21COE, University of Tokyo

MMRC Discussion Paper No. 98

MMRC-F-98

How do firms compete in architectural changes?:
Lessons from optical storage media industry
The University of Tokyo, Department of Economics
Koichi NAKAGAWA
September 2006

21COE, University of Tokyo

MMRC Discussion Paper No. 98

How do firms compete inarchitectural changes?:
Lessons from optical storage media industry
The University of Tokyo, Department of Economics
Koichi NAKAGAWA
September 2006

1. Architectural change causes serious managerial problems‘Vertical integration to horizontal specialization’ has been one of the characteristics of industrial competition
since 1990s. Many firms thought about ‘outsourcing’ and ‘refocusing’, to improve competitive performances.
In fact, in electronics industries, traditional vertically integrated firms lost competitiveness and networks ofspecialized firms took over them (Sturgeon, 2002). In computer industry, specialized firms such as Intel orMicrosoft can make each component of computer, and they replaced integrated firms such as IBM (Grove,1995). In semiconductor business, instead of vertical integration, specialization in design (fab-less) and that inmanufacturing (foundry) became the dominant form of organization.
Those changes were caused by modularity. Modularity is the decoupled condition of product or process
architecture. When architecture changes towards modularity, each component or each business activity can bedone independently, and firms can get competitive advantage by focusing their resources on specific businessareas. Modularity is the essentials of the trends towards specialization in these days.
But architecture not only goes modular but also goes integral. When architecture return from modular tointegral, specialized firms, who got competitiveness in modularity, did not respond to integrity and lostcompetitiveness. Kusunoki and Chesbrough, 2001 called this problem as ‘modularity trap’.
1

Koichi Nakagawa
Then, how do firms respond to such two-way architectural changes? When architecture changes to modular,
firms should specialize. But, specialization disables a firm to respond to reintegration. To think about thisdilemmatic problem, we analyze optical storage media industry.

2. What is the architecture? : Literature review
2.1 Architectural perspective of the product and process
Architecture is one of the perspectives of artificial systems. ‘Artificial’ means human-made, and ‘system’
means composed of more than one component. So an artificial system is a thing that consists of somecomponents made by humans. It includes not only concrete objects, such as automobiles or mobile phones, butalso immaterial properties such as economic systems or human relations (Simon, 1969).
‘Architecture’ as a characteristic of a system can be described as the pattern of interrelations between
components (Baldwin and Clark, 2000). We can distinguish the architecture of systems into two types by thestrength of the interdependence of their components: integral and modular. A modular architecture specifies
independence (a decoupled structure) of each component. An integral architecture specifies interdependence (atightly coupled structure) of each component (Ulrich, 1995). The automobile, the quality of which is realized
by integrating many parts, is a typical integral architecture product. On the other hand, the personal computer(PC), whose components, such as the MPU, DRAM, or HDD, are developed and produced independently, is atypical modular architecture product.
Firms must have adequate knowledge and capabilities for their confronting product or process architecture.
In other words, different types of knowledge are required in different types of the architecture (Ulrich, 1995).
When the system has integral architecture (consists of tightly coupled subsystems: Simon, 1969) we needmutual coordination and architectural knowledge (knowledge about the system) in order to produce, develop or
operate that system. When the system has modular architecture (consists of nearly decoupled subsystems) we
do not need knowledge of the system but we need special, detailed component knowledge (Henderson and
Clark, 1990, Sanchez and Mahoney, 1996)(Figure 1).

2How do firms compete in architectural changes?

Fig.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

Because of these relationships, value chain structure can be laid out in accordance with the product orprocess architecture (Figure 2). In integral architecture, a firm should have architectural knowledge, so it will
choose a vertically integrated form of organization, whereas in modular architecture the firm should take aspecialized form in order to focus its resources on a limited area (Sturgeon, 2002).

