Paths of architectural co-evolution

The evolution of product architectures can be traced back to Simon’s (1962:468) seminal work on hierarchy and systems. As technological systems, product architectures are rarely static in nature and may often evolve over time (Christensen, et al., 2002; Fine, 1998; Fixson

& Park, 2008; Schilling, 2000; Shibata, et al., 2005) “in response to changes in their context, or to changes in their underlying components in the pursuit of better fitness” (Schilling, 200:314-5).

Product architectures are often assumed to follow an evolutionary path towards increasing modularity. In other words, product architectures may often be designed initially as closed and integrated, and progress through various iterations of design changes until they exhibit more or less open and modular characteristics (ie, Sanchez, 2008; Shibata, et al., 2005).

Empirically, this phenomenon has been examined in a number of product market settings, such as stereos (Langlois & Robertson, 1992), numeric controllers (Shibata, et al., 2005) motor vehicles (Argyres & Bigelow, 2010) computers (Baldwin & Clark, 2000), mortgage banking (Jacobides, 2005) software (MacCormack, et al., 2012) semi-conductors (Funk, 2008) and bicycles (Galvin & Morkel, 2001). Shibata et al., (2005) suggest that in most cases the evolution of product architecture shifts from one of “complex, non-standard interfaces, through simple company-wide standard interfaces and ultimately to industry-wide standards” (2005:15).

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In a similar vein, the dominant logic in explaining shifts in firm and industry architecture is conceptualised as a set of ‘centrifugal forces’ (Jacobides, et al., 2006) that push towards disintegration and ‘modular organisations’ especially in more mature industries. Schilling and Steensma (2001:1149) also highlight the dominant logic of disintegration, whereby “the role of a tightly-integrated hierarchy is supplanted by loosely-coupled networks of organisational actors”. In other words, analogous to the dominant logic of shifts in product architecture towards modularity, many scholars have also argued that firm and industry architecture tends to follow a path towards a loosely-coupled organisational form and disintegrated product markets populated by highly-specialised firms.

However, a number of authors have hinted at a reverse path towards integrated product designs. For example, Shibata, et al., (2005:27) points out that “returning to a product system that has a complex mapping of function to structure and a complex interface….is conceivable” and Schilling (2000:312) also suggests that software packages and bicycles as examples where “sets of components that were once easily mixed and matched may sometimes be easily bundled into a single integrated package that does not allow (or that discourages) substitution of other components”. Moreover, MacDuffie (2013:12) contends that reverse swings are possible when “technological change or customer demands for new functionality can redefine module boundaries [which] may increase interdependencies across modules, and can reverse maturation processes that lead to dominant designs”. Empirically, Christensen, et al., (2002:972) highlight the role of technology and argue that increasing integration is associated with a ‘performance gap’ in product markets. In other words, firms continually improve products to a point where they overshoot the demands of users such that

“disruptive technologies – simpler, more convenient products that initially do not perform well enough to be used in mainstream markets – can take root in undemanding tiers of the market and then improve at such a rapid rate that they squarely address mainstream market needs in the future” (Christensen, et al., 2002:961).

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An alternative explanation is offered by Cacciatori and Jacobides (2005:1854) who examine the building and construction industry and observe that specialisation of productive capabilities eventually leads to cracks in the overall system at the aggregate level which causes pressure for reintegration, compounded by the presence of exogenous shocks. As it becomes evident that the existing specialised productive capabilities in a value chain are insufficient to meet the demands of users, firms respond by offering new products or services.

However, Cacciartori and Jacobides (2005:1867) argue that firms often pursue a form of reintegration that preserves its original advantage. In other words, “when threatened with the spectre of commoditisation, or intensified competition, firms will pursue aggressive strategies of reintegration to protect their profitability” such that “this provides them with new sources of revenue and allows them to enter higher margin parts of the industry, using their existing capabilities as the ‘thin end of the wedge’; they use their scope and capabilities as their entry point to integrated service provision which is expected to be more profitable than their existing business…”.

In the Swiss watch industry, Jacobides and Winter (2005:405) argue that “…the cycle pushing towards specialisation get reversed when new and superior capabilities arise from knowledge bases that are misaligned with the existing vertical structure of the industry”.

New productive capabilities emerge in a product market as a consequence of a technological innovation, in this context one based on miniaturisation and micro-electronics. As a consequence, the existing vertical structure of the product market was unable to effectively respond which favoured vertically integrated firms Japanese firms. The ensuing selection process then forced out the co-specialised structures of the incumbent Swiss manufacturers.

Finally, Schilling and Steensma (2001) argue that firm and industry architectures may resist or reverse the shift towards a more modular form. This may occur where a firm architecture has performance advantages or cost savings from integrating particular activities. Schilling and Steensma (2001) also draw upon the arguments of TCE to highlight that in the presence of asset specificity, transaction costs may overload the productive system which leads to a disincentive to shift towards a more loosely-coupled form. As such, the shift towards a loosely-coupled firm architecture is not a given; rather, it is a trade-off between “the gains achievable through greater flexibility and the performance advantages of integration”

(Schilling and Steensma, 2001:1163).

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Despite these contributions, Fixson & Park (2008:1312) highlight that few empirical studies have examined architectural co-evolution in complex supply networks, and therefore do not distinguish between horizontal and/or vertical structures, or moreover, how industry structures evolve across time. In this research study, I aim to contribute to the gap identified by Fixson & Park and explain how and why product markets reintegrate horizontally and vertically across time, but to go further and connect such processes with changes in product architecture. As highlighted, the extant literature on reintegration has tended to focus on either endogenous processes at firm level or exogenous processes at the industry level. I aim to use empirical data to propose more nuanced stylised types of hybrid product architecture, under conditions of reintegration. Few (if any) prior studies have done so.