Module and Interface

Abstract

The goal of this chapter is to analyze and to deepen comprehension of a notion of modularity from the perspective of interfaces. It will show how the design and management methodologies of modules become established by clarifying that modularity is a structure defined by interfaces and by applying the design and management methodologies of interfaces.

Modularity is a structure defined by interfaces. It greatly improves resource efficiency.

These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

4.1 What Is Modularity?

The concept of modularity is very profound.

4.1.1 The Arguments About Modularity in Academia and Its Background

Why does the argument continue?

The goal of this chapter is to analyze and to deepen comprehension of a notion of modularity from the perspective of interfaces. It will show how the design and management methodologies of modules become established by clarifying that modularity is a structure defined by interfaces and by applying the design and management methodologies of interfaces.

Higher efficiency of modular structure has received widespread attentions in the fields of design and production of products/parts and programming. Modular design has been deemed as a promising methodology to develop products adaptive to more complicated market demands with more agility and lower cost.

Utilization of modular structure was advanced first in the computer industry. Before the concept of modularity spread out, computer manufacturers like IBM produced every component in-house, such as the OS, CPU, printer, application software, and network. The business model is called closed vertical integration, in which most transactions are executed only in a company or among group companies. This is also called “insourcing oriented policy” or “not-invented-here syndrome.” However, when IBM entered into the PC business responding to the market needs, it converted its policy to outsourcing components, such as the OS to Microsoft and the CPU to Intel. It is generally known that this revitalized the industry, and IBM pioneered the global conversion to the new industrial structure of modularity. The structure has spread to other industries gradually and steadily and continues changing business models globally. Consequently, arguments about the potential for applications of the concept arose.

In today’s PC industry, products are likely to be composed of standardized parts and software procured beyond group companies. Modular design has progressed, especially in the Internet era. Underneath the surface of the digital world, modularization has penetrated into every field, far more than generally recognized. After the PC, it has spread from DVDs, mobile phones, flat-screen TVs, and household appliances through semiconductors and various products, one after the other.

Regarding reusability of resources as an advantage of modularity, computer programs that do not need adjustments for assembling or physical transportation are obviously more favorable than mechanical products/parts. However, modularization has become pervasive even in areas of mechanical products/parts.

The aviation industry standardized interfaces of jet engines for the Boeing 787, and a new entry of jet engine manufacturers besides Rolls-Royce and GE is expected to provoke innovations in the stagnant technologies and performances.

At the time of writing this chapter, not a single day passes by without newspaper articles mentioning about the modularization happening in the automotive industry. It has been reported that the modular structure will certainly spread more when it shifts to electric. In China, because gasoline supply and demand is expected to become imbalanced more seriously and the nation is also watching for an opportunity to obtain the number-one position in the next-generation automotive industry, electric vehicles will presumably become mainstream. In order to decrease present prices for faster market penetration, modularization is considered a key success factor.

It has been said in the automotive industry for a long time that the modular structure was inappropriate to manufacture excellent products with perfect performance such as ride comforts. Even there, however, modularization has progressed rapidly in companies such as Volkswagen. Volkswagen leaped out of its stagnation over a period of years and caught up with Toyota and other companies with a momentum to dominate the world automotive market. The Renault/Nissan group follows the strategy successfully with aggressiveness as strong as Volkswagen’s. No suspicion regarding the consequences of their modularization can be observed in the group. The wave that began with IT-related products and propagated to electronic products such as semiconductors, mobile phones, and home electric appliances has finally reached mechanical products.

A business model in which processes are distributed and parts are outsourced to various suppliers beyond company groups is called horizontal division (of functions). As business relationships of companies extend across borders in the global economy, it is also called global horizontal division. Relationships of companies also become modularly structured in synchronization with products/parts. Accordingly, the term modularity has referred to relationships of companies.

4.1.2 Intuitive Comprehension of Modularity

There is no established theory of modularity.

4.1.2.1 Widely Accepted Perceptions

Although scholars have not reached a consensus on the definition of modularity, they generally agree on the following:

• The application of modularity is easy and effective in digital (electronic) industries, but difficult in analog (mechanical) industries.

• Modularity is conspicuously seen in innovation-intensive industries such as those in Silicon Valley.

• Modularity contrasts with the craftsman manufacturing practices that were responsible for the past success of Japan and that are still being emphasized even in Japanese electronic industries.

• Modularity weakens the past strengths of companies and undermines the vested power.

• It undermines existing competencies and strengths of companies thus resulting in radical changes in the vested power of industries.

• It has led to the decline of industries in developed countries and enabled the rise of industries in developing countries that have adopted and applied it.

• Companies and individuals in existing structures need to accept the conversion of their mindsets.

While academia agrees that modularity will bring about large-scale innovation, opinions vary regarding what is modular and what is not. To provide contexts for an analysis of modularity, academic discussions in economics and management science will be reviewed next.

There are two commonly used definitions of modules:

• (1) Units that are relatively tightly and coherently connected inside and relatively loosely and weakly outside

• (2) Quasi-independent units sharing multiple interfaces to order, interact, integrate, and combine

Even in the most accepted definitions, the important keywords (tight or loose connections) are qualified by relatively, the result of which is that the term modularity is still shrouded with ambiguity, and it is not clear how modularity should be identified. Melissa Schilling, a professor at New York University Business School, a leading expert of the modularity study, generalized all previous studies by saying that almost all systems are recognized “to some extent” as modular,¹ admitting that all systems are modular but the characteristics are unknown. Definition (1) also has apparent contradictions in that a unit is no longer modular when the inside becomes modularly structured. The definition denies all the attempts to modularize the inside.

The comprehension of modularity is so difficult that an established theory or an explicit definition does not exist, but it is obvious that this situation hinders planning, implementation, and the effective utilization of modules in practice. We need to check examples of modules in businesses to recognize the facts and deepen our intuitive understanding before discussing the precise definition.

4.1.2.2 Most Common Examples of Modules

As described in the beginning of this chapter, the modular structure has been deployed aggressively in PCs and electronic devices so that the products are manufactured easily only by assembling components. The PC manufacturers deployed outsourcing of CPUs and OSs from the start and procured parts actively from foreign countries such as Taiwan. The contracted Taiwanese manufacturers pushed forward standardization of the PC parts, including the design and production of motherboards, and as a result, modularization has advanced.

In many semiconductor products, special processing functions such as analog data processing, graphic data processing, and telecommunication processing are provided by modules, and these functions are subdivided further into modules of the circuitry design diagram called the intellectual property (IP) core for the distribution. User companies purchase the IP modules separately, integrate them to make a circuit diagram, and provide it to the foundries. In Taiwan, this foundry business has been very successful since the 1990s. Taking this opportunity, modular manufacturing (e.g., of PCs, game machines, printers, mobile phones, bicycles, automobiles) has been promoted as a national strategy of Taiwan, which has led to the current success of the state.

An OS is a platform module—that is, an aggregate of the operating functions of the CPU, hard disk, DVD, network communication, and so forth, which all the application programs use frequently. Only frequently used functions are collected into one OS module, so that the same function no longer needs to be developed redundantly for each application program. Customizing these functions for every application program might be effective for miniaturization or speeding up processing, but modularization is a superior design philosophy from the perspective of efficiencies of development. As a result, this modular structure brought lower prices, extensions of product lines, technical innovations, and, as a result, the historic growth of the industry.