Fig.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

2.2 When the architecture changes
Next we will consider changes in the product or process architecture. As we saw in the precious subsection,
the architecture decides the value chain structure. Thus, changes in architecture cause changes in the value
chain structure.
When the architecture of an industry is relatively stable, it is easy for firms to take adequate strategies andorganization design. In modularity, a firm should specialize their domain where they have core competence. In
integrity, a firm should integrate its business activities. However, when the architecture changes continuously,
the problems faced can become difficult. In turbulently changing competitive environments, known as3

Koichi Nakagawa
hypercompetitive (D’Aveni, 1994) or fast-clockspeed industries (Fine, 1998), the structure of interactions
between business activities can change continuously and violently (Figure 3). Within such a turbulent
architectural change, how do firms decide on their strategies and organizational designs?

Fig.3. continuous shift of the architecture

Integral architecture,
Vertical industry

Modular architecture,
Horizontal industry

Pressures todisintegrate

Pressures tointegrate

Source: Fine(1995),
simplified and modified by the author
In a continuously changing architecture, firms should neither focus on specific areas nor integrate vertically.
Consider the situation in which product architecture gradually becomes modular in a turbulent environment.
Should a firm specialize its business? Specialization gives firms to a competitive advantage in modularity, but
if the product architecture changes toward reintegration, the specialized firms will lose their competitive
advantage (Kusunoki and Chesbrough, 2001). And the possibility of re-integration is high in turbulently
changing environments. If firms choose integrated business models, the story becomes opposite. They can getcompetitiveness if the product architecture goes integral, but they lose competitiveness when architecture keeps
going modular.
From the discussion above, we can say that firms should not fix their strategies and their business domains
when the product architecture is changing turbulently. Rather, they need flexible modifications of strategies anddomains. To put it simply, firms should alter their business domains in accordance with the architectures withwhich they are confronted. That is, when architecture changes toward modular firms should specialize, andwhen architecture goes integral, then firms should expand their business domains and reintegrate them.
However, alterations of domains would cost a great deal. When a firm specializes its business, it has toabandon some of its tangible and intangible assets. Firms have to abandon some plants, R&D centers and sales
departments, as well as manufacturing capabilities, technological knowledge or sales know-how. On the other4How do firms compete in architectural changes?
hand, when a firm integrates its business, it has to get new capabilities. Firms have to merge with othercompanies and invest in new assets. In addition, to integrate business activities firms build up architectural
knowledge, in other words, coordination capabilities between old capabilities and new ones. In short,knowledge needed changes as a firm’s domain changes (Demsetz, 1991), so the alteration of domain would
take costs to build or abandon knowledge.

Fig.4. When the product or process architecture changes,
how do firms respond to that?
yyalter their businessdomainshave knowledge neededin new domainsnn

Co mpetitive
advantage

Co mpetitive
disadvantage

Co mpetitive
disadvantage

Thus, we can infer that a firm can alter their domains by keeping various kinds of knowledge. Consider thecondition that product architecture goes integral and a firm has specialized form. If that firm has knowledge
about the system, it can realize the reintegration and keep competitiveness in integral architecture. Whenarchitecture becomes modular and a firm has integrated form, it can respond to modularity if it has detailed
knowledge about one specific area. By keeping knowledge about the system and the component, firms arethought to be able to respond to any architectural changes easily (Figure 4).
So far, we considered the problem from theoretical perspective. From the next section, we think about it froman empirical study. In order to certify how a firm can keep competitiveness in a turbulently changing value
chain structure, we adopted one hypercompetitive industry as a unit of the study, that is, optical storage media
industry. Whether strategies mentioned above gives firms competitiveness or not will be clear from the casestudies.

