value defined
by Kenneth Rudich
What do a personal computer, a supermarket, and clothing apparel all have in common?
Answer: the concept of modular design.
In simple terms, modular design subdivides a larger system into smaller independent parts or modules. The individual modules can then be connected together to form a system or platform.
For example, you can swap out an old computer hard drive with a new one without having to buy a new computer. Supermarkets can take one product off the shelf and replace it with another more profitable one without having to change the whole store. And you can mix and match clothing apparel and accessories to change the look of an outfit.
This kind of thinking – modular thinking — is the basis for mass customization.
modular thinking versus industrial age thinking
Modular thinking differs from the thinking that dominated the industrial age, with its mass production of standardized goods based on a single product design. Back then, efficiency stemmed from reducing the number of parts that needed to be assembled.
For example, if the same product that consisted of 24 assembled parts could be modified so only 12 parts needed to be assembled, it would yield production efficiencies that lowered the cost of producing it in mass. Remember, it’s the exact same product. Only, the assembly line would be shorter, a smaller workforce would be needed, and it would take less time to produce it. Plus, it could be rolled out in greater quantity. With these factors reducing the manufacturing costs, the savings could either be passed on to the consumer in the form of lower prices or kept by the manufacturer in the form of higher profits.
Bear in mind, this conversely meant that more parts or modules were counterproductive because they introduced inefficiencies and higher production costs.
The downside of this mindset is that it promoted an inflexibility that lessened consumer choices, because it relied on mass standardization. You couldn’t change one piece of the product without having to change the whole product. As a result, it led to a “what you see is what you get” proposition for customers. Or, if you prefer, “Take it or leave it.” Hence, Henry Ford’s rumored quip about the Model T, when he reportedly said, “You can have it in any color as long as it’s black.”
the ascent of modular thinking
Near the end of the industrial age, people began to look hard at doing the exact reverse by asking: is there a way to break a product down into its component pieces and still rein in the costs of assembling it?
The reason for entertaining this question rested with the recognition that, if it could be done, it would create new value by offering the benefit of making the product customizable. Individual customers could fashion it into whatever they desired rather than have to take – or leave – what the manufacturer decided to offer.
Then the locus of control would shift over to the customer, and the providers of products and services would have to become “customer-centric” instead of “product-centric.” That one change in mindset alone would invariably work to benefit the customer.
the answer
The answer to this question, it turned out, lay not in creating a product per se, but in creating a system or architectural design that allowed the mixing and matching of components into the specific configurations preferred by the individual customers. It’s called modular design.
Modular design permits customization combined with cost containment — because you can change or modify a module without having to modify the larger system or platform. For example, you can install and uninstall all sorts of software on one operating system such as a Mac or Windows platform. By the time everyone has finished doing this, it’s conceivable no two desktops will look exactly alike.
Professor of Strategy and Technology Management Ron Sanchez says, “Businesses need to create product and process architectures that are capable of providing the flexibility to customize products for individuals and to upgrade them when better components come along.” I would add that the same holds true for services as well.
specialization and systemization
Modular thinking strategically combines specialization with systemization. At the module level, for instance, there will often likely be a reliance on specialization — for example, the Intel processor in a computer is a specialized piece or part. At the system level, however, strategy will dictate how the specialized modules are interfaced to create the larger whole. The system will change as the modules or pieces change. This kind of flexibility, when aligned with low costs, broadens the horizon for creating value.
the value chain for marketing
The value chain for marketing encourages this sort of modular thinking. Some components of it might be tweaked to increase the benefits offered, while others might be used to lower the costs. For example, some parts of it might be outsourced while others might be handled in-house, depending on the strategic thinking involved.
The various combinations of value creating opportunities that are available as one moves across the chain, via the mixing and matching of them, can produce different scenarios of value creation. I’ll explore the different scenarios for value creation in the next post.
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