In the area of software development, a type of modularization called object orientation is of considerable interest. Because the reproduction costs in programming are nearly zero, the effect of cost reductions by reuse is substantial. As the reuse incurs only transaction costs, technologies to reduce the transaction costs have been investigated for a long time. Various interfaces between programs and between programmers have been built for each of the five transaction elements of connection, presentation, negotiation/agreement, exchange, and ex post processing to assure reusability. Structural frameworks of aggregates of these interfaces are called architectures, and it has been recognized that the success of a software product greatly depends on the capabilities of the architects in charge of the design. It is significant that the last position of Bill Gates at Microsoft was chief architect. Architectures will be discussed further in Chap. 6.

Cloud computing, in which every demand of every client is processed by only one system on the network, has taken root in the market these days. It is essential for the sake of efficiency to respond to all those diversified demands only by a combination of modules instead of the conventional development customized for each client. This requires the architects’ exceptional intelligence to design the overall modular architecture, precisely taking into account the trends of all their users in the global markets from the present to the future.

Applications for smartphones are much easier and quicker to develop than those of PCs, as the object-oriented approach (modularity) has been adopted so thoroughly that the frequently used functions are provided as modules in large quantities.

All organizations assume a modular structure without exception because the respective sub-organizations (departments) are supposed to carry out their tasks independently to some extent. If all departments make decisions independently (only by complying with fixed interfaces), then coordination between departments is unnecessary and the transaction costs are largely reduced. In reality, however, various activities are adjusted between departments depending on conditions and occasions on an ad hoc basis (ad hoc interfaces). Coordination for determining the ad hoc interfaces is indispensable if fixed interfaces are not well prepared and the organization is not accurately structured, causing too many coordination meetings in a company, such as coordination meetings between production and sales departments. The immaturity of the modular structure of organizations correlates significantly with the number of meetings, according to our research shown in Chap. 8. The amount of coordination that is required between modules is one of the important factors that determine the degree of modularity, which will be discussed later in this chapter.

4.1.2.3 A Platform Is a Module That Provides Redundant Functions, Including Interface Function

The term platform has also various meanings, but generally it is understood as a unit that provides basic redundant functions to support activities of all related entities. In addition, it is often used to mean a foundation to connect each activity. In short, it can be defined as a module to provide functions that all modules need in common. Consequently, it is perceived as a significant and special module comparable to a hub in a hub-and-spoke system.

OSs, networks (e.g., the Internet), and databases in which the most commonly used functions are aggregated are called platforms in the case of IT. The platform modules are used by all other modules (e.g., system programs, application programs, and human users). Online marketplaces offer functions such as search, presentation, exchange, payment, and so forth to all of their participants as a platform. A platform is basically a nexus of a large number of fixed interfaces that reduce transaction costs.

The Chinese government defines its mission as “Pin-Tie” in Chinese (translated as platform in English). This means that it emphasizes functions to support and promote free economic activities in the market, rather than to regulate or control individual activities of respective companies. The platform function here is to design and provide transaction interfaces between each entity (individual and organization)—in other words, to establish and operate economic institutions in order to activate transactions. In the sense that they provide interfaces to all modules, they are perceived as a platform module.

4.1.2.4 Examples of Products That Do Not Take the Modular Structure

To deepen comprehension of the concept of the modularity, it will be discussed from another perspective, “what is not modular?”

The most commonly cited instances of non-modular products are automobiles, particularly Japanese ones. Those are manufactured based on the design policy that all the parts must be custom designed, including ashtrays, to realize perfect ride comfort. To accomplish this, the design and development must be executed in-house (or within a company group).

It is strongly believed that the self-contained design, development, and manufacturing processes create the best products. If all the activities are coordinated with each other on an ad hoc basis for each model (i.e., all the coordination is conducted by ad hoc interfaces without using a fixed interface applied beyond multiple models) like this assertion, the degree of modularity is considered to be very low.

Even in automobiles, however, the tires affecting the ride comfort greatly are obviously structured to be exchangeable, namely, modular. The battery is the same. The parts standardized by ANSI, DIN, JIS,² and so forth including screws, volts, electric wires, and harnesses are also used in large quantities. Electric systems including air conditioners, car audio systems, navigation systems, and in-vehicle telecommunication systems are particularly modular, which are almost completely standardized so that the products of any manufacturer are applicable to almost all car models.

The Renault/Nissan group has been working on a structural conversion that promotes sharing of basic modules such as chassis and engines across their affiliated companies, called “CFM (Common Modularity Family).³” The modularization strategy of Hyundai KIA Motors has not been disclosed to the public, but it proceeds with modularization as its main strategy after merging of Hyundai and Kia in 1998. As for the conversion to the modularization, European automotive manufacturers are the pioneers. Volkswagen started modularization⁴ as its major corporate strategy in 2007 and expanded its businesses aggressively. By combinations of a few types of chassis (called “platform”), engines, and standard accessories (e.g., car navigation systems, air conditioners) like “combinations of Legos (the company’s expression),” it realizes mass production from compact to medium-sized products with high efficiency. The company announced that the modular parts are planned to comprise up to 70 % of the vehicles.

Volkswagen pursues the aggressive expansion of its business scale including M&A synchronously with the promotion of modularization. This is a reasonable strategy because it is essential for successful modularization to expand the scale in order to obtain the higher usage frequencies of standard modules and the higher resource efficiency. Volkswagen entered the Chinese and Indian markets at the earliest stage and has been most active, and it is perceived as one of the most aggressive and innovative automotive companies in the world. It is more likely to become a leading player of the automotive industry in the future, alongside the Renault/Nissan group. As described above, “how much can be modularized?” becomes a central issue of the argument in the automotive industry instead of “it should not be” or “is it possible?”

It is truly more difficult to modularize mechanical products than electronic products because there is an inevitable physical problem in that mechanical parts cannot be machined to the exact design specification, resulting in delicate fabrication errors. It is not simple that products are produced only by assembling parts. The manufacturing errors of Japanese manufacturers are predominantly smaller than others, but still it is impossible to eliminate them completely.

On the other hand, the error does not accrue basically in electronic and digital signals. Every part is made to the exact specification and assembled to an end product without errors. The adjustment, like the one in shop floors, is not necessary. Therefore, the modules can be produced separately and independently as long as the interface is clearly fixed, which makes the production much easier than that for mechanical products.

The proportion of electronic parts in automobiles is increasing drastically these days. Even in Japan, the Ministry of Economy, Trade and Industry (ex MITI) started a project called the “Automobile Strategy Study Committee” to modularize the parts across Japanese manufacturers, and Japanese news media reported that Japanese manufacturers introduced modular methodology in 2012. In addition to automatic windows, automatic seat adjustors, windshield wipers, EFI, and air cooling fans, the electric parts include fuel pumps, electric brakes, electric dual clutches, and in-vehicle telecommunication systems connected to intelligent transport systems or ITS. When it comes to electric vehicles, the proportion is expected to increase much further.

