Annals of Business Administrative Science 5 (2006) 1-18
Available at www.gbrc.jp

Online ISSN 1347-4456 Print ISSN 1347-4464©2006 Global Business Research Center

How Do Firms Compete When
Faced with Architectural Changes?:
Lessons from the Optical Storage Media Industry

Koichi NAKAGAWA
Graduate School of Economics, the University of Tokyo
E-mail: allegro_assai@hotmail.com

Abstract: This study explores how firms respond to changes in product or process
architecture. Product or process architecture is the design rules of a system which
can be described as the pattern of interrelations between components. Firms must
prepare adequate knowledge in a specific architectural condition, so changes ofarchitecture cause serious managerial problems for firms, called modularity traps (orintegrity traps). A case study of the optical storage media industry gives some hints
for overcoming such traps. First, firms have to alter their strategies and businessdomains when architectural conditions are changing. That is, in a modularity
condition firms have to specialize, and in an integrity condition firms have tocoordinate some activities. Second, and more importantly, firms have to retain theircomponent and system knowledge, in order to maintain competitiveness both inspecialized activities and in integrated activities.
Keywords: product architecture, modularity trap, architectural knowledge, vertical
integration, optical storage media, CD, DVD

1. Architectural change causes serious

about ‘outsourcing’ and ‘refocusing’, to improve

managerial problems

competitive performances. In fact, in electronics‘Vertical integration to horizontal specialization’ hasindustries, traditional vertically integrated firms lostbeen one of the characteristics of industrial

competitiveness and networks of specialized firms

competition since the 1990s. Many firms thought

took over them (Sturgeon, 2002). In computer1

Nakagawaindustry, specialized firms such as Intel or Microsoft

2. What is architecture?: Literature

who can make each component of a computer,

review

replaced integrated firms such as IBM (Grove, 1995).

2.1. Architectural perspective of the productIn semiconductor business, instead of verticaland processintegration, specialization in design (fab-less) andArchitecture is one of the perspectives of artificial

thatsystems.

inmanufacturing(foundry)

becamethedominant form of organization.

‘Artificial’ means

human-made,and‘system’ means composed of more than one

Those changes were caused by modularity.

component. So an artificial system is a thing that

Modularity is the decoupled condition of product orconsists of some components made by humans. It

process architecture. When architecture changes

includes not only concrete objects, such as

towards modularity, each component or eachautomobiles or mobile phones, but also immaterial

business activity can be done independently, andproperties such as economic system or humanfirms can get competitive advantage by focusing

relations (Simon, 1996).

theirresourcesonspecificbusinessareas.

‘Architecture’ as a characteristic of a system

Modularity is the essentials of the trends towards

can be described as the pattern of interrelations

specialization in these days.

between components (Baldwin & Clark, 2000). We

But architecture not only goes modular but also

can distinguish the architecture of systems into twogoes integral. When architecture return fromtypes by the strength of the interdependence of theirmodular to integral, specialized firms, who gained

components: integral and modular. A modular

competitiveness in modularity, do not respond toarchitecture specifies independence (a decoupledintegrity and lose competitiveness. Kusunoki andstructure)

Chesbrough, 2001 called this problem as ‘modularity

architecture specifies interdependence (a tightly

trap.’

coupled structure) of each component (Ulrich, 1995).

of

each

component.

AnintegralThen, how do firms respond to such two-way

The automobile, the quality of which is realized byarchitectural changes? When architecture changes tointegrating numerous parts, is a typical integral

modular, firms should specialize. But, specializationarchitecture product. On the other hand, the personal

disables a firm to respond to reintegration. To thinkcomputer (PC), whose components, such as theabout this dilemmatic problem, we analyze optical

MPU, DRAM, or HDD, are developed and produced

storage media industry.

independently, is a typical modular architecture
product.
Firms must have adequate knowledge andcapabilities for their confronting product or process2How do firms compete when faced with architectural changes?

