Industry Standard Modular Innovation Trap: Causes and Avoiding Strategies
Jun Liang
Business School of Shandong University
No.180 West Culture Road Weihai, 264209, China
(liangjunsong@sdu.edu.cn)
Abstract - Many scholars only see the positive role of the
modular innovation network to the industry-standard
innovation and ignore the existence of modular innovation trap.
In fact, the latecomer companies often easily fall into the trap of
modular innovation. The reason is the companies do not
recognize the essence of the modular innovation networks,
cannot handle the monopoly, competition and cooperation
relationship between their own, the systems integrator and other
module suppliers. For the module with a relative disadvantage
technical capabilities must adjust its innovation strategies,
correctly handle the competition and cooperation relationship
with other module suppliers, and on the basis of that, compete
and cooperate with the system integrators and effectively avoid
the trap of modular innovation.
Keywords-Industry Standards; Modular
Latecomer Companies; Trap; Avoid Strategies.
Innovation;
I. INTRODUCTION
In recent years, modular and modular innovations was
applied to many occasions including the industry standard
innovation, how to promote the latecomer companies
integration into the modular innovation to enhance their
innovation efficiency had become a hot research topic. The
existing studies only see the positive role of the modular
innovation networks bring to the latecomer companies and
ignore the fact that the modular networks easily form modular
innovation trap and its negative effect to the latecomer This
paper describes the modular trap , analyze the root of the
modular innovation trap, and propose some strategies to avoid
it.
together to the other subsystem and forms a more complex
system or process. Modular innovation firstly decompose the
original innovation chain in the traditional linear innovation
model, and then integrate them together. Through the
innovative modular decomposition, the module has the
"information package" feature, that is, according to the
"public information", their innovation is independent and
dispersed without disturbing each other, and any organization
can be used as an innovation module get into each innovation
node, including the innovative integration link. Under the
coordination of public information different innovative
modules is interconnected to form a modular innovation
network, the core of the modular innovation is to integrate
knowledge.
Modular
innovation
network
based
on
industry-standard is a agglomeration which interrelated
businesses and organizations form in the virtual space, in
order to integrate and develop global market, and enhance
global competitiveness of the whole network, it is
network-based, use modern communications and
information technology as the main means of
communication and exchange, its main content is to make,
lead, develop and use the industry standards. This kind
virtual space agglomeration whose elements are industry
technical standards replace the geographical proximity
with
the organization close[2], after encoding the
knowledge and information that the industry-standard
technologies involved in, make them cross geospatial
global transmission and cooperation, and thus can
effectively link and integrate the global innovation
resource .
II. FORMATION OF THE INDUSTRY STANDARD
MODULAR INNOVATION NETWORKS
III. LATECOMERS IS EASY TO FALL INTO THE
INDUSTRY STANDARD MODULAR INNOVATION
TRAP
In the knowledge economy and information economy, the
manner which how to handle the information and knowledge
within the economic system will directly affect the system
innovative capacity and global competitiveness. Modular as
an effective method to treat complex systems was applied to
more and more occasions, to enhance the modularity of the
system has become a general strategy to manage complex
things[1]. The so-called module is semi-self-regulating
subsystems, and in accordance with certain rules is linked
In the modular networks, the developing countries are
locked in a subsidiary and peripheral lower-end. In the
modular network whose the highest demand is system
integrators interests, if the developing countries want to
popularize their industry standards, participate in global
standards innovation and competition, implement
industrial upgrading, they will encounter not only the
ruthless suppression and obstacles of the system
integrators[3], but industry-standard modular innovation
trap.
First of all, the system integrators which have more
advantage at the industry-standard innovation and their
developed countries gain more benefit from the modular
innovation network.(a) The contract manufacturing service
providers in the developed countries often obtain the most
interests from the high-tech enterprises outsourcing strategy.
These contract manufacturing services have strong supply
chain management and technical advantages, form a close
contact, quick response production system in the world, pose
a great threat on supplier-led upgrade strategy of the
developing countries [4]. (b) In modular mode, the small and
the start-up companies in the developed countries are easier
to enter into the industry high-end such as making industry
standards and innovation. In contrast, if the developing
countries with lower level of knowledge and technology in
general want to study and gain the core modules technical
knowledge and other information, because of the
"information package" feature of the module, can only direct
acquire the necessary modules through merger, research and
development, or the intellectual property and patents "glued"
on it. Unfortunately, since a variety of political obstacles,
policies and regulations, national consciousness and the trade
unions and other "non-economic factors", making
cross-border mergers hide a huge risk [5]. (c) These leading
enterprises, which have been able to control the industry rules
and design standards need less venture invest for the
capital-intensive production processes, they can rely on their
skills, knowledge and talent advantage, rapidly put their
autonomous, has not been code-based knowledge and
technology into new industries, firstly carry and lead leading
design or industry standard of the emerging industries, and
thus also vacillate in many different industries, rather than
trapped in any one kinds of individual downstream consumer
goods.