The next mainstay fighter, the F35 Lightning II, is another interesting example. The F35 is the latest fighter planned to be deployed in the USA by the end of 2016, in Japan from 2011, and in countries such as the UK, Italy, the Netherlands, and Canada through 2035. It was developed as a part of the Joint Strike Fighter (JSF) program, which supports all the demands of the Air Force, Navy, Army, and the armed forces of the allied nations by modular structures. To overcome the recent defense budget reduction, approximately 80 % of the parts, mainly on the airframe, will be shared as a platform with all the models, and the remaining 20 % are to respond to the different functional requirements of each military force, such as air-to-air/air-to-ground/air-to-ship attack and conventional/short-range/vertical/carrier taking off and landing. The modular structure was adopted by even the leading-edge fighters, the performance of which is most significant (obviously more significant than the ride comfort of automobiles), even with the political pressure of the budget cut in the post-Cold War years, and it realized 3–8 times the performance of the previous model. It is planned to substitute all existing models with the F35 and is expected to achieve a large improvement in efficiency by economies of scale. Incidentally, the term module is not used in the JSF program at all, but the concept is the modularity. Besides, there was identical criticism against the introduction of the modular structure into the fighters, which require perfect coordination and adjustment.

The IT outsourcing industry has grown drastically since the 1990s and contributed to the economic growth of India. A large number of labor-intensive positions not limited to software-related process but also various business processes have been transferred to the developing countries due to their cost advantages. The reduction of the transaction costs enabled access to the human resources, providing an overwhelming competitive advantage in terms of costs.

When admitting a language obstacle, there are still very few cases in which Japanese companies successfully utilize software outsourcing services in other countries. They have offshore software development centers in China and India, but the reality is that those scales are exceedingly smaller than those of US and European companies. In the IT outsourcing industry, a unique characteristic of Japanese companies is a “bridge engineer” who runs back and forth between China/India and Japan to perform coordination of the development. It is a well-known theory that the performance of outsourcing depends on bridge engineers’ personal capabilities.

What are the competencies required for the bridge engineers, who play such significant roles? The answer to my question from the managers in charge is likely to be “a capability to understand atmosphere from scenes,” which is too ambiguous to recruit or train such significant workers in large quantities. There seem to be two essential implications behind these vague answers.

The first one is the ability to supplement missing descriptions when necessary through Japanese development processes in which specifications are not so clearly described. And the second one is the ability to restrain their complaints against Japanese software development, which is not efficiently managed (never like their shop floor operations⁵).

Conventionally and commonly, large Japanese companies require their contract programmers to sit in the same room with them while they outsource software development. The reason why the contract programmers should be physically in the same place and why they cannot be managed remotely is because the development starts without a completion of design specifications and the specifications must be determined flexibly on an ad hoc basis.

On the other hand, in the modular approach, the development begins only after the overall framework and the interfaces of the modules are designed explicitly in detail, whereby all the modules can be developed separately and independently. Therefore, the overall architecture is emphasized in the modular structure. Complaints against the Japanese inefficient approaches are disliked as they disturb the “atmosphere” and their prideful harmonization.

The Japanese ad hoc development process causes critical problems in terms of efficiency and agility. As for the software development of mobile phones, their backlog of software developments has already exceeded the limits of capacities, and this issue has been growing similarly with many other products in which Japan has maintained strong competitiveness. When software is developed on an ad hoc basis, it easily becomes like entangled “spaghetti.” The custom-made approach may work to complete one product perfectly, but the flexibilities such as design changes, additions, and removals of function, expansions of product line, and reuses of parts are obstructed. Whenever a new product is introduced, all redundant development works must be repeated from scratch.

Customizing or coordinating interfaces ad hoc incurs enormous transaction costs, including presentation, confirmation, negotiation, monitoring, and modification. As high functionality and novelty of products are emphasized too much, they are likely to neglect such transaction costs. Gaps between diversified needs of the emerging markets and their products, however, have been increasing. In the good old days, they could rely on the mass production and sales of one highly functional/high-priced product to compensate for the huge transaction costs. Because it no longer works, the business model has collapsed. Nevertheless, insufficient understanding of transaction costs and lack of the management expertise make them still persist in the obsolete strategy of the old business environment. In order to deal with product diversification and price reduction at the same time for emerging markets, the mindset should be changed to utilize fixed interfaces in applicable areas and to develop the technologies needed, just like they did for production costs in their shop floors.

A sole case of a non-modular product in the PC industry, in which modularization is most advanced, is battery chargers. A new PC comes with a new battery charger without exception and the manufacturers never provide information for their reuse. When an additional battery charger is needed, we are surprised with their high-price setting and apathy to environmental issues. Feature phones (old-type mobile phones) are identical. This example shows the fact that reusability increased by modularization makes users happy but not manufacturers.

In contrast, simple, standardized, and reusable battery chargers using a USB⁶ and micro-USB were adopted for smartphones and tablet PCs. The power supply function of the USB has been used for small electric fans and miniature lamps as well recently.

Since this protocol was standardized by the International Telecommunication Union (ITU), all mobile phone manufacturers are expected to adopt it. The International Electrotechnical Commission (IEC) has been promoting standardization of non-contact charging for smartphones, which will contribute to more convenience of the users.

The example of the battery chargers shows that modularization is possible, if there is a will.

4.1.2.5 Examples of Companies That Are Perceived as Being Not Modular Oriented

Let us consider Apple and Samsung, which are generally perceived as rejecting the horizontal division of functions, rejecting modular structure, and being self-contained.

• (1) Apple

  Apple is likely to be perceived as in-house and self-contained oriented. It devoted considerable resources to CPU manufacturing, merging a CPU design company in 2007, which is extremely exceptional among PC and mobile phone manufacturers. Apple differentiates itself by graphics processing and low-energy-consumption capabilities. However, all its CPU design is processed by aggregations of IP modules (off-the-shelf IC design diagrams), and contracted manufacturers such as Samsung are used for the CPU manufacturing—that is, Apple depends heavily on outside resources. It outsourced CPUs before iPhone 4 but altered to self-procurement, which seems a strategic conversion after it became easier to outsource the design and production capacities of the CPU. It is generally known that Apple’s final assembling depends on Foxconn, a Chinese EMS and a subsidiary of Hon Hai Precision Industry, and many of its core parts are outsourced to various Japanese companies.

  Apple’s OS is not open to any other companies, while Google’s Android uses open source software and has been adopted by many companies, resulting in rapid growth and domination of the smartphone market.

  Apple’s historical growth was triggered by the great success of its iTunes service (App Store was included later), a digital music distribution service. It started the service with huge risks for the first time among large companies but succeeded in establishing a market platform and strong competitive edge (only for Mac machines in the first place). The leading-edge products (iPhone and iPad) utilizing Apple’s brand image, the company’s other competitive advantage, were launched as additional modules on the platform.

  Afterward, many companies that noticed the potential of the digital content distribution service followed Apple to enter into the business, and the competition became fierce as described previously.

  For Android smartphone applications and content, individual markets operated by each company above and the Android Market by Google coexist and provide the same functions and the products. They have been scrambling for customers, resulting in very bad dispersion of sales and profits. As Apple can monopolize all its OS users in its content and application market, the difference in the sales and profit rate is huge. However, the open competition would possibly vitalize the Android markets, jeopardizing Apple’s present position.

  As described above, Apple has managed the interfaces extremely well using insourcing and outsourcing distinguishably and strategically. Instead of the emotional decisions of inside or outside, it maintains internal resources judged to be the critical sources of competitiveness and procures the best resources from outside that are not critical, paying careful attention to the standardization of its own interfaces as well. It is reasonable to do so considering resource efficiencies; it must become the key success factor of the companies in the global open economy.

