.g., output monitoring and relationship performance: r = .409), yet testing piecewise exclusion for these variables is not possible without fundamentally altering the modeling approach.

  10. As Muller et al. (2005) suggest, moderated mediation occurs if the mediating process that is responsible for producing the effect of the independent variable on the outcome depends on the value of a moderator variable. If the moderator is a contextual variable (as is modularity), the mediating process (i.e., between strategic hazards and relationship performance through monitoring and socialization) varies as a function of context. In other words, moderated mediation is demonstrated when the conditional indirect effect of strategic hazards on relationship performance via governance mechanisms varies in strength, depending on the level of modularity.

  11. We measured this variable using a 7-item scale:

    1. 1

      Purchasing from a new supplier would require retraining for a number of our employees.

    2. 2

      Developing procedures to deal effectively with a new supplier would take a lot of time and effort.

    3. 3

      Developing working relationships with new suppliers would be a time-consuming process.

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Acknowledgements

The authors would like to acknowledge the Institute for the Study of Business Markets at Pennsylvania State University for their research funding support. In addition, the authors would like to thank David A. Griffith and Steven H. Seggie for their comments on prior versions of this manuscript.

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  1. Koç University, Istanbul, Turkey

    Nukhet Harmancioglu

  2. Pennsylvania State University, State College, PA, USA

    Stefan Wuyts

  3. Ozyegin University, Istanbul, Turkey

    Peren Ozturan

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Harmancioglu, N., Wuyts, S. & Ozturan, P. Governance implications of modularity in sourcing relationships. J. of the Acad. Mark. Sci. 49, 601–625 (2021). https://doi.org/10.1007/s11747-020-00748-w

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  • Issue Date:

  • DOI: https://doi.org/10.1007/s11747-020-00748-w

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