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Component complementarity and transaction costs: the evolution of product design

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Abstract

The issue of whether firms design and develop products with modular product architectures that benefit from the efficiencies of using the market, or integrated product architectures that allow for leveraging firm capabilities is a central question within the product architecture literature. Empirical results show that product modularisation increases over time across a range of industries. However, evidence of increasing (re)integration at the product and industry level has also been hinted at in a limited set of studies. The fact that product architectures potentially oscillate between the modular and integrated designs, as well as often adopting a hybrid form, highlights the need for an integrated explanation concerning how and why this evolution occurs. On this basis we use draw upon the notions of synergistic specificity and product component complementarity. By considering the trade-offs between different types of value capture that are possible in modular and integrated architectures, we are able to build a basic explanation for the evolution of product architectures and their governance choices over the long-run. The proposed typology and discussion helps to synthesise existing evidence and provides the foundation for further empirical research.

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Notes

  1. The ideas of complementarity draws heavily on the work in the papers by Teece (1986) and Argyres and Zenger (2012) and Schilling’s (2000) work on synergistic specificity.

  2. Shibata et al. (2005: 15), argue that a stylised open and integrated product architecture is very unlikely to exist in practical terms, because “there are virtually no products for which the mapping relationship is complex and for which standard interfaces have been established. Accordingly, we may assume that as a rule, open architectures are [always] modular architectures”. For conceptual clarity, we adopt the same position in this paper.

  3. Like much of the work that is considered within the field of strategic management, there is an assumption here that managers behave in a manner is utility maximising on the part of the firm. However, we do not assume true rationality as per an economic definition whereby all managers possess the same information, assess threats and opportunities the same or reason in the same way (Stubbart 1989). In this respect, some managers will note opportunities for unique complementarity due to either their exclusive knowledge of internal bundles of components or their unique processing of the benefits that may accrue through externally available bundles of components available through the market.

  4. Extremely low transaction costs may be available due to market dynamics such as the significant presence of industry standards throughout the entire product architecture, as well as the intermediate market moving from a supplier base to a complementor base, for example.

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Authors and Affiliations

  1. Newcastle Business School, Northumbria University, Newcastle upon Tyne, UK

    Nicholas Burton

  2. School of Business and Law, Edith Cowan University, Perth, Australia

    Peter Galvin

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  1. Nicholas Burton
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  2. Peter Galvin
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Correspondence to Nicholas Burton.

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Burton, N., Galvin, P. Component complementarity and transaction costs: the evolution of product design. Rev Manag Sci 14, 845–867 (2020). https://doi.org/10.1007/s11846-018-0310-3

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