• (2) Samsung

  Samsung, with revenue accounting for approximately 20 % of the Korean GDP, has an increasingly strong presence. Its capabilities of active globalization and prompt decisions of strategic investments accompanied with considerable risk have made the company successful, and it continues to grow rapidly. It is natural that a company growing rapidly involves all business areas. Under the conditions that it is trying to increase the size of the organization, modularization is likely to be less prioritized. While the area that should be focused is clear and the strong leadership works well, centralization is privileged over autonomy in order to attain stronger competitiveness. Samsung is identical to the Japanese companies in their old years of high growth.

  Samsung is often perceived as not aggressive with modularization, but the reality is that its movement toward modularization is most active. Ryozo Yoshikawa, who supported the company-wide reformation as requested by Lee Kun-Hee, the chairman who rebuilt the competitive power of the current Samsung, mentioned in his book⁷ that they started the reformation from the deployment of PDM system. This is a database indispensable to promoting the company-wide use of standardized parts (modules), which was the symbol of the Samsung of the future at that time.

  In addition, Samsung staff often comment in interviews that “systematization” is most prioritized at Samsung. Various definitions are possible for the term “systematization,” but it refers to a meaning of standardizing interfaces in the company that is identical to modularization. The company can make the ROI of its modularization good enough even if it only modularizes internally. The internal information has not been disclosed officially, but our findings reveal that Samsung is one of the most advanced companies in terms of modularization. The company recognizes that Chinese companies will catch up to them in several years and is preparing for the introduction of selection and concentration—that is, the utilization of external modules for the coming threads.

  In a stage of growth with overwhelming competitive power in fast-growing markets, there is little need for selection and concentration of domains utilizing modularization internally or externally. But when technologies and products get commoditized and competitions intensify, efficiencies of resources become critical. At that time, selection and concentration by the modularization become strategically more significant. This is the reason why Samsung is considered to stimulate its modularization actively.

4.1.3 Definition of Modularity

Interfaces determine modular structure.

Modularity has various meanings and various definitions without an established theory as described previously, and the comprehension is confused in spite of the increasing significance of the concept. Although this section is a little technical, the structure will be explained as concisely as possible.

Experts of the modularity study usually refer to the following definitions:

• (1) Units that are relatively tightly and coherently connected inside and relatively loosely and weakly outside (“units” are usually referred to parts and programs)

• (2) Systems in which separation and exchanges are possible

• (3) Units with functions of splitting, substitution, augmenting, exclusion, inverting, and porting

• (4) Units that share interfaces

(3) is a definition by Carliss Y. Baldwin and Kim. B. Clark, professors at Harvard Business School in their most authoritative book⁸ in this area. The description is difficult even for experts, with the difference of “splitting” and “exclusion,” the difference of “substitution” and “augmenting,” and the meanings of “inverting” and “porting.” In addition, the book includes a long list of mathematical equations from financial engineering, which make it more complicated. The explanation of the definition is omitted here as it is considered not practically valuable.

On the contrary, the definitions of (1) and (2) are simpler but so ambiguous that they cannot describe what a module is precisely. For example, “relatively” in the definition: “relatively tightly and coherently connected inside and relatively loosely and weakly outside” eventually leads to a conclusion that “all the systems as module to some extent.” Then the subjects of the modularity study cannot be identified objectively or measured as a matter of degree, which causes the studies to get stagnant and decline, despite a general attention.

As is obvious, the definition of (4), “units/entities that share interfaces,” is being explored in this book, which deals with transaction interfaces. There are many analyses focusing on modules, but only a few deal with interfaces that determine the modular structure. In this book, the modularity will be analyzed and explained structurally and concisely by analyzing interfaces. When we understand modularity correctly, a paradoxical conclusion that there exists no such concept of modularity in the first place will be obtained.

Modularity and interfaces will be explained below according to Fig. 4.1.

Fig. 4.1

Structure of module and interface

An interface between modules regulates the ways of connection, presentation, negotiation/agreement, exchange, and ex post processing. In other words, an interface defines/redefines the (new/existing) relationship. The functions of interfaces are twofold: interconnection and division.

• (1) Interconnection

  If there is no transaction between entities (e.g., persons, departments, companies, products, software, IT devices), the existing relationship is considered to be division, separation, or independence. When a new interface is established, a transaction relation (i.e., interconnection) becomes developed for the first time. For example, if a supplier has ISO9000 certification, customers can trust the quality of its products. It would be too costly for the customers to investigate the quality of an unknown company by themselves, but ISO9000 decreases such transaction costs largely and creates the interconnection. Online marketplaces such as Amazon decrease the transaction costs of searching, investigation, accreditation, and so forth, enabling transactions that would have been impractical in the past. This is an example of interconnecting separated entities to function as modules. While the cases above described fixed interfaces, ad hoc interfaces can also develop the interconnections, although the transaction costs are much larger.

  Interfaces exist between a transactor and the transaction partner and regulate the activities of both of them. The transactor will comply with the agreement and, at the same time, the partner is required to do so. When the promises are fulfilled mutually, the transaction becomes completed. This discussion is applied to both organizational interfaces and interfaces between products/parts.

• (2) Division

  In the case that an existing relationship of interconnection is redefined to increase the independence of entities, the function of the redefining interface is division. For example, when a director of a certain department needs to obtain approvals for all his/her decision markings from the president, the director is not independent but heavily dependent on the president. In this relationship, profit-and-loss statements and balance sheets can be introduced for his/her activity outcomes in order to allow all his/her arbitrary independent decision makings as long as he/she satisfies goals of revenue and profit. The new rule functions as an interface to redefine their relationship and allows the director to act independently for the most part. Accordingly, the introduction of the new interface brought independence of the director. It should be noted that it is not a perfect but a partial independence, as there still exist transactions.

In short, in the case that there is no transaction relation as the transaction costs are too large, the function of the interconnection is applied to reduce the cost. And in the case that a transactor depends on a transaction partner heavily and the transactor is needed to be independent, the function of the division is applied. As seen above, it is significant in theory to distinguish the two functions: (1) the interconnection brought into separation and (2) the division brought into dependence.

4.1.4 Advantages of Modularity in the Global Changes

The significance of resource efficiency improvement by modularization is increasing.

4.1.4.1 Two Advantages of Modularity: Inter-module and Intra-module

The two cases above were based on extreme assumptions: a case of absolutely no relation and a case of the perfect dependence. However, in most of practical cases, the existing relations are redefined and reorganized through the combinations of interconnections and divisions, which makes the functions of interfaces seemingly complicated; the reality is likely to be the combination of those two. As the introduction of an interface defines/redefines relationships, the functions of both the interconnection and division are applied and utilized. In the defining and redefining processes, the interface should be designed to embody the advantages of modularity shown below.

4.1.4.2 Inter-modular Advantages (Advantages Between Modules)

Individual modules (e.g., persons, departments, companies, products, software, IT devices) sharing fixed interfaces execute transactions adhering to the interfaces. Interfaces should make addition and removal of modules easy to realize resource efficiency improvement.

When an interface shared by Module A and B1 is also shared by Module B2, B2 can be added to the transaction between A and B1, meaning the new transaction between A and B2 is possible without an additional cost. This can be applied to B3, B4, and so forth. On the contrary, if a specific interface is used between Module A and B1, and if B2 intends to start a transaction with A, coordination and agreement on specifications and conditions of the new transaction incur a large amount of an additional cost (this is the transaction costs for creating a new relationship). And if the transaction costs to create a new relationship are too large to invest for B2, B2 cannot start the transaction. If a common interface such as a standardized one is used by both B1 and B2, B2 can start it with a lower additional cost and shorter time. Removal of B2, B3, and B4 is easy in the same manner as the addition.

