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Antecedents and outcomes of modular production in the Brazilian automobile industry: a grounded theory approach

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Abstract

Our paper focuses on how foreign automobile manufacturers in Brazil have implemented and benefited from strategic modularization. Based on our case studies and in-depth interviews, we developed a theoretical framework to examine the antecedents and outcomes of strategic modularization. Our theoretical framework suggests that strategic modularization may help improve a firm's positional advantage by reducing the cost of managing tacit knowledge. In addition, the adoption of strategic modularization influences the nature of relationships with major suppliers, further blurring the boundaries of the firm.

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Notes

  1. Modular strategy may reduce product distinctiveness. To the extent that product distinctiveness helps product differentiation and thus adds value to the consumer, modular design may inadvertently sacrifice overall product performance (Robertson and Ulrich, 1998).At the same time, modular strategy may improve product design flexibility by enabling firms to deal more flexibly with which components to select and how to assemble them when market needs are uncertain. Market uncertainty represents a situation where there is a wide range of business lines, products and technologies from which to choose, and where it is difficult to know which to select. One study shows that, when faced with a high degree of market uncertainty around 2000, Japanese companies that relied on modular architecture performed better (in terms of return on sales) than those that relied on integral product architecture (i.e., lean production) (Fujimoto and Nobeoka, 2004). It is beyond the scope of our study to examine the net effect of the disadvantage of the loss of product distinctness and the advantage of product design flexibility on firm performance over time. In other words, selection capability is vital for modular production, as the level of uncertainty is high. The empirical research outlined in the second part of the paper shows that, faced with a high degree of business uncertainty, most Japanese firms produce disappointing results because they lack selection capability. The poor performance of household electrical appliance and IT manufacturers around 2000 is symbolic of this phenomenon.

  2. In the 1990s, the Brazilian automotive sector stated that it gained momentum mainly due to the Sectoral Chamber Agreement among the government, industry, and trade unions (Marx et al., 1997). Zilbovicius et al. (2002) noted that the stabilization of the economy with a rapid drop in inflation rates in 1994 played a major role in this industry by attracting many new investments. The industry has experienced a broader transformation and restructuring in global terms. The traditional vertical structures began to give way to smaller and more flexible units with fewer suppliers. In addition, new global competitors entered the Brazilian market by establishing new operations and/or by acquiring Brazilian companies (Zilbovicius et al., 2002). As we concluded from our interviews, this transformation made Brazil the test bed for new organizational design and production technology. Today, Brazil is the country with the largest range of automobile brands produced in a single country.

  3. The American Heritage Dictionary defines outsourcing as ‘The procuring of services or products, such as the parts used in manufacturing a motor vehicle, from an outside supplier or manufacturer in order to cut costs’. Therefore, outsourcing can be defined as the delegation of non-core activities from in-house production to an external supplier that usually has more competencies and can supply at a lower cost.

  4. A modular product platform is created by designing the product in ways in which it can be decomposed into independent components and/or modules in a way that they can be reassembled together without any loss of functionality. In addition, standard interfaces must be specified in order to manage the flow of inputs and outputs between interacting components and/or modules. Modular process architecture describes the decomposition of a firm's activities (or modules) into specific routines, tasks, and interactions that allow frequent reconfiguration of processes through mixing and matching. For a more detailed explanation and definitions, see Sanchez and Mahoney (1996) and Worren et al. (2002).

  5. Strategic flexibility has two basic dimensions: adaptability and versatility. Adaptability is defined as the ability to change the course of action quickly to take advantage of an opportunity or to avoid a threat. Versatility is the ability to apply different resources and capabilities according to specific situations. This involves the ability to mix and match components to deliver product variety to customers.

  6. At this stage of our research, we did not interview any Japanese company. Japanese companies are newer entrants than US and European firms in the Brazilian auto industry, so they have not yet fully established modular structure in their plants.

  7. A complete list of questions used in the interviews can be obtained from the authors.

  8. Integral product architecture was popularized by Japanese automakers with a high level of flexibility in coordinating component and subassembly development between an automaker and its suppliers after a project gets under way (Kotabe et al., 2003; Parente and Gu, 2005).

  9. A pull approach to manufacturing production is driven by real-time information about the customer's requirements. In other words, design and production are defined based on what customers need. An example is Dell's built-to-order manufacturing system, which requires a high level of flexibility.

  10. Blue Macaw is the name of GM's new modular small-car assembly complex in Gravatai, Brazil, which cost US$554 million to build. The goal of the top-secret project was to build profitable small cars using supplier modules pre-assembled within a multi-manufacturing complex that functions as a single plant.

  11. We thank one of the reviewers for drawing our attention to this potential correlation.

  12. We thank an anonymous reviewer for calling our attention to this potential limitation.

  13. We thank one of the reviewers for suggesting this extension of our research.

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Acknowledgements

We acknowledge the three anonymous reviewers and Arie Lewin for their constructive comments and encouragement during the review process.

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Authors and Affiliations

  1. Temple University, The Institute of Global Management Studies, Philadelphia, USA

    Masaaki Kotabe

  2. Rutgers University, School of Business Camden,

    Ronaldo Parente

  3. College of Business Administration, University of Missouri-St Louis, St Louis, USA

    Janet Y Murray

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  1. Masaaki Kotabe
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  2. Ronaldo Parente
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  3. Janet Y Murray
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Correspondence to Masaaki Kotabe.

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Accepted by Arie Y. Lewin, Editor-in-Chief, 20 April 2004. This paper has been with the authors for three revisions.

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Kotabe, M., Parente, R. & Murray, J. Antecedents and outcomes of modular production in the Brazilian automobile industry: a grounded theory approach. J Int Bus Stud 38, 84–106 (2007). https://doi.org/10.1057/palgrave.jibs.8400244

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