The Relationship Between Business Models and Product Architecture: An Empirical Study

ABSTRACT

Outsourcing of production process has recently shown itself to be the winning business model amongst companies in the IT industry. In the US IT industry, where technology turnover is rapid, many companies outsource their production operations to electronic manufacturing services (EMS) so that they can focus their resources on the design and development end of their business. This strategy has been the way to the top for many in the IT industry. It is indicative of a relationship that where the main product is based on modular architecture, as in the computer industry, the so-called "virtual corporation" - i.e. the inter-company network formed by outsourcing and temporary affiliation - is the dominant business model. By contrast, however, when the product is based on integrated architecture, like passenger cars in the automobile industry, the vertically integrated business model - a model in which the entire process from production to sales takes place amongst a relatively small and closed group of companies - is the most competitive. Toyota is a good example. In this way, the roots of a business model can be found to some extent in the architecture of the manufactured product. However, with few exceptions, this relationship between business model and product architecture has not yet been effectively and empirically analyzed.

Using the data collected from a mail-in survey sent to the business offices of listed manufacturers in various fields, this report empirically analyzes the relationship between the architecture of the product and the business model decision of in-house versus outsourced production process. The analysis confirmed a positive correlation between the level of modularity in the product (the degree of modularity in this case being measured by the proportion of standard parts that are used in the product) and the company decision to outsource their assembly operations. It was also found, however, that the product architecture itself is in turn determined by a variety of factors including the degree of competition in the market, and production characteristics such as the development of assembly automation and the dependency on highly skilled labor. The influence of these factors on the product architecture, and thus the ultimate business model decision is also a major part of this analysis.

It is recognized, however, in this report that the factors that influence the decision of whether or not to outsource are not limited to the nature of the product, but can also be found in the nature of the company : its management strategy as well as its unique attributes, what could be called personality. For instance, the companies that outsource have on average a more innovative personality than those that do not. Though not possible here due to the limits in data, an interesting next step would be to consider this subject from this side and examine, by focusing on the differences in business models amongst companies in the same industry, the influence of company personality and management strategy upon the business model.