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Harvard Business Review on Managing the Value Chain Harvard Business Review on Managing the Value Chain THE HARVARD BUSINESS REVIEW PAPERBACK SERIES The series is designed to bring today's managers and professionals the fundamental information they need to stay competitive in a fast-moving world. From the preeminent thinkers whose work has defined an entire field to the rising stars who will redefine the way we think about business, here are the leading minds and landmark ideas that have established the Harvard Business Review as required reading for ambitious businesspeople in organizations around the globe. Other books in the series: Harvard Business Review on Brand Management Harvard Business Review on Breakthrough Thinking Harvard Business Review on Business and the Environment Harvard Business Review on the Business Value of IT Harvard Business Review on Change Harvard Business Review on Corporate Governance Harvard Business Review on Corporate Strategy Harvard Business Review on Crisis Management Harvard Business Review on Effective Communication Harvard Business Review on Entrepreneurship Harvard Business Review on Knowledge Management Harvard Business Review on Leadership Harvard Business Review on Managing High-Tech Industries Harvard Business Review on Managing People Harvard Business Review on Managing Uncertainty Harvard Business Review on Measuring Corporate Performance Harvard Business Review on Negotiation and Conflict Resolution Harvard Business Review on Nonprofits Harvard Business Review on Strategies for Growth Copyright 1993, 1994, 1996, 1997, 1998, 2000 President and Fellows of Harvard College All rights reserved Printed in the United States of America 04 03 02 01 00 5 4 3 2 1 All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the copyright holder. The Harvard Business Review articles in this collection are available as individual reprints. Discounts apply to quantity purchases. For information and ordering, please contact Customer Service, Harvard Business School Publishing, Boston, MA 02163. Telephone: (617) 783-7500 or (800) 988-0886,8 A.M. to 6 P.M. Eastern Time, Monday through Friday. Fax: (617) 783-7555, 24 hours a day. E- mail: [email protected]. Library of Congress Cataloging-in-Publication Data Harvard business review on managing the value chain. p. cm.—(The Harvard business review paperback series) Includes index. ISBN 1-57851-234-4 (alk paper) 1. Business logistics. 2. Distribution of goods—Management. 3. Industrial procurement—Management. I. Harvard business review. II. Title: Managing the value chain. III. Series. HD38.5.H37 2000 658.5—dc21 99-28452 CIP The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Publications and Documents in Libraries and Archives Z39.48-1992. Contents Managing in an Age of Modularity 1 Carliss Y. Baldwin and Kim B. Clark Fast, Global, and Entrepreneurial: Supply Chain Management, Hong Kong 29 Style An Interview with Victor Fung Joan Magretta How Chrysler Created an American Keiretsu 61 Jeffrey H. Dyer The Power of Trust in Manufacturer-Retailer Relationships 91 Nirmalya Kumar What is the Right Supply Chain for Your Product? 127 Marshall L. Fisher Make Your Dealers Your Partners 155 Donald V. Fites From Value Chain to Value Constellation: Designing Interactive Strategy 185 Richard Normann and Rafael Ramírez From Lean Production to the Lean Enterprise 221 James P. Womack and Daniel T. Jones About the Contributors 251 Index 257 . Managing in an Age of Modularity Carliss Y. Baldwin and Kim B. Clark Executive Summary Modularity is a familiar principle in the computer industry. Different companies can independently desig n and produce components, such as disk drives or operating software, and those modules will fit tog ether into a complex and smoothly functioning product because the module makers obey a g iven set of desig n rules. Modularity in manufacturing is already common in many companies. But now a number of them are beg inning to extend the approach into the desig n of their products and services. Modularity in desig n should tremendously boost the rate of innovation in many industries as it did in the computer industry. As businesses as diverse as auto manufacturing and financial services move toward modular desig ns, the authors say, competitive dynamics will chang e enormously. No long er will assemblers control the final 1 . product: suppliers of key modules will g ain leverag e and even take on responsibility for desig n rules. Companies will compete either by specifying the dominant desig n rules (as Microsoft does) or by producing excellent modules (as disk drive maker Quantum does). Leaders in a modular industry will control less, so they will have to watch the competitive environment closely for opportunities to link up with other module makers. They will also need to know more: eng ineering details that seemed trivial at the corporate level may now play a larg e part in strateg ic decisions. Leaders will also become knowledg e manag ers internally because they will need to coordinate the efforts of development g roups in order to keep them focused on the modular strateg ies the company is pursuing . In the Nineteenth century, railroads fundamentally altered the competitive landscape of business. By providing fast and cheap transportation, they forced previously protected regional companies into battles with distant rivals. The railroad companies also devised management practices to deal with their own complexity and high fixed costs that deeply influenced the second wave of industrialization at the turn of the century. Today the computer industry is in a similar leading position. Not only have computer companies transformed a wide range of markets by introducing cheap and fast information processing, but they have also led the way toward a new industry structure that makes the best use of these processing abilities. At the heart of their remarkable advance is modularity—building a complex product or process from smaller subsystems that can be 2 . designed independently yet function together as a whole. Through the widespread adoption of modular designs, the computer industry has dramatically increased its rate of innovation. Indeed, it is modularity, more than speedy processing and communication or any other technology, that is responsible for the heightened pace of change that managers in the computer industry now face. And strategies based on modularity are the best way to deal with that change. Many industries have long had a degree of modularity in their production processes. But a growing number of them are now poised to extend modularity to the design stage. Although they may have difficulty taking modularity as far as the computer industry has, managers in many industries stand to learn much about ways to employ this new approach from the experiences of their counterparts in computers. A g rowing number of industries are poised to extend modularity from the production process to the desig n stag e. A Solution to Growing Complexity The popular and business presses have made much of the awesome power of computer technology. Storage capacities and processing speeds have skyrocketed while costs have remained the same or have fallen. These improvements have depended on enormous growth in the complexity of the product. The modern computer is a bewildering array of elements working in concert, evolving rapidly in precise and elaborate ways. Modularity has enabled companies to handle this increasingly complex technology. By breaking up a 3 . product into subsystems, or modules, designers, producers, and users have gained enormous flexibility. Different companies can take responsibility for separate modules and be confident that a reliable product will arise from their collective efforts. The first modular computer, the System/360, which IBM announced in 1964, effectively illustrates this approach. The designs of previous models from IBM and other mainframe manufacturers were unique; each had its own operating system, processor, peripherals, and application software. Every time a manufacturer introduced a new computer system to take advantage of improved technology, it had to develop software and components specifically for that system while continuing to maintain those for the previous systems. When end users switched to new machines, they had to rewrite all their existing programs, and they ran the risk of losing critical data if software conversions were botched. As a result, many customers were reluctant to lease or purchase new equipment. The developers of the System/360 attacked that problem head-on. They conceived of a family of computers that would include machines of different sizes suitable for different applications, all of which would use the same instruction set and could share peripherals. To achieve this compatibility, they applied the principle of modularity in design: that is, the System/360's designers divided the designs of the processors and peripherals into visible and hidden information. IBM set up a Central Processor Control Office, which established and enforced the visible overall design rules that determined how the different modules of the machine would work together. The dozens of design teams scattered around the world had to adhere absolutely to these rules. But each team 4 . had full control over the hidden elements
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