Secondly, the latecomer companies are often locked in the
innovation low-end, their most work is to repair and
consolidate the existing industry standards and consolidation,
their patents is often a peripheral rather than core paten and
they often carried out "support innovation" instead of
"disruptive innovation". (a) When suppliers have invest all of
the specific investment including all of equipments and links
needed by a finished products production, and their destiny
will be locked together with this specific product, it is often
doomed, although they will be innovative, but often only
peripheral non-core innovation, their fundamental starting
point is to improve the performance of goods to meet
consumer demand, they will instinctively reject those new
technologies and ideas which may completely replace the
existing product. These actions actually defend and strengthen
the systems integrator's core interests. (b) The leading
companies in the modular innovation networks often adopt a
variety of strategies to deal with the challenge of the standard
competitor. Among them, the "parts brand" strategy makes
users regard particular brand as a very important factor in the
assessment element as people purchase and evaluate the
product function and quality, and ultimately continue to
strengthen the control of the core companies to the industrial
chain; implementation of the "integrate standard, patents and
intellectual property "makes technical standards become a
private resources and a control competitive tool, the patent
owner use the patent to expand patent interests to the entire
range of technical standards, and thus control the entire
industry [6], further strengthen and expand the
standard-setter's
monopoly
profits[7];
"continuously
assimilate and integrate the periphery innovation "
increasingly expand the functions range of the core
technology,at the same time, continue to squeeze the space
created by the periphery innovation and the added value,
and rapidly increasing the threshold that high-links access to
market, further consolidate its core position of the leading
industry-standard.
IV. CAUSE OF THE FORMATION OF MODULAR
TRAP
Integrators build, maintain and operate the modular
innovation network, their fundamental purpose is to
strengthen their own core competencies and monopoly.
Integrators utilize innovative leadership and the strong
market monopoly position, relying on the global network,
decompose the innovation chain into different links and
contract to different companies, integrate their own
innovation ability in full range by modular thinking, and
through the "cascade effect "[8]conduct the operating
pressure of the core competency modular to other
participating companies in the network, attract more
outstanding enterprises to participate in the modular
innovative and network and dynamically make a choice,
communicate and collaborate with their own innovation
resources and capabilities, thereby break the
organization's physical and geographical boundaries,
utilize the supplies core competency advantage of the
global innovation networks to enhance their innovative
function, obtain the leverage effect of the innovation
competency, strengthen and consolidate their own
monopoly position.
The cause of the modular innovation traps is that
module supplies as a latecomer companies don’t
understand the essence of the modular innovation
networks when they merge in it, therefore, cannot
correctly handle the relationship of the monopoly,
competition and cooperation with system integrators and
the other module suppliers, competition and cooperation.
It mainly embody as follows.
First, module suppliers simply pandering to the integrator
strategic arrangement, they emphasis too much on their
dependence on integrators and ignore their own competency
autonomy development. Latecomers in the process of
integration into the modular network don’t sight the mutual
beneficial cooperation need and urgency between the module
supplier, compete with each other to meet and adapt to the
need and arrangement of the system integrators in the
monopoly position, make their operation highly modular,
implement the so-called "refocusing strategy", willing to act
as a low-end modular supplies, under the industry standard
"surveillance", engaged in labor and natural resources
intensive work of the organization processing and assembly
industries, gain pitiful meager profits. Their innovation often
is support innovation rather than disruptive innovation to
repair and maintain the established industry standards. These
excessively competition will eventually lock module
suppliers in the modular trap.
Second, module suppliers often emphasis too much on
their survival and development independence in the modular
innovation network and ignore their capabilities complement
and the need for cooperation with the other module suppliers.
The core companies which at any moment can feel a variety
of innovative competitive pressures inside and outside the
network, they have been seeking and implementing strategic
measures to consolidate and strengthen their leading position.