Figure 1. Relationships between knowledge and architecture
type of architecture

type ofknowledge

integralmodularknowledge about systemcapability for integration or coordination

good

bad

knowledge about component
capability for specific area

bad

good

Figure 2. Change of the architecture causes that of value chain structure

IBM

DEC

BUNCH

Intel
Microsoft

Microprocessors
Operating systems
Peripherals
Application software

SeagateIBM

Network services
Assembled hardware

DELL

Modular architecture
No need to interact with othercomponents

Integral architecture
Need to integrate each component

Source: Grove (1995).

architecture. In other words, different types ofBecause of these relationships, value chain

knowledge are required in different types ofstructure can be laid out in accordance with thearchitecture (Ulrich, 1995). When the system has anproduct or process architecture (Figure 2). In integral

integral architecture (consists of tightly coupledarchitecture, a firm should have architecturalsubsystems:

Simon,

knowledge, so it will choose a vertically integrated

coordination

and

1996)

we

architecturalneedmutualknowledge

form

of

organization,

whereasinmodular(knowledge about the system) in order to produce,architecture the firm should take a specialized form

develop or operate that system. When the system hasin order to focus its resources on a limited areaa modular architecture (consists of nearly decoupled(Sturgeon, 2002).

subsystems) we do not need knowledge of thesystem but we need special, detailed component

2.2. When the architecture changes

knowledge (Henderson & Clark, 1990, Sanchez &Next we will consider changes in the product or

Mahoney, 1996) (Figure 1).

process architecture. As we saw in the previous
3NakagawaFigure 3. Continuous shift of the architecture

Integral architecture,
Vertica l industry

Modular architecture,
Horizontal industry

Pressures todisintegrate

Pressures tointegrate

Source: Fine (1998), modified by the author

subsection, the architecture decides the value chain

should neither focus on specific areas nor integrate

structure. Thus, changes in architecture cause

vertically. Consider the situation in which productchanges in the value chain structure.

architecture gradually becomes modular in a

When the architecture of an industry is

turbulent environment. Should a firm specialize its

relatively stable, it is easy for firms to take adequate

business? Specialization gives firms a competitive

strategies and organization design. In modularity, aadvantage in modularity, but if the productfirm should specialize their domain where they havearchitecture

core competence. In integrity, a firm should integrate

specialized

its

the

advantage (Kusunoki & Chesbrough, 2001). And thearchitecture changes continuously, the problems

possibility of re-integration is high in turbulently

faced can become difficult. In turbulently changing

changing environments. If firms choose integrated

competitive

business

activities.

However,whenchanges
firms

will

towardreintegration,

losecompetitive

theirenvironments,

known

as

business models, the story becomes opposite. They

(D’Aveni,

1994)

or

can get competitiveness if the product architecture

fast-clockspeed industries (Fine, 1998), the structuregoes integral, but they lose competitiveness whenof interactions between business activities canarchitecture keeps going modular.

hypercompetitivechange continuously and violently (Figure 3). Within

From the discussion above, we can say thatsuch a turbulent architectural change, how do firms

firms should not fix their strategies and theirdecide on their strategies and organizational designs?

business domains when the product architecture is

In a continuously changing architecture, firms

changing turbulently. Rather, they need flexible
4

How do firms compete when faced with architectural changes?

Figure 4. When the product or process architecture changes, how do firms respond to that?
how do firms respond to that?
yy

Co mpetitive
advantage

have knowledge neededin new doma ins

alter their businessdomainsn
Co mpetitive
disadvantagenCo mpetitive
disadvantage

modifications of strategies and domains. To put it

domains by keeping various kinds of knowledge.

simply, firms should alter their business domains in

Consider the condition that product architecture goesaccordance with the architectures with which they

integral and a firm has specialized form. If that firm

are confronted. That is, when architecture changes

has knowledge about the system, it can realize thetoward modular, firms should specialize, and whenreintegration and keep competitiveness in integral

architecture goes integral, then firms should expand

architecture. When architecture becomes modular

their business domains and reintegrate them.

and a firm has integrated form, it can respond to

However, alterations of domains would cost a

modularity if it has detailed knowledge about one

great deal. When a firm specializes its business, it

specific area. By keeping knowledge about thehas to abandon some of its tangible and intangible

system and the component, firms are thought to beassets. Firms have to abandon some plants, R&D

able to respond to any architectural changes easily

centers(Figure 4).