3. Research method
This paper is based on one detailed industry case study. The industry analyzed here is the writable opticalstorage media industry (here I call it OSMW: optical storage media writable industry). The data were collectedfrom a field based study program of the optical storage industry in 2003 ‐ 2006 1. Initially the data werecollected by interviews with the managers of the firms concerned. A total of 65 interviews were executed. For
the information on financial performances, I basically used the firms’ IR brochures. For national or
1

The research project had been undertaken by 5 research staff (including me) at the University of Tokyo.
5

Koichi Nakagawa
whole-industry statistics I was supported by the IEK (the Taiwanese Government’s research institute) andTechno System Research (a research company in Japan). Also, I used several secondary sources such as
newspapers, catalogs and some academic papers and books to triangulate the facts 2. We piled up those data andmade up the industry level analysis.
Optical storage is a system of reading, erasing and storing data by the optical technology. It is famous as CD
or DVD. This system is made up of two devices: the drive and the media. The drive reads, writes and erases thedata on the media (Figure 5). The media and drive are separate from each other physically. The business of the
optical media is also separate from that of the drive. Writable optical storage media, which we analyzed here,
are optical media on which information can be written. They are known as ‘CD-R’ (compact disc – recordable)or ‘DVD-R’ (digital versatile disc – recordable).

Fig.5. the system of optical storage

media

laser
drive

In the case study, we focused on the conditions of process architecture of OSMW industry. We analyzed theprocess architecture, because the production process of optical storage media is process-intensive, so theindustrial structure is affected by process architecture more than product architecture. To make the analysis easy,
we picked up three important processes among whole production processes. I picked out three activities; ‘final
product production’, ‘organic dye production’, ‘manufacturing equipment production’. Organic dye is the mostimportant material in making writable optical storage media, because the specifications and the qualities oforganic dye mainly decide the lifetime of final product and the precision of data writing. The manufacturing
equipment production is also important, as it affects on final product’s cost and quality. Furthermore, I addedthe ‘final product sales’ into the analytical unit of the case study, because the relationships between production
and sales are also the important factor for the settings of industrial structure. The flow of those activities is
depicted in Figure 6. We will analyze the interactions between these activities to determine the changes in the2

I was helped by Yin,1994 and Fujimoto,2003 in designing the case studies.
6How do firms compete in architectural changes?
rocess architecture of the OSMW industry.

Fig.6. Flowchart of important activities of OSMW industry
organic dye
production
manufacturing
equipment production

final productproduction

final productsales

4. Case studies: Writable optical storage media industry
The writable optical storage media (OSMW) industry started in 1989, when the first CD-R was produced.
After that, the industry developed step by step, and now the OSMW industry yielded sales of about 4.5 billion
dollars and produced 14 billion units of products in 2004 (Figure 7).

Fig.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
Source: Techno System Research (1991-2000)
Author (2001-2004)

4.1 The first stage of OSMW industry
The OSMW industry started in 1989 when Sony and Taiyo Yuden developed and produced the CD-R. At thattime Sony mainly commercialized the CD-R drive and Taiyo Yuden did the CD-R media. Taiyo Yuden’sconcept of CD-R media business was that ‘everyone can make his own original CD at a relatively low price’,
7

Koichi Nakagawa
so the target of the CD-R was the consumer market. But that plan did not go well. Sony did not sell CD-R
drives actively to consumers because it had a music content business (it’s target market was also consumers)
and felt worried about the negative effect of the CD-R, onto which people can copy music, on its musicbusiness. So the CD-R standard did not spread into the consumer market in the early 1990s. In other words, theearly CD-R business had no customers. Firms had to find customers other than consumers.
Therefore, the early entrants into the OSMW industry looked for demand through their own efforts. For
example, Taiyo Yuden sold their media to corporate and government customers such as NASA who needed fast,high-volume, stable data storage technology. Kodak sold CD-Rs as storage media for digital photographs(photo-CDs) 3. To increase production volume, firms had to find uses and customers for CD-Rs, so the process
architecture between sales and final product production seemed to integral in this sense.
Not only the customers, but also the production technology, were different in each firm. Every entrant
adopted a different material (organic dyes) and different production technologies (manufacturing equipment),
which were developed through each firm’s own efforts. Manufacturing equipment and materials (especiallyorganic dyes) were functionally interactive, so firms had to develop and adjust them to improve the final
product quality. In order to differentiate in quality and adjust to the customers’ several needs, firms made CD-R
media with original technology that used original organic dyes and original equipment.
To meet the architecture described above, the entry firms, Taiyo Yuden, TDK, Mitsubishi Kagaku, Mitsui
Kagaku and Kodak selected a vertically integrated form. No firm specialized in any one activity. Every firmused original dyes and manufacturing equipment, made high quality products, and sold them to corporate
customers. This vertical structure stayed in place until 1996.