In the academia of management science, the entities that can be reusable, substitutable, and transferable by sharing interfaces have been defined as modules. However, it is significant to explore further and distinguish two cases: a case of functionally homologous modules and a case of functionally heterogeneous modules as follows:

• (1) A case of functionally homologous modules ➔ Resource efficiency improvement by adjustment of input resources (addition and removal of input resources)

  When input resources (module) need to be increased or decreased, it is easily added or removed as long as the interface is shared. This avoids unnecessary use of resources and improves the resource efficiency. For example, resources of production (factories, equipment, and labor) can be added and removed easily and flexibly by outsourcing instead of owning if the interface is shared by outsourcers.

• (2-1) A case of functionally heterogeneous modules ➔ Resource efficiency improvement by functional allocation (economies of scale)

  In the above case of (1), each module of B1, B2, and B3 is functionally homologous, and the addition and the removal are just quantitative adjustments. On the contrary, when each module is functionally heterogeneous, the addition and the removal are qualitative adjustments—that is, addition and removal of (new and existing) functions. Only when an interface is shared, the addition and removal of functions are possible without an additional cost. Examples include addition of an IC chip with a graphics processing function onto a PC to increase the performance and splitting overhead functions from multiple divisions for integrating and sharing in a company.

  Different functions can be allocated to each module, as they are independent in the modular structure. The functional allocation makes tasks at each module simple, repetitive, unified, and specialized, thus enabling automation and/or substitution by lower-wage labor and improvement of productivity by learning-curve effects.

• (2-2) A case of functionally heterogeneous modules ➔ Resource efficiency improvements by sharing resources

  An addition of a module with a different function means addition of a new function on the system. If a module (function) is not frequently used but shared by all other modules, it increases the usage frequency—that is, the resource efficiency. Examples include sharing of a supercomputer for simulations, sharing of special equipment for manufacturing, and sharing of an M&A planning team. It is not limited to special resources to share for the improvement of efficiency. All platforms are shared by all modules on it and improve the efficiencies. A structure of options for minor changes to expand product line has the same aim as well.

  All those are possible with lower costs and in shorter time only when the interfaces are shared. Only when procedures for use of supercomputers such as connection, data transmittance, processing operation, and payments are explicitly described, the users can start the operation immediately. Professionals with national licenses (e.g., accountants, pilots) can be contracted easily as their capabilities are guaranteed by governments.

  Although only the reusability of a module is likely to be focused on, the sharing of resources described above is also another great advantage of the modularity. Improvements of resource efficiency at each module consequently lead to an improvement of the system—that is, all related entities (modules) as a whole.

Advantages of modules—load balancing, functional allocation, and resource sharing described above—are also known as the “three functions of a network.” A network corresponds to an interface, essentially; it is natural that the advantages of the interface are identical to those of the network. “Network,” however, refers only to an artifact between modules (inter-modular); therefore, the phenomena inside modules (intra-modular) are not considered. Intra-modular advantages, which are as significant as the inter-modular ones, will be discussed next.

4.1.4.3 Intra-modular Advantages (Advantages Inside Each Module)

As long as a module complies with interfaces, it can act independently without being interfered with by other modules. The independence and autonomy contribute the following advantages to each module. This mechanism is applied not only to organizational modules but also to parts/products indirectly that are developed by the organizational modules.

• (1) Strengthening motivation of each module by clarification of authorities and outcomes

  With the independence in the modular structure, outcome attributes of each module are developed under clear responsibilities and authorities. If entities are not independent without the clear description of responsibilities and authorities, their superiors can decide the attribution ad hoc and arbitrarily. It is significant to note that authority corresponds to ownership in the organization. Clear ownership strengthens motivation of the owner (subordinate) and not only increases his/her productivity but also encourages his/her capability development.

  Property rights theory⁹ argues that ownership in an organization is classified into control rights and residual control rights.¹⁰ Control rights correspond to authorities agreed in contracts (as fixed interfaces), and residual control rights correspond to all other authorities not described in contracts (authorities to determine all ad hoc interfaces). Authorities become explicit by fixing interfaces, and they are not when interfaces are determined ad hoc. If interfaces are not fixed, a superior can make decisions (i.e., determine interfaces ad hoc). In short, the more fixed interfaces, the clearer the authorities, and the more independence.

  Fixing interfaces strengthens the independence and self-initiative of each entity. But at the same time, it will diminish rights of the superiors to determine ad hoc interfaces, which are also rights to satisfy desires to control, dominate, and deprive profits. Therefore, rejections to the fixing are likely to occur (this will be discussed in Chap. 6 as one of the structural problems of fixed interfaces).

  In general, it is said that the success factor of capitalism was to confer ownership and the failure factor of socialism is to prohibit it. It is concluded that clear property rights as a basic concept of capitalism incentivize each entity and increase the productivity of the society. From a viewpoint of productivity, it is important to provide entities independence to strengthen ownership.

• (2) Strengthening motivation of each module by promotion of competition

  Because outcomes (revenues, profits, achievements of missions, and so forth) of each module are explicitly visualized and modules are easily substituted according to their outcomes, motivation and sense of crisis are strengthened and competitions among modules are promoted, resulting in higher productivities. They are objectively and fairly evaluated and rewarded or penalized according to their outcomes. The modular structure is an environment in which opportunities and threads coexist.

• (3) Promoting improvements to each module by explicitly visualizing responsibilities and outcomes

  Also related to explicit visualizations of outcomes, responsibilities, and authorities above, it encourages improvement of productivities at each module. If those are not visualized, the improvements are easily ignored.

4.1.4.4 Advantages of Modularity from Viewpoints of Transaction Costs

Two kinds of advantages of introducing the modular structures will be analyzed here from two viewpoints of transaction costs: transaction costs in day-to-day operation and transaction costs at changes (substitution and addition) of modules (effectively innovation).

• (1) Reducing transaction costs in day-to-day operation

  Each specific task is divided and allocated to each module for concentration and specialization in the modular structure, resulting in simplification and economization of those tasks (transactions become simpler to streamline by the repetition). This decreases the total amount of transaction costs inside each module.

  At the same time, most of the decision making can be distributed to each module with increased independence. As it is no longer necessary to ask superiors for permission regarding every decision, the transactions between modules are greatly reduced. As the number of hierarchical layers increases, the volume of transactions increases, and therefore, the influence of the division on transaction costs by the introduction of the modular structure is considerable.

  In order to reduce the transactions between vertical and horizontal modules in organizations, recurring ad hoc interfaces should be fixed to be simple and easily understandable, thus decreasing complexity.

• (2) Reducing the transaction costs of changes of modules (substitution and addition for innovation)

  Easy addition and removal of modules correspond to easy substitution—that is, lower transaction costs of innovation.

4.1.5 Requirements for Designing Interfaces of Modules

Interfaces of modules should be designed so as to minimize transaction costs.

4.1.5.1 Requirements for Interface of Modules

The previous section already clarified the requirements for design and development of interfaces of modules. Those are summarized below in terms of (1) requirements for interfaces of day-to-day operations, (2) requirements for changes of modules, and (3) requirements for development of interfaces (e.g., information systems.)