and

sales

departments,

as

well

as

manufacturing capabilities, technological knowledge

So far, we considered the problem from aor sales know-how. On the other hand, when a firm

theoretical perspective. From the next section, we

integrates its business, it has to get new capabilities.

think about it from an empirical point of view. In

Firms have to merge with other companies andorder to certify how a firm can keep competitivenessinvest in new assets. In addition, to integrate

in a turbulently changing value chain structure, webusiness activities firms build up architectural

adopted one hypercompetitive industry as a unit ofknowledge, in other words, coordination capabilities

the study, that is, optical storage media industry.

between old capabilities and new ones. In short,

Whether strategies mentioned above gives firms

knowledge needed changes as a firm’s domaincompetitiveness or not will be clear from the casechanges (Demsetz, 1991), so the alteration ofstudies.

domain would take costs to build or abandon

3. Research methodknowledge.
Thus, we can infer that a firm can alter theirThis paper is based on one detailed industry case5Nakagawastudy. The industry analyzed here is the writable
Figure 5. System of optical storage
optical storage media industry (here I call it OSMW:
optical storage media writable industry). The data
were collected from a field based study program ofmedia

the optical storage industry in 2003 to 2006. 1
laser

Initially the data were collected by interviews withthe managers of the firms concerned. A total of 65

driveinterviews were executed. For the information on
financial performances, I basically used the firms’ IR
brochures. For national or whole-industry statistics I
disc-recordable).
was

supported

by

the

IEK

(the

TaiwaneseIn the case study, we focused on the conditions

Government’s research institute) and Techno Systemof process architecture of OSMW industry. We
Research (a research company in Japan). Also, I used
analyzed the process architecture, because theseveral secondary sources such as newspapers,
production process of optical storage media iscatalogs and some academic papers and books toprocess-intensive, so the industrial structure istriangulate the facts. 2 We piled up those data andaffected by process architecture more than productmade up the industry level analysis.
architecture. To make the analysis simple, we picked
Optical storage is a system of reading, erasing
up three important processes among the wholeand storing data by the optical technology. It is
production processes. I picked out three activities;
famous as CD or DVD. This system is made up of‘final product production,’ ‘organic dye production,’
two devices: the drive and the media. The drive‘manufacturing equipment production.’ Organic dyereads, writes and erases the data on the media
is the most important material in making writable(Figure 5). The media and drive are physically
optical storage media, because the specifications andseparate from each other. The business of the opticalthe qualities of organic dye mainly decide themedia is also separate from that of the drive.
lifetime of final product and the precision of data
Writable optical storage media, which we analyzed
writing. The manufacturing equipment production ishere, are optical media on which information can bealso important, as it affects on final product’s cost
written. They are known as ‘CD-R’ (compact
and quality. Furthermore, I added the ‘final productdisc-recordable) or ‘DVD-R’ (digital versatilesales’ into the analytical unit of the case study,1

because the relationships between production and

The research project had been undertaken by fiveresearch staffs (including me) at the University ofTokyo.
2
I was helped by Yin (1994) and Fujimoto (2003) indesigning the case study.

sales are also the important factor for the settings ofindustrial structure. The flow of those activities is
6How do firms compete when faced with architectural changes?

Figure 6. Flowchart of important activities of OSMW industry

organic dye
production
manufacturing
equipment production

final productproduction

final productsales

depicted in Figure 6. We will analyze the interactions

4.1. The first stage of OSMW industry

between these activities to determine the changes in

The OSMW industry started in 1989 when Sony andthe process architecture of the OSMW industry.

Taiyo Yuden developed and produced the CD-R. At
that time Sony mainly commercialized the CD-R

4. Case studies: Writable opticaldrive and Taiyo Yuden did the CD-R media. Taiyo

storage media industry

Yuden’s concept of CD-R media business was that

The writable optical storage media (OSMW)‘everyone can make his own original CD at a

industry started in 1989, when the first CD-R was

relatively low price,’ so the target of the CD-R was

produced. After that, the industry developed step by

the consumer market. But that plan did not go well.

step, and in 2004, the OSMW industry yielded sales

Sony did not sell CD-R drives actively to consumersof about 4.5 billion dollars and produced 14 billion

because Sony was into music content business toounits of products (Figure 7).