Among these strategies, rapidly increase the core module
technology integration is the most powerful strategic
response. For example, in the era of picture tubes television
have five core chip, in the flat-panel TV age, the number of
core chips become two or one [9]. By putting the original
five-chip functions into two chips to improve the integration
of the core chip, the global leader again make Chinese
companies far behind them which in the era of color TV
tubes had formed their core technical capabilities. When the
product technology becomes integration again from the
modular, the relationship between the various components
will be extremely complex, the product system does not exist
standard rules, the product cannot be divided by the uniform
rule. At this time, if the companies at the disadvantage of the
technology and knowledge refuse cooperation with the other
companies within the product internal division, then this
excessive "independence" will make they be bound in the
past technology paradigm and development path, it is
difficult to separate from the established product technology
framework and break the monopoly of the incumbent
control, the knowledge, hard work and the huge investment to
explore and develop new product often come to naught,
ultimately these companies are fallen into modular innovation
trap.
V. STRATEGY TO AVOID THE MODULAR TRAP
In modular age, the company competition is become
into the network competition, the competitiveness of
companies depends on whether the company merge into
the modular network and their own understanding and
adapting to the network[10]. Therefore, the module
suppliers at a relative disadvantage of the technical ability
should correctly the relationship of the competition and
cooperation with the other module suppliers, and on this
basis, develop innovative competition and cooperation
with integrators.
First, module suppliers should deeply dig local market,
consolidate the existing "modular" core competencies, at
the same time, broaden the scope of value chain
management, cultivate products framework capacity
based on local market. In the process of the industry
standard innovation, although the leader will try to
suppress, hinder development and combat the latecomer,
they cannot seize all of the market opportunity, establish
their own global standards in all the emerging strategic
industries. Chinese companies should deeply dig the local
market, accurately understand and grasp of the local base
on the product function and characteristics required by the
local market, merge in much more local elements and
re-definition the product. To cultivate and develop the
product framework capacity based on the local market is
the important starting point for Chinese companies to
participate in the global competition of the industry
standards innovation.
Second, the related module suppliers in the product
value chain should collaborate with each other, actively
respond to the monopoly suppression of the core
companies to enhance the core components integrated
degree. MP3 as a digital product is a good example, most
important components within MP3 is the main chip, it is
integrated by the MP3 decoder chip, MCU
(microprocessor), interface control chip and the operation
control circuit. The solution of the higher chip technical
barriers, China's domestic companies adopt a vertical and
horizontal collaboration manner, different enterprises are
located in different nodes of MP3 value network. Finally,
in the MP3 route tends to integrated design conditions,
China's domestic companies are still able to occupy
different value network nodes though the open
organizational structure, give a strong fight back to the
pressure of the leading companies to enhance the degree
of core component integration, obtain remarkable result of
the domestic MP3 70% market shares.
Third, the upstream and downstream of the value chain
should closely cooperate to build their own standard
innovation networks in order to participate in global
competition, access to industry standard-setting power. In
2003, Lenovo, TCL, Konka, Hisense and Great Wall,
co-sponsored and established "IGRS" 3C collaborative
standards consortium, then continue to expand to the industry
chain’s upstream and downstream, achieve vertical
integration of the industrial chain, enhance the Alliance's
manufacturing capacity, research capacity and product
technology integration degree and "IGRS" standard industrial
applications, and successfully create a standard innovation
network
including
chip
manufacturing,
software
development, network operations, product manufacturing,
knowledge innovation and many other modules. On this
basis, "IGRS" union began to directly compete with DHWG
alliance composed by Intel and Microsoft companies and
other standard innovation network in 3C industry
collaborative standards. After five years of hard work, in
2008, "IGRS" series of testing and certification standards
were recognized by the International Standards Organization
ISO, this standard has been the first 3C collaborative
standards adopted by ISO.
VI.CONCLUSION
Modular innovation can effectively enhance the industry
standards innovation efficiency and global competitiveness.
Modular innovation network, in essence, is the organizational
platform for system integrators to strengthen their core
competencies and monopoly position. When latecomer
companies merge into the modular innovation network and
participate in industry-standard modular innovation, they
must understand the essence of the modular innovation
networks, correctly handle the relationship of the monopoly,
competition and cooperation with systems integrators and
other module suppliers and adapt their industry standard
competition strategies in order to effectively avoid the trap of
the modular innovation and improve innovation efficiency.
ACKNOWLEDGMENT
The writing of this paper got my wife Dr. Ying-chun
Song's support, and the discussion with her lets me get a lot
of inspiration, she helped me polish the words in the text,
without her support, this paper could not be completed
successfully. At the same time, I also got my graduate
students Yang Zhou, Jiao Cai, Ting-ting Huang , Chunlin Sun
and Fang-yuan Zhao and other students various forms of help
and support, they are always well complete the work which I
hand to them and their excellent makes me feel very proud. I
want to express my sincere gratitude to them.
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