• (1) Requirements for interfaces of day-to-day operations

  Fixed interfaces of modules in day-to-day operations should be designed to satisfy the advantages described in Sect. 4.1.4: simplification, specialization, and independence (especially from superiority modules) by concentration of redundant tasks at each module.

• (2) Requirements for changes of modules

  Fixed interfaces should be designed to be as simple and easily understandable as possible to minimize the transaction costs of changing (i.e., substitution and addition) of modules. Parts changed (i.e., a cost for the change) should be minimized by subdividing functions into modules as small as possible, insofar as the disadvantages (i.e., the increase of inter-module transaction costs) do not appear prominently. In order to improve usability/reusability of external resources by simplifying interfaces, the structure and configuration of the platform and options should be appropriately adopted.

• (3) Requirements for design and development of interface media

  An interface is an intangible means to regulate activities; it is usually implemented using a network and/or databases as interface media these days. As the development of those information systems is more costly in particular, the resource efficiency of interface media should be carefully considered. For all systems, the appropriate modular structure is indispensable for higher resource efficiency, and, of course, it is required for the design and development of the interface media as well. That is, the requirements of (1) day-to-day operation and (2) changes of modules above are directly applied to the design and development of interface media; (1) corresponds to regular development of modules for the design and development of the interface media, and (2) corresponds to changes of modules for changes of the interface media, respectively. The advantages of the concentration and the specialization in (1) are applicable for simpler and easier design and development of the interface media as well. And the minimization of parts changed and the improvements of usability/reusability of external resource by the subdivision in (2) decrease the design and development cost of the interface media as well.

4.1.5.2 Avoiding Disadvantages of Modular Structure

Interfaces of modules should be carefully designed to avoid their disadvantages, which will be examined in this section.

In the case that the advantages are not realized and the initial development cost is not compensated, the cause of the failure is likely to be attributed to the disadvantages instead of the lack of capabilities. First, this obvious distinction of capability issues from structural disadvantages is significant to understand the disadvantages correctly.

Then next, what are the negative influences of the pure disadvantages? Introduction of complicated interfaces increases transactions immensely, resulting in the increase of total transaction costs. Concentration of redundant tasks on a module may create new inter-module transactions to utilize the module. Examples often cited include software processing speed that has deteriorated due to a newly standardized telecommunication protocol and larger physical shapes of products due to new interfaces for streamlining assembly.

In these examples, however, the advantages attained by economies of scale inside the module are neglected, which will be achieved by the capability of dealing with the issue. Investment and efforts to streamline the processing inside the module, the volume of which increased due to the concentration, should be accompanied to realize the advantages of modularization. Examples of the investment include automation, speeding up, and miniaturization. In other words, without the technologies and capabilities, attempts for the modularization are reckless. Consideration on external environments is also significant. In environments in which the redundant functions are hardly extracted, such as right after an introduction of a new product to a new market, it is impossible to achieve the economies of scale effect.

In the intensified global competition, however, there are an increasing number of companies that make the decisive investment with huge risk even in such adverse environments. Capabilities to predict markets and technologies and to manage risks become indispensable in making proper investments earlier than their competitors. In short, the advantages are realized with the capabilities, and the disadvantages can also be avoided with them.

An integral model as a counter concept to modularity is often argued. However, the situation where the modular structure is not adopted due to the lack of capabilities is likely to be conceived as the integral model. Therefore, it can never be an ideal strategy. This will be further discussed in Chap. 6.

4.1.6 Degree of Modularity

Degree of modularity is determined by substitutability and independence of decision making under the business environment today.

It has been discussed that the concept of modularity is useful in various aspects of management. And the next questions are: how modularity is assessed and under what conditions an entity is determined to be a module. According to the previous discussions and under the business environment today,¹¹ a module should be identified as an independent entity in certain relations achieving higher resource efficiencies inter-modularly and intra-modularly. Therefore, the degree of modularity is appropriately determined by two axes: substitutionability and independence. As for the independence axis, however, it is not correct to evaluate isolation (absolutely no relation with others) positively. Independence of decision making—that is, the degree of freedom of decision making without enforcement by transaction partners—should be the focus instead of the isolation. Therefore, it could be illustratively expressed as freedom of decision making as well.

Substitutionability and independence of decision making will be discussed in detail below. These two correspond to ease of escaping from the present dependent situation (future independence) and present independence, respectively; these two axes are mutually exclusive. Substitutionability is determined by the transaction costs to substitute transaction partners, and independence of decision making is determined by the transactions in day-to-day operations. In other words, those two are keys for entities to be modules.

• (1) Substitutionability

  This is evaluated by three factors: depth, breadth, and unilaterality/bilaterality of fixed interfaces required for the substitutions.^12,13

  • (a) Depth (number and detail level) of fixed interfaces

    In the case of substituting transactors or products/parts, the conditions of the new transactions must be determined again. If many of transaction interfaces are fixed and standardized, those can be shared with a new transactor; the transaction costs of the substitution decrease greatly, meaning it is easy to execute the substitution. Of course, if they are not shared with a new transactor even though they are fixed, the transaction costs remain large. The depth of fixed interfaces is determined by how much and how detail interfaces are fixed (to be shared).

    On the contrary, if no interfaces are fixed (and shared), the transaction costs of substitution are much larger and it is hardly identified as a module (the degree of modularity is low).

  • (b) Breadth (ratio of entities sharing or penetration) of fixed interfaces

    This is how much the ratio of potential substitutes shares the fixed interfaces. The more potential substitutes sharing them, the easier it executes the substitution—that is, the higher degree of modularity the entity is considered to possess. The level of sharing is determined by a level of the standardization, including the openness of the interface.

    The more the interfaces are (fixed and) shared, the lower transaction costs become, that is, the higher degree of modularity the entity is considered to possess. In the case of commodities, because most of the transaction interfaces, especially the specifications, are (fixed and) shared by many, the transactor can be substituted with lower transaction costs.

    Even depending on a transactional partner 100 % as to revenue, it is possible to substitute the one as long as expected revenue from a new partner exceeds the estimated substitution costs. Therefore, the concept of the breadth is significant.

    If an interface is regulated by law, all potential substitutes share and use it certainly. On the contrary, if a proprietary interface is owned by a present transactional partner but not shared by any other entities, the breadth is zero, and consequently its modularity is also zero. Even when a fixed interface is shared by both sides of transactional entities, but not by other entities (such as by a custom), the breadth is also zero.

  • (c) Unilaterality/Bilaterality of fixed interfaces

    It is significant to recognize directions of substitutionability. Two directions, the substitution of suppliers by customers and the substitution of customers by suppliers, should be distinguished. It is reasonable to define that bilateral substitutionability has a higher degree of modularity than the unilateral type.

    If only one side of transaction entities has the ownership¹⁴ of an interface, the other entity cannot reuse it with potential substitutes. For example, as an OEM has the property of design specification of a product, the contract manufacturers cannot sell the product to other end-product manufacturers. Therefore, the modularity degree of the contract manufacturer is low. If both sides have the ownership, it is bilaterally substitutionable. For example, as standardized interfaces such as open EDI can be used by both sides, they are bilaterally substitutable.