(its target market being also consumers) and felt
worried about the negative effect of the CD-R, onto

Figure 7. Trend in writable optical storage media sales
16000
14000
12000

80
60

10000

40

8000

20

6000

WritableDVD
CD-R/RW

01991 1992 1993 1994 1995 1996

4000
2000
million 0
units
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
year

Sources: Techno System Research (1991-2000), author (2001-2004)

7

Nakagawawhich people can copy music, on its music business.

entry firms, Taiyo Yuden, TDK, Mitsubishi Kagaku,

So the CD-R standard did not spread into the

Mitsui Kagaku and Kodak selected a verticallyconsumer market in the early 1990s. In other words,

integrated form. No firm specialized in any one

the early CD-R business had no customers. Firms

activity. Every firm used original dyes andhad to find customers other than consumers.

manufacturing

Therefore, the early entrants into the OSMW

equipment,

made

high

qualityproducts, and sold them to corporate customers. This

industry looked for demand through their own

vertical structure stayed in place until 1996.

efforts. For example, Taiyo Yuden sold their media
to corporate and government customers such as

4.2. The way to modularity

NASA who needed fast, high-volume, stable data

In the late 1990s the process architecture of OSMW

storage technology. Kodak sold CD-Rs as storage

industry went modular. On the production side, somemedia for digital photographs (photo-CDs). 3 To

technologicalincrease production volume, firms had to find usage

Gradually,

and customers for CD-Rs, so the process architecturematerials and equipment came to be clarified, andbetween sales and final product production seemeddevelopment activities for both materials andto be integral in this sense.

equipment could be done independently. Ciba

innovations
functional

led

to

interrelations

modularity.
betweenNot only the customers, but also the production

Specialty Chemicals developed the organic dyes, bytechnology, were different in each firm. Every

which firms could produce good CD-R media using

entrant adopted a different material (organic dyes)

any

and

technologies

companies produced the manufacturing equipments,(manufacturing equipment), which were developed

called in-line equipments, which yielded good

through each firm’s own efforts. Manufacturing

quality CD-Rs stably in any environment and withequipment and materials (especially organic dyes)

any material. By using these dyes and equipments,

were functionally interactive, so firms had to‘everyone can produce CD-R, if he can get thedevelop and adjust them to improve the final productmaterials and equipments. No knowledge of

quality. In order to differentiate in quality and adjust

equipments and materials is required.’ 4

different

production

equipment.

Similarly,someequipment

to the customers’ several needs, firms made CD-R

The market for CD-R media also changed in the

media with original technology that used originallate 1990s. From 1997, CD-R drives for personalorganic dyes and original equipment.

computers were developed and spread rapidly, as

To meet the architecture described above, the3

personal computers were being sold all over the4

For the early phase of the OSMW industry see Nakajima(1998).

8

Comment by the process engineer of a Japanese OSMW
firm.

How do firms compete when faced with architectural changes?

Figure 8. Business architecture went modular in the late 1990s

organic dye
production

final productproduction

organic dye
production

final productproduction

manu. equipment
production

final productsales

manu. equipment
production

final productsales

1997 - 2002
modular architecture

1989 - 1996
integral architecturetechnological and market changes decreased the interrelationships between business activities.

world. As a result, consumers started to use theachieved competitive advantages over vertical ones.