4.2 The way to modularity
In the late 1990s the process architecture of OSMW industry went modular. On the production side, sometechnological innovations led to modularity. Gradually, functional interrelations between materials andequipment came to be clarified, and development activities for both materials and equipment could be done
independently. Ciba Specialty Chemicals developed the organic dyes, by which firms could produce good
CD-R media using any equipment. Similarly, some equipment companies produced the manufacturing
equipments, called in-line equipments, which yielded good quality CD-Rs stably in any environment and withany material. By using these dyes and equipments, ‘everyone can produce CD-R, if he can get the materials andequipments. No knowledge of equipments and materials is required 4.’

3
4

For the early phase of the OSMW industry see Nakajima, 1998.
Comment by the process engineer of a Japanese OSMW firm.
8How do firms compete in architectural changes?
The market for CD-R media also changed in the late 1990s. From 1997 CD-R drives for personal computerswere developed and spread rapidly, as PCs were being sold all over the world. As a result, consumers started touse the CD-R at last. The market changed rapidly from corporate to consumers. In the early 1990s corporate
customers bought better quality CD-R media, but in the late 1990s the consumers bought CD-Rs with famousbrand names and low prices; they were not so concerned about quality. In addition to such qualitative changes,
quantitative change also heavily affected sales activities of the firms. In the past firms had sold millions of
CD-R media, but now they sold from several hundred million to a billion CD-R media. Sales activities needed
large administrative functions, marketing professionals and a great distribution network. These capabilities
were special for sales, so sales activity became independent functionally on production activity. Fig.8
summarizes changes of architecture. Technological and market changes led to modularity of business activities.
All the interactions between activities were no longer needed.

Fig. 8 Busines 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.

In this modularity phase, specialized firms achieved competitive advantages over vertical ones. At first, let’slook at CD-R production business. As we saw before, everyone can produce CD-R media if he can buy dyes
and in-line equipments from the market. So firms cannot get competitive advantage by possessing their own
organic dye division or manufacturing equipment division. In addition, consumers as customers did not wantdifferentiated CD-Rs but cheap ones, so production activity did not need integration between materials andequipments. Firms needed to focus their resources on CD-R manufacturing activity. Taiwanese CMC and Ritek
took this strategy and got a total share of more than 70%in total in the production of CD-R. They entered the
OSMW industry in about 1996 by focusing on CD-R production. They exploited the Taiwanese stock exchange
market and obtained a large amount of capital, and they invested it only in building CD-R manufacturing
capacities larger than those of the existing firms. These huge investments on production capacities gave themeconomies of scale. CMC and Ritek bought materials and equipments from other firms and started to operation.
9

Koichi Nakagawa
They focused their resources on the efforts to make final production more efficient. As a result, in theprice-concerned consumer market, Taiwanese CMC and Ritek had competitiveness over Japanese. In
1998—only 3 years after their entry—CMC and Ritek caught up with Japanese firms in production volume.
Figure 9 shows the overwhelming presence of Taiwanese firms.