• (2) Independence of decision making

  This is the degree to which a company’s decision making is not influenced by its transaction partner. In this axis, only the seller (including supplier, subcontractor, and subordinate)-to-buyer (including customer, end-product manufacturer, and superior) direction is an issue, as buyers/customers are never controlled by sellers/suppliers (except when a customer has no choice of suppliers, in which case the substitutionability and the modularity are already zero).

  The Independence of decision making is determined by the ratio of fixed interfaces to ad hoc interfaces. If ad hoc interfaces account for a substantial portion, a supplier is dependent on a customer who makes decisions arbitrarily. Fixed interfaces such as contracts are considered to be deployed with agreements of free wills (in the case of customs, they are considered to be established under long-term mutual relationship of own free wills without utilizing opportunities to become independent).

To summarize the discussion above, the degree of modularity is measured and evaluated as shown in Fig. 4.2.

Fig. 4.2

Measurement and evaluation of modularity

• (A) Seller-to-Buyer Direction (the Degree of Modularity of Sellers from Buyers)

  The sellers’ degree of modularity is determined by (1) substitutionability multiplied by (2) independence of decision making (the area shaded in Fig. 4.2). The Y axis is the ratio of fixed interfaces, which implies the ratio of independent decision making. As ad hoc interfaces set by buyers increase, the degree of (2) independence of decision making decrease; for example, little power is delegated to a subordinate from his/her superior. The X axis is the ratio of potential substitutes that share the fixed interfaces. The ratio increases as the standardization proceeds further. If no entity shares the interface, the ratio and the modularity become zero, such as the case in which a seller perfectly depends on the fixed interfaces of its buyer. If unsubstitutable fixed interfaces such as customs are dominantly established, the degree also becomes low.

• (B) Buyer-to-Seller Direction (the Degree of Modularity of Buyers from Sellers)

  Only the X axis is an issue here because the Y axis (the buyers’ freedom of decision making) does not make sense; decisions about all ad hoc interfaces are normally made on the authority or under the permissions of buyers. If there is no substitute of a seller’s unique technology, there is also no substitute to share fixed interfaces; the buyers’ degree of modularity is zero. On the contrary, if a product is completely standardized, such as a commodity, and the transaction costs of a substitution are zero such as at an online marketplace, the substitutionability and the modularity are 100 %.

The discussion above is about the modularity of each entity, and the modularity of a relationship could also be acquired by a multiplication of the two directions.

4.1.7 A Module as a Composite of Components in the Automotive Industry

The automotive industry has a different background for modularity.

In this section, a module as defined by the automotive industry as a composite of components will be examined. In the automotive industry, a module means a composite unit of components that are integrated in advance in order to decrease the number of end-product assembly processes for higher efficiency in the assembly lines. This is seemingly unrelated to the discussion of the modularity in this book, but it also contains the identical philosophy in the background.¹⁵

The composites of components have been applied to parts such as dashboards, doors, front panels, and rear panels. The assembly of the internal components is relegated to the suppliers for the improvement of their own efficiencies. This synthesis was embodied by sharing of the mechanical and electric interfaces among each supplier of the components. At the design of these interfaces, the efforts to simplify them must be expended because the simplification increases general versatility, the consequence of which increases the volume of applications in both components and end products. The increase of usage frequency of the interfaces increases economies of scales and the ROI, eventually.

As the intellectual property of the interfaces has been owned by the automotive companies until recently, the substitutionability functions only unilaterally but still improves the efficiency and the ROI as follows:

• For the production (assembly) of the composites: The efficiency of assembling the simplified and standardized components increases.

• For the maintenance service of the composites: The efficiency of maintaining the simplified and standardized components after the sales increases.

• For the design of each component in the composite: The efficiency of designing each component is easily standardized as the interfaces are standardized, and therefore, it increases.

• For the production and the procurement of the material and parts for each component in the composite: In the same manner, the efficiency of the production and the procurement of the material and parts increase due to economies of scale.

• For the testing of each component in the composites: In the same manner, the efficiency of the testing increases.

When Volkswagen announced its comprehensive modular strategy, there was criticism in Germany that the impact of recalls and the consequent risk when such parts were manufactured in large volume would cause serious trouble. This is a superficial consideration. As economies of scale function at the testing, it can be executed by lower costs, or the larger and stricter testing can be executed with the same cost. The reduced costs can be transferred to the enhancement of automobile safety (i.e., effectiveness). The stricter testing and the greater cost for safety design will definitely make the expected cost of recalls smaller than the present.

All those advantages are the efficiency improvements to be gained by predetermining interfaces, consequently increasing the usage frequency of interfaces in each element of transaction: connection, presentation, negotiation/agreement, exchange, and ex post processing.

The term module as the composite of components in the automobile industry has not been used in the definition of this book, but actually the expected advantages are based on economies of scale—that is, exactly the same scheme as the modularity in this book. In the industry, there have been objections against the introduction of modules on the grounds of deterioration in product competitiveness such as ride comfort and downsizing. In reality, however, the industry has been adopting and utilizing the concept from a very early stage.

The substitutionability of the modular structure should be indispensably utilized when outsourcing is introduced. The modular structure ensures the substitution of suppliers to increase the bargaining power for selection of the best partner. At the early stage, the automotive companies with own company groups had little interest on the substitution of suppliers, and the applications of the fixed interfaces were limited to the own company groups. Afterward, however, since the substitution came to be conceived as crucial for enhancing competitiveness prior to the groups’ affiliates, modularization has spread quickly by necessity.

The wider the range in which a module is applied, the higher the ROI obtained. The modularity in the closed relationship consequently became open to widen the application range. The reorganization and consolidation in the automotive parts industry is growing, and subsequently the competition for standardization of parts will become fierce. At that moment, the unilateral modular structure will turn into the bilateral one for certain.

4.1.8 A Module as a Composite of Components in the Electronic Parts Industry

The electronic parts industry also has a different background of the modularity.

In the electronic parts industry, the term module refers to another meaning customarily. Examples include power modules, telecommunication modules, Wi-Fi modules, GPS modules, LTE modules, and sensor modules. In their customary usage, the modular features of self-containability and independence are emphasized instead of the substitutionability. The electronic parts manufacturers take the lead in this new trend with their marketing messages that their modules contain all necessary functions; the efficiency will be improved in production, design, and maintenance by the introduction; and it will be substitutionable with competitors’ products without a risk of being locked in (this is just an image and not yet true in reality). At the same time, it is driven by their strategy to increase their value added by integrating peripheral parts with their core parts, which have dominant technology and market share. This is the reason why they actively use and diffuse the term.

If the customers’ benefits—that is, the efficiency increases of production, design, and maintenance—are seriously considered, it is necessary to standardize the interfaces of the modules just as in the automotive industry case. The substitutionability, the most significant feature of modules, will contribute to the industry considerably. At an early stage, the standardization will be focused on the company’s proprietary interfaces, but it must expand beyond companies under the pressures from customers in the future.

4.1.9 Organizations as Modules

All organizations are modular.

Modularity in products/parts and organizations are very similar. The interconnection, division, and substitution of products/parts are directly applied to organizational issues. In the first place, the idea that all organizations are more or less modules with some independence should be reconfirmed here. In the ancient hunting age, functions of hunting and cooking were divided, with transaction rules as interfaces. Even within hunting functions, watching, goading, and shooting were divided, and interfaces to organize hunting teams were deployed. That is, if a group of people is organized even slightly, some fixed interfaces must have been introduced; organization is considered to be a module.