CD-R at last. The market changed rapidly fromAt first, let’s look at CD-R production business. As

corporate to consumers. In the early 1990s corporate

we saw before, everyone can produce CD-R media if

customers bought good quality CD-R media, but inhe can buy dyes and in-line equipments from thethe late 1990s the consumers bought low pricemarket. So firms cannot get competitive advantage

CD-Rs with famous brand names on it; they wereby possessing their own organic dye division or

not so concerned about quality. In addition to suchmanufacturing equipment division. In addition,

qualitative changes, quantitative change also heavily

consumers as customers did not want differentiatedaffected sales activities of the firms. In the past,

CD-Rs but cheap ones, so production activity did not

firms had sold millions of CD-R media, but now

need integration between materials and equipments.

they sold from several hundred million to a billion

Firms needed to focus their resources on CD-R

CD-R

large

manufacturing activity. Taiwanese CMC and Ritek

administrative functions, marketing professionals

took this strategy and got a total share of more thanand a great distribution network. These capabilities

70% in total production of CD-R. They entered thewere specialties for sales, so sales activity became

OSMW industry around 1996 by focusing on CD-R

functionally independent from production activity.

production. They exploited the Taiwanese stock

Figure 8 summarizes changes of the architecture.

exchange market and obtained a large amount ofTechnological and market changes led to modularity

capital, and they invested it only in building CD-Rof business activities. All the interactions between

manufacturing capacities larger than those of theactivities were no longer needed.

existing firms. These huge investments on

media.

Sales

activities

neededIn this modularity phase, specialized firms

production capacities gave them economies of scale.
9NakagawaFigure 9. Trend of writable optical storage media production by nationality
16000
14000
12000
10000
India and
China
Taiwan

8000
6000

Japan

4000
2000

million
units

0

1995
year

1996

1997

1998

1999

2000

2001

2002

2003

2004

Source: Techno System Research

Figure 10. Experience curve of CD-R media
100

９１
10

９２

９３

y = 15.941x-0.3935
R2 = 0.9729
experience rate: ７６％

９４
９５

９６
９７

million units
0.1

９８
1
1

10

100

1000

10000

100000

９９
００

０１

０２

０３

0.1
Cost: US dollars

Source: Techno System Research

CMC and Ritek bought materials and equipments

and Ritek had competitiveness over Japanese. In

from other firms and started operation. They focused

1998—only 3 years after their entry—CMC andtheir resources on the efforts to make final

Ritek caught up with the Japanese firms inproduction more efficiently. As a result, in the

production

price-concerned consumer market, Taiwanese CMC

overwhelming presence of Taiwanese firms. And
10volume.

Figure

9

shows

the

How do firms compete when faced with architectural changes?

Figure 11. CD-R media sales share in 2000
Memorex(US)11%unknown
34%

Mitsubishi
Kagaku(J)10%
TDK(J)
9%otherPhilips(EU)Japanese6%6%Princo(Tai)Mitsui6%
Kagaku(J)Hitachi
3%
Kodak(J) Maxell(J) Imation(US) Sum: 4.4 billion units
Source:4%6%5%Techno System Research

Source: Techno System Research

Figure 10 shows the impact of Taiwanese firms on

Ciba Specialty’s dye and process firms’ in-line

CD-R production business. Experience curve insists

equipments enabled Taiwanese firms to enter thethat in 1997 cost suddenly lowered than expected. 5

OSMW industry and changed the competitive

Taiwanese firms might have caused this drastic

environments, by altering process architecture.
In the CD-R sales business, where marketingchange.
In organic dyes, Ciba Specialty Chemicals

skills, brand names and distribution networks wereobtained a monopolistic share by selling highly

effective in competition, Memorex, Imation, Philips,

equipment-independent

manufacturing

Mitsubishi Kagaku and TDK got competitiveequipment production, firms who had developed

advantage. All of them were multidivisionals, andin-line equipments early received many orders andthey exploited sales capabilities such as brandenjoyed high profitability. Before Ciba Specialty androyalty, which had been built in other divisions’process equipments makers produced those materials

business.

dyes.