And Figure 10 shows the impact of

Taiwanese firms on CD-R production business. Experience curve insists that in 1997 cost suddenly lower than
expected 5. Taiwanese firms might make this shock.
Fig.9 Trends 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

5

For the reason behind the bending of the experience curve, see Abell and Hammond, 1979 or Shintaku, 1994.
10

How do firms compete in architectural changes?
Fig.10 The exparience 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

In organic dyes, Ciba Specialty Chemicals obtained a monopolistic share by selling highly
equipment-independent dyes. In manufacturing equipment production, firms who had developed in-line
equipments early received many orders and enjoyed high profitability. Before Ciba Specialty and processequipments makers produced those materials and equipments, firms could not make CD-R media without dyes
and equipments adjusted to each other. And Japanese and American existing firms did not have sold those
integrated dyes and equipments. So Ciba Specialty’s dye and process firms’ in-line equipments enabled
Taiwanese firms to enter the OSMW industry and changed the competitive environments, by altering process
architecture.
In the CD-R sales business, where marketing skills, brand names and distribution networks were effective incompetition, Memorex, Imation, Philips, Mitsubishi Kagaku and TDK got competitive advantage. All of themwere multidivisionals, and they exploited sales capabilities like brand royalty, which had been built in otherdivisions’ business.
The firms who had vertically integrated structures could not keep competitiveness without changing
strategies. Mitsui Kagaku and Kodak tried to keep their vertical structures, but they were beaten by specialized
firms in each area and withdrew from the OSMW industry. Taiyo Yuden focused on CD-R production and TDK
specialized in CD-R sales, abandoning other activities. Mitsubishi Kagaku also focused their business on CD-R
sales, but they maintained some CD-R production capacities and the R&D function for organic dyes and11

Koichi Nakagawa
production processes. Mitsubishi Kagaku was concerned that it had lost its knowledge of media production,
though to maintain knowledge it would have required some expenditure. Mitsubishi Kagaku continued a little
commercial production by selling its CD-R to niche markets, where qualitative differentiation could bedesirable.

Fig.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

12How do firms compete in architectural changes?

4.3 The witable DVD media: back to integrity
Fig.12 Writable DVD media production
10000000
1000000
100000
10000
1000
100
thousand units

101995 1996 1997 1998 1999 2000 2001 2002 2003 2004
year

Source：Techno system research (1995-1999)
Author (2000-2004)

In 1996, a new standard of optical storage, the Digital Versatile Disk (DVD), was determined. Although theDVD standard had only ROM (read only memory) at first, development programs for writable DVD media had
continued in the late 1990s and Writable DVD media standards were set around in 1999 6. The Writable DVD
has 4.7 GB storage capacity whereas the CD-R has 700 MB, and writable DVD media spread gradually after
2001, replacing CD-R media.
The advent of Writable DVD media made the process architecture of the OSMW industry go integral again.
While everyone could make CD-R in 2000 if he can get materials and equipments, people had to have detailed
knowledge of organic dyes and manufacturing equipments and integrate them in order to produce writable
DVD media. The shape of the DVD media is as same as that of CD-R, but the storage capacity of the DVD isabout seven times bigger than that of the CD-R. To realize that huge capacity, firms have to realize strict
specifications by integrating material technology and process technology. For example, the quality of thewriting layer on DVD media, where the data are recorded, is determined by the interaction between injection
machine performance and the organic dye’s specifications. In addition to realize strict specifications, the users
had wanted DVD media to be better quality than CD-R media. In 2002 a DVD recorder for TV diffused into
the market as one of digital home appliances but people came to dislike the writing errors of DVD media that
occurred when they recorded TV programs, as VCR had rarely failed to record. So DVD media manufacturers

6

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

13

Koichi Nakagawa
tried to improve the product quality by adjusting the materials and equipments to respond to customer needs.
On the other hand, the relationships between production and sales did not change drastically. Though users
want quality more than low cost, basically the target market―the consumer―did not change. Sales companies
did not have to alter methods of sales and distributions. They did not need mutual interactions with production
and they focused on sales activities only, that is, marketing, branding or building distribution systems.