In this chapter, starting the discussion regarding the interface of products/parts, it will be shown that the concept can be applied directly to organizations. In general discussions of organizations, the roles and responsibilities of each department are likely to be described conventionally. However, significant issues exist in the interfaces that are hardly perceivable. While designing organizations, those interfaces such as rules, systems, processes, protocols, standards, and regulations should be more carefully considered. Meetings that deal with coordination of interdepartmental issues are also likely to be depreciated, although those are also the significant interfaces.

The reason that an organization has higher productivity than just a collection of people is that by utilization of the modular structure, an organization enhances specialization, competition, and people’s motivation and achieves higher resource efficiency. Therefore, the history of the modern organization is that of modularity, and “almost all systems are recognized to some extent as modular.” It is not as if the concept of modularity has just appeared. The difference from the past is that the development of the interface has become much easier and faster on the accumulated foundation of interfaces, the fast-growing Internet. That has called attention to the competitiveness of the modular structure and spread its practical utilization.

It is inevitable that organizations become more modular if they need to strengthen efficiency and consequent effectiveness. That is, the concept of modularity corresponds exactly to the concept of organization, which leads to a conclusion that actually there exists no such a concept as modularity.

In the meantime, what distinguishes the modularity in an organization, software, and mechanical parts?

As shown in Fig. 4.3, the streamlining of redundant functions is realized by concentrations on an organizational module in the case of an organization, while those are realized by reuse of a software module in the case of software. While no additional cost is incurred with the reuse of a software module, considerable additional costs such as resource costs (e.g., human and facilities) and overhead costs are incurred with the utilization of a common functional module in organizations. The increase of the costs is not a significant issue as long as the efficiency improvement by economies of scale is satisfactory. If not, the initial costs introducing the interfaces will not be compensated. That is, organizations require much more precise design and sophisticated technology to make good use of modular structure than software does.

Fig. 4.3

Difference of modular structure and its effects between an organization and software

In the case of mechanical parts, some additional costs such as materials and labor also incur when a module is reused, but it is much easier to achieve economies of scale in manufacturing than in organizations. This is the reason why modular utilizations in software, mechanical parts, and organizations have obtained attention in this chronological order and the attention to organizations is still little.

4.2 Design of Modules: Methodology, Cost, and ROI

The design methodology of a module is identical to the one of interface.

As a module is defined by its interface, the design methodology, costs, and ROI of a module are identical to the ones of an interface. The methodologies of design, development, operation, and utilization of the module are included in Chap. 6. In Chap. 6, in addition to the design methodologies, the capabilities required for designers, costs, ROI, and obstacles, solutions, and political opposition of modularization will be discussed.

The discussion regarding dividing hierarchical functions by the modular design will not be included in the generalized theory of an interface. It was described briefly in the previous section; however, the delegation of authorities as the division among hierarchical levels is a related and significant issue, especially regarding when and how it should be done. Because this is not a universal problem varying from organization to organization, or individual to individual, it is excluded from this book.

4.3 Activation of SMEs by Shifting from Subcontracting to Winners by Applying Modular Structure

Introduction of modularity encourages independent growth of SMEs and independent modules have opportunities to dominate the global market.

SME’s customary dependence on their customers and governments may become shackles restricting their survival in the fiercer competition of the global market. On the contrary, they have great potential to expand their businesses globally if they are willing to utilize proactively the power of the modular structure.

In the current global economy, only one or two companies in each market can survive and enjoy dominant market positions. Encouraging such venture spirits despite considerable risk and shifting the national resources from obsolete and exhausted companies to innovative ambitious companies are significant to revitalize the economy. Entrepreneurship should be respected and developed in the society much more seriously.

SMEs should learn from the failures of declining large companies and expand their businesses based on the standardization strategy deploying the modular structure. The accompanying risk is not small, but the opportunities are also wide open. Once they enter into the positive feedback cycles of standardization successfully, any small companies can become winners in the global market, even overnight.

The steps to embody the expanding growth for SMEs trapped in existing subcontracting relationships are proposed in Fig. 4.4.

Fig. 4.4

Steps from dependence to winner-takes-all position for SMEs

• (1) Step 1

  In the developing stage of an economy, such as the 1970s and 1980s of Japan, the relationships between end-product manufacturers and suppliers are favorably stable, as there is no dissatisfaction on either side and it may seem sustainable. The subcontractors’ success depends on being loyal and obedient to their customers (and governments). However, as the competition from the emerging countries becomes fiercer and end-product manufacturers start suffering from decreasing profits, the seemingly stable relationships must change. The subcontractors should consider the environmental change seriously and start preparation for changes in the relationships. Without spontaneous initiation of the change, it may become too late shortly.

• (2) Step 2

  As the competition becomes fiercer, SMEs without any differentiated technology may not be able to survive. The SMEs with the technologies need to start converting their passive attitude to a proactive one—that is, from just waiting for orders to giving advice and proposals regarding the applications of their technologies to the customers. In order to do so, the SMEs need to understand the requirements of the customers and the problems they are facing. It also means the SMEs need to change their position from advisees to advisors. An entry into the emerging markets based on relationships with the local customers may be one of the strategic options that embody the conversion easily, although some risks are involved.

• (3) Step 3

  Assuming that the proposals for the technology applications are well accepted by multiple customers in Step 2, their scope should be widened to perceive the market trend more precisely regarding the promising applications and technologies. The largest and most possible application should be extracted to obtain a standard position. At that time, the company should think inductively to consider all the possible matching of its technologies and their applications. From this step, the intellectual property belongs to itself as well as the inventory, which again brings risks. However, the profitability increases drastically, and the earned profits will be transferred to price reduction, shorter delivery time, higher product quality, and so forth, thus increasing their competitiveness further. The potential for continuous development of technologies also grows. Although there are considerable initial risks, a departure from subcontracting and perfect independence with possibility of further growth are embodied.

• (4) Step 4

  In order to expand its business domain, the company should more actively respond to the wider range of customer needs. At this moment, the maximum utilization of their standard core modules or platform modules should be considered instead of customizing them to customer needs individually. This would increase sales with minimal variable costs and improve profitability. The standardization of the company’s modules in the market should be deliberately pursued. This necessitates marketing skills to understand market needs and to extract the most frequently used interfaces, the capability of designing the appropriate interfaces, and acceptance of some more risks. The capability will be and could be developed in the repetitive challenges in this step, while it will never be possible to achieve without them.

• (5) Step 5

  The modular structure of the products developed in Step 4 should be elaborated more sophisticatedly in this step to enlarge the application area. More modules should be developed utilizing the existing interfaces. According to the possibility of growth, new developments of platform modules should be challenged. At that moment, the extra resources gained from the increase of profitability should be allocated to product and technology development to enhance the marketing and technological differentiation. Repeating the utilization of the successful interfaces to expand the modular structure extends the product line, increases the efficiency, and embodies the positive feedback of standardization. After the establishment of the standard in the market, the innovation of next-generation technology should be challenged without falling into “the innovator’s dilemma.”

As described above, companies’ independence must be accompanied by considerable risks. However, the risk of doing nothing—remaining as a subcontractor and waiting substitution by the emerging competitors—is also increasing. The repetitive challenge will cultivate the possibilities to excavate and activate potential technologies. Globalization means fiercer competition, and only the companies accepting those numerous risks can survive in this environment. There is no assuring that taking risks leads to success, but it is at least certain that surviving companies are ones that take substantial risks.