In

and equipments, firms could not make CD-R media

The firms who had vertically integrated

without dyes and equipments adjusted to each other.

structures could not keep competitiveness without

And Japanese and American existing firms did notchanging strategies. Mitsui Kagaku and Kodak tried

have sold those integrated dyes and equipments. So

to keep their vertical structures, but they were beatenby specialized firms in each area and withdrew from5

the OSMW industry. Taiyo Yuden focused on CD-R

For the reason behind the bending of the experiencecurve, see Abell and Hammond (1979) or Shintaku(1994).

production and TDK specialized in CD-R sales,
11Nakagawaabandoning other activities. Mitsubishi Kagaku also

only memory) at first, development programs forfocused their business on CD-R sales, but they

writable DVD media had continued in the late 1990s

maintained some CD-R production capacities andand writable DVD media standards were set aroundthe R&D function for organic dyes and production

1999. 6 The Writable DVD has 4.7 GB storage

processes. Mitsubishi Kagaku was concerned thatcapacity whereas the CD-R has 700 MB, andotherwise it will lose media production knowledge

writable DVD media spread gradually after 2001,

though to maintain knowledge it would have

replacing CD-R media.

required some expenditure. Mitsubishi Kagaku

The advent of writable DVD media made thecontinued a little commercial production by selling

process architecture of the OSMW industry go

its CD-R to niche markets, where qualitative

integral again. While everyone could make CD-R indifferentiation could be desirable.

2000 if they can get materials and equipments,
people had to have detailed knowledge of organic

4.3. The writable DVD media: Back todyes and manufacturing equipments and integrate

integrity

them in order to produce writable DVD media. The

In 1996, a new standard of optical storage, theshape of the DVD media is the same as that of CD-R,

Digital Versatile Disk (DVD), was determined.

but the storage capacity of the DVD is about seven

Although the DVD standard had only ROM (readtimes bigger than that of the CD-R. To realize that

Figure 12. Writable DVD media production
10000000
1000000
100000
10000
1000
100
thousand units

101995 1996 1997 1998 1999 2000 2001 2002 2003 2004
year

Sources: Techno System Research (1995-1999), author (2000-2004).

6

12

Writable DVD media had various standards, such as
DVD-R, DVD+R or DVDRAM. All of them were
determined in 1996-2000.

How do firms compete when faced with architectural changes?

Figure 13. Reintegration of business architectureorganic dye
production

final productproduction

organic dye
production

final productproduction

manu. equipment
production

final productsales

manu. equipment
production

final productsales

1997 - 2002
modular architecturehuge

capacity,

firms

have

to

realize

2002-2005
integral architecture

strictneed mutual interactions with production and theyspecifications by integrating material technology andfocused on sales activities only, that is, marketing,process technology. For example, the quality of thebranding or building distribution systems.

writing layer on DVD media, where the data are

In this integration phase, Mitsubishi Kagaku

recorded, is determined by the interaction between

became a leading company in the OSMW industry.

injection machine performance and the organic dye’s

Mitsubishi Kagaku had integrated all its activities

specifications.

strictvertically in early 1990s, but it specialized in sales

specifications, the users had wanted DVD media towhen the industry went modular. And then,be better quality than CD-R media. In 2002 a DVD

Mitsubishi Kagaku succeeded in the technicalrecorder for TV diffused into the market as one ofintegration of writable DVD in 2002. The profit rate

digital home appliances but people came to dislikeof Mitsubishi Kagaku had not been announced, but

the writing errors of DVD media that occurred whenabout a half of our interviewees answered thatthey recorded TV programs, as VCR had rarely

Mitsubishi Kagaku is the best performer in thefailed to record. So DVD media manufacturers tried

OSMW industry. Now Mitsubishi Kagaku had about

to improve the product quality by adjusting the

a 20% share in final product sales, which is thematerials and equipments to respond to customer

largest in the world. And it had monopolistic share inneeds.

organic dyes, but it did not have DVD productionIn

additiontorealizeOn the other hand, the relationships between

capacity. How did Mitsubishi Kagaku succeed in the

production and sales did not change drastically.

DVD business?