Fig.13 Reintegration of busines architectureorganic dye
production

final productproduction

organic dye
production

final productproduction

manu. equipment
production

final productsales

manu. equipment
production

final productsales

1997 - 2002
modular architecture

2002-2005
integral architecture

In this integration phase, Mitsubishi Kagaku became a leading company in the OSMW industry. Mitsubishi
Kagaku had integrated all its activities vertically in early 1990s, but it specialized in sales when the industry
went modular. And then, Mitsubishi Kagaku succeeded in the technical integration of Writable DVD in 2002.
The profit rate of Mitsubishi Kagaku had not been announced, but about a half of our interviewees answeredthat Mitsubishi Kagaku is the best performer in the OSMW industry. Now Mitsubishi Kagaku had about a 20%
share in final product sales, which is the largest in the world. And it had monopolistic share in organic dyes, but
it did not have DVD production capacity. How did Mitsubishi Kagaku do in the DVD business?
Mitsubishi Kagaku did not internalize business activities into its domain, and kept specialization in limitedareas. But, Mitsubishi Kagaku succeeded in integration of the process architecture. To realize integration,
Mitsubishi Kagaku was in charge of the system integration activity and exploited external knowledge in thearea where integration did not need. Mitsubishi Kagaku developed the production system of DVD, which
consisted of organic dyes and process equipments adjusted to each other. Mitsubishi Kagaku itself did organic
dye production, and then, about the detailed design of process equipment, Mitsubishi Kagaku was helped by
the other firms who specialized in equipment business. Mitsubishi Kagaku was also helped by Taiwanese
media producers, especially CMC, in final writable DVD production. And Mitsubishi Kagaku bought writable
DVD media from Taiwanese suppliers and did final product sales.
Mitsubishi Kagaku could realize the integration of the architecture because it had knowledge of the wholesystem of production of writable DVDs. It was called as the ‘recipe’ of writable DVD media. Mitsubishi
14How do firms compete in architectural changes?
Kagaku kept the ‘recipe’ by keeping possessing some CD-R production capacities and the R&D function fororganic dyes and production processes still in the modularity phase. Mitsubishi Kagaku outlaid some costs tokeep these capabilities, but after 2000 those capabilities remained gave Mitsubishi Kagaku the chance to leap
forward.
Mitsubishi Kagaku’s ‘recipe’ was an aggregate of know-how for making good quality writable DVD media.
By using that recipe, Mitsubishi Kagaku and an equipment maker jointly developed the dyes and the equipment.
Mitsubishi Kagaku (and the equipment producers) obtained a large share in dye business (or equipments
business). In addition, Mitsubishi Kagaku sold the dyes, the equipment and the recipe as an integrated
production system only to some exclusive producers. They could produce better DVD media by that integrated
system than by using dyes and equipment bought separately from markets. Mitsubishi Kagaku bought better
quality DVD media produced from those exclusive producers and sold them. In this way Mitsubishi Kagaku
succeeded in the DVD business.
After Mitsubishi Kagaku’s leap forward, some firms followed Mitsubishi’s ways and tried to integratearchitecture. Among them TDK succeeded in integration of the process architecture. TDK also kept knowledge
for integrated production system, so TDK could follow Mitsubishi’s way. Taiyo Yuden was the third successcompany. Taiyo Yuden chose final product manufacturing business in the late 1990s. Then Taiyo Yuden did notcompete directly with Taiwanese makers. Taiyo Yuden focused their business on differentiated niche where thecustomers needed above normal product quality, so it kept integrated production way. So Taiyo Yuden could
respond to the change of the architecture when the writable DVD media emerged. Taiyo Yuden would realize
integration in DVD business easier than Mitsubishi Kagaku because only it had to do was to continue the same
way of business as it did in CD-R business. But Taiyo Yuden did not have sales functions, so they could notearn more than Mitsubishi Kagaku. To think from the opposite side, Mitsubishi Kagaku’s success wan
attributed to the creation of effective business model that Mitsubishi Kagaku could exploit whole value chain
by possessing the upper end (organic dyes) and the lower end (sales to final customers).