Though users want quality more than low cost,

Mitsubishi Kagaku did not internalize businessbasically the target market―the consumer―did not

activities into its domain, and kept specialization inchange. Sales companies did not have to alter

limited areas. But, Mitsubishi Kagaku succeeded inmethods of sales and distributions. They did not

integration of the process architecture. To realize
13

Nakagawa

integration, Mitsubishi Kagaku was in charge of thebusiness (or equipments business). In addition,system integration activity and exploited external

Mitsubishi Kagaku sold the dyes, the equipment andknowledge in the area where integration was not

the recipe as an integrated production system only toneeded.

thesome exclusive producers. They could produce

production system of DVD, which consisted ofbetter DVD media by that integrated system than byorganic dyes and process equipments adjusted tousing dyes and equipment bought separately fromeach other. Mitsubishi Kagaku itself did organic dyemarkets. Mitsubishi Kagaku bought better quality

production, and then, about the detailed design ofDVDprocess equipment, Mitsubishi Kagaku was helped

producers and sold them. In this way Mitsubishiby the other firms who specialized in equipment

Kagaku succeeded in the DVD business.

Mitsubishi

Kagakudeveloped

media

produced

from

those

exclusivebusiness. Mitsubishi Kagaku was also helped by

After Mitsubishi Kagaku’s leap forward, someTaiwanese media producers, especially CMC, infirms followed Mitsubishi’s ways and tried to

final writable DVD production. And Mitsubishi

integrate architecture. Among them TDK succeeded

Kagakuin integration of the process architecture. TDK alsoboughtwritable

DVD

media

from

Taiwanese suppliers and did final product sales.

kept knowledge for integrated production system, so

Mitsubishi Kagaku could realize the integration

TDK could follow Mitsubishi’s way. Taiyo Yudenof the architecture because it had knowledge of thewas the third successful company. Taiyo Yuden

whole system of production of writable DVDs. It

chose final product manufacturing business in thewas called as the ‘recipe’ of writable DVD media.

late 1990s. Then Taiyo Yuden did not compete

Mitsubishi Kagaku kept the ‘recipe’ by keeping

directly with Taiwanese makers. Taiyo Yuden

possessing some CD-R production capacities and thefocused their business on differentiated niche where

R&D function for organic dyes and production

the customers needed above normal product quality,

processes still in the modularity phase. Mitsubishi

so it kept integrated production way. So Taiyo Yuden

Kagaku outlaid some costs to keep these capabilities,

could respond to the change of the architecture when

but after 2000 those capabilities remained gave

the writable DVD media emerged. Taiyo Yuden

Mitsubishi Kagaku the chance to leap forward.

would realize integration in DVD business easier

Mitsubishi Kagaku’s ‘recipe’ was an aggregate

than Mitsubishi Kagaku because only it had to doof know-how for making good quality writable DVD

was to continue the same way of business as it did in

media. By using that recipe, Mitsubishi Kagaku and

CD-R business. But Taiyo Yuden did not have sales

an equipment maker jointly developed the dyes andfunctions, so they could not earn more than

the

the

Mitsubishi Kagaku. To think from the opposite side,

equipment producers) obtained a large share in dye

Mitsubishi Kagaku’s success was attributed to theequipment.

Mitsubishi

Kagaku(and

14

How do firms compete when faced with architectural changes?

Figure 14. Business model of Mitsubishi Kagaku
integrated
production system(dyes, equipments
and recipe)
Organic dyes
sales

manufacturing
equipments

final product(DVD)

Mitsubishi Kagaku
DVD made byintegrated
production systemcreation of effective business model that Mitsubishi

In the DVD sales business, although Mitsubishi

Kagaku could exploit whole value chain byimproved its share and the sales specialists showed apossessing the upper end (organic dyes) and thedecrease in profits, a general survey of the situation

lower end (sales to final customers).

did not change drastically. Memorex and Imation

Specialized firms that did not participate instill kept their profit by specializing in sales, because

Mitsubishi’s or TDK’s group lost competitiveness.

performance in this area was decided by sales

Ciba Specialty Chemicals continued organic dye

capability, regardless of the strength of thesedevelopment by itself in the DVD business, but theircompanies’ other capabilities.

dyes did not satisfy the customer’s quality needs.
Firms who developed only equipment also lost

5. Discussion and conclusion

market position. In DVD final production, CMC or

In the previous section, we observed the OSMW

Indian company MBI (Moser Baer India), who

industry from a process architecture perspective.

placed importance on cooperation with other

And we confirmed that the changes in processcompanies, improved their performance. Theyarchitecture drove changes in the value chain

introduced Mitsubishi’s or TDK’s integrated system

structure. In the early 1990s process architecture wasand got orders from them, so they could produce

integral and firms had vertical integrated forms. Next,

better DVD media and achieved a relatively stablein the late 1990s, process architecture went modular

competitive environment. However, firms that did

and specialized firms got competitive advantage overnot cooperate with others were placed in a position

vertically integrated ones. However, after 2001, inof fierce competition. They could not make goodthe DVD business, firms had to integrate their

quality DVD media, so they had no way to sell thembusiness activities to produce good quality DVDs,

at lower price.

and Mitsubishi Kagaku realized the integration of15

Nakagawathe process architecture by collaborating with otherslack resources is not solved from the case study of

specialized firms.

the OSMW industry. It is to be solved in the future.

This case study gives us hints as to how to

Now, what we can say is that firms should have suchcompete in a changing architecture. First, firms haveresources so that they can keep their knowledge in ato alter their strategies and business domains inturbulently changing architecture, even if it comes ataccordance with the process architecture with whicha cost, because firms cannot respond to architectural

they are confronted. That is, in a modularity situation

change without it.

firms have to specialize, and in integrity firms have

Finally the contributions of this paper will be

to coordinate some activities. Second, and even morediscussed. This paper’s novelty exists in its dynamic

importantly, firms have to retain their component

view of competition. Past research has suggested

and system knowledge. This might be the very

strategies in modularity (Baldwin & Clark, 2000,

condition that makes firms easy to alter their

Sturgeon, 2002) and those in integrity (Takeishi,

domains. If firms keep both component and system

2003). But there has been little research on how toknowledge, they can do business both in specializedcompete when the architecture changes. Kusunoki

activities and in integrated activities so they can

and Chesbrough (2001) and Fine (1998) dealt withchange business domains. Firms have to keep system

the dynamics of architecture, but they did not reach aknowledge even if firms did not need it insolution to it. This paper has tried to find out how tomodularity.

compete in the change of the architecture. I consider

Because

they

may

use

systemknowledge in the future integrity phase. Firms

this the main contribution of this study.

should also keep component knowledge in integrity

Some researchers have already reached theto respond to future modularity. Thus we conclude

conclusion that knowledge should be kept widelythat firms should alter their domain as the product orregardless of the domain of a firm’s businessprocess architecture changes, but they should keep

(Brusoni & Prencipe, 2001; Takeishi, 2003). Those

their system and component knowledge.

researches insisted that knowledge wideness is

Keepingknowledge

woulddecrease

theimportant from static analysis. This paper extends

difficulty in changing business domain. However,the discussion from static to dynamic. That is, heresome costs still remain. Mitsubishi Kagaku kept

we insist that to keep knowledge leads tosystem knowledge during the modular architecturecompetitiveness in a dynamic changing environment.

phase by retaining a small production capacity for

In such turbulent environments, firms have tothe final product and also its R&D function for dyes

achieve strategic flexibility in order to respond to theand equipments. These slack resources do not meetchanges (D’Aveni, 1994). From this study, we cantheir cost. The question of how to lower the cost of

say that keeping knowledge would be one of the16How do firms compete when faced with architectural changes?

bases of strategic flexibility.

the product architecture: Concepts, measurement
and strategy]. (CIRJE Discussion Paper Series No.

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18

ABAS: Annals of Business Administrative ScienceVol. 5 December 2006

CHIEF EDITOR

Junjiro Shintaku

University of TokyoEDITORIAL BOARD

Makoto Abe
University of Tokyo
Takahiro Fujimoto University of Tokyo
Makoto Kasuya
University of Tokyo
Nobuo Takahashi University of Tokyo
Technical Editor: Maki Nishida, Global Business Research Center

ABAS: Annals of Business Administrative Science is published annually in December by
Global Business Research Center, Hongo, Bunkyo-ku, Tokyo, JAPAN. http://www.gbrc.jp