15

Koichi Nakagawa

Fig.14. The 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 system

Specialized firms that did not participate in Mitsubishi’s or TDK’s group lost competitiveness. Ciba
Specialty Chemicals continued organic dye development by itself in the DVD business, but their dyes did notsatisfy the customer’s quality needs. Firms who developed only equipment also lost market position. In DVD
final production, CMC or Indian company MBI (Moser baer India), who placed importance on cooperation
with other companies, improved their performance. They introduced Mitsubishi’s or TDK’s integrated system
and got orders from them, so they could produce better DVD media and achieved a relatively stablecompetitive environment. However, firms that did not cooperate with others were placed in a position of fierce
competition. They could not make good quality DVD media, so they had no way to sell them at lower price.
In the DVD sales business, although Mitsubishi improved its share and the sales specialists showed adecrease in profits, a general survey of the situation did not change drastically. Memorex and Imation still kept
their profitability by specializing in sales, because performance in this area was decided by sales capability,
regardless of the strength of these companies’ other capabilities.

5. Discussion and Conclusions
In the previous section, we observed the OSMW industry from a process architecture perspective. And we
confirmed that the changes in process architecture drove changes in the value chain structure. In the early
1990s process architecture was integral and firms had vertical integrated forms. Next, in the late 1990s, process
architecture went modular and specialized firms got competitive advantage over vertically integrated ones.
However, after 2001, in the DVD business, firms had to integrate their business activities to produce goodquality DVDs, and Mitsubishi Kagaku realized the integration of the process architecture by collaborating withother specialized firms.
16

How do firms compete in architectural changes?
This case study gave us hints as to how to compete in a changing architecture. First, firms have to alter theirstrategies and business domains in accordance with the process architecture with which they are confronted.
That is, in a modularity situation firms have to specialize, and in integrity firms have to coordinate some
activities. Second, and even more importantly, firms have to retain their component and system knowledge.
This might be the very condition that makes firms easy to alter their domains. If firms keep both component
and system knowledge, they can do business both in specialized activities and in integrated activities so they
can change business domains. Firms have to keep system knowledge even if firms did not need it in modularity.
Because they may use system knowledge in the future integrity phase. Firms should also keep component
knowledge in integrity to respond to future modularity. Thus we conclude that firms should alter their domain
as the product or process architecture changes, but they should keep their system and component knowledge.
Keeping knowledge would decrease the difficulty in changing business domain. However, some costs still
remain. Mitsubishi Kagaku kept system knowledge during the modular architecture phase by retaining a small
production capacity for the final product and also its R&D function for dyes and equipments. These slack
resources did not value that exceeded their cost. The question of how to lower the cost of slack resources is not
solved from the case study of the OSMW industry. It is to be solved in the future. Now, what we can say is thatfirms should have such resources so that they can keep their knowledge in a turbulently changing architecture,even if it comes at a cost, because firms cannot respond to architectural change without it.
Finally the contributions of this paper will be discussed. This paper’s novelty exists in its dynamic view ofcompetition. Past research has suggested strategies in modularity (Baldwin and Clark, 2000, Sturgeon, 2002)
and those in integrity (Takeishi, 2003). But there has been little research on how to compete when thearchitecture changes. Kusunoki and Chesbrough,2001 and Fine,1998 dealt with the dynamics of architecture,
but they did not reach a solution to it. This paper has tried to find out how to compete in the change of thearchitecture. I consider this the main contribution of this study.
Some researcher have already reached the conclusion that knowledge should be kept widely regardless of thedomain of a firm’s business (Brusoni and Prencipe,2001, Takeishi,2003). Those researches insisted thatknowledge wideness is important from static analysis. This paper extends the discussion from static to dynamic.
That is, here we insist that to keep knowledge leads to competitiveness in a dynamic changing environment. In
such turbulent environments, firms have to achieve strategic flexibility in order to respond to the changes(D’Aveni,1994). From this study, we can say that keeping knowledge would be one of the bases of strategic
flexibility.

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Koichi Nakagawa

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