Customer uncertainty: a source of organizational inefficiency in the light of the modularity theory of the firm

Over the last century, customers have become increasingly uncertain about how to be satisfied because of the growing complexity of their own needs. On the one hand, most standardized needs have been satisfied, whereas on the other hand, worldwide demand for intrinsically complex needs (such as health care and long-term care) has increased, especially because of population ageing. On the supply side, producing on the basis of an estimated foreseen demand has become increasingly difficult and customer uncertainty has become a cause of organizational inefficiency. Nevertheless, in the theories of the firm so far developed, the customer is still a missing player, confined to the position of 'rational agent'. This research discusses how organizational efficiency is impacted by customer uncertainty in taking consumption decisions when the needs are complex. The central issue is to understand when it is efficient for the organization to involve the uncertain customer in the production process and, accordingly, which organizational form is the most effective in managing such involvement. Today the lack of clarity regarding this theoretical issue has permitted, or even supported, an imprudent adoption of mass-customization in important sectors which gives customers the option of choosing exclusively from among standardized options, without suitable consideration for both the complexity of their needs and the organization required. My dissertation is organized into three chapters. The first chapter proposes a theoretical framework on the basis of the Modularity Theory of the Firm (Langlois and Robertson 1995; Langlois 2002, 2006; Baldwin and Clark, 2003; 2006), which allows for the identification of the most effective organizational types to face customer uncertainty. The second chapter studies the most efficient way to design and manage production processes in the presence of uncertain customer needs, implying the necessity to involve the customers themselves in the production process. The focus here is also on the design and management of long term care (LTC) services. And the third chapter, by adopting case study research methods for theory building (Eisenhardt, 1989, Yin 2003), in order to investigate the relationship between organizational and production efficiency, analyses five LTC organizations that belong to different categories of modularity and are characterized by different governance forms. Summarizing the results, the thesis firstly theorizes that cooperative governance (the internal organization of labour based on inclusion, participation, and horizontal relations) is the most effective to minimize dynamic transaction costs and the related unexpected production costs (damages, errors, waste of time, legal actions) thanks to developing capabilities related to how to satisfy customers' complex needs. Particularly, the accountability of workers supports a learning-by-doing process that allows for life-long learning and the necessary flexibility to adequately meet customers' needs. Secondly, the study proposes a blueprinting approach to service design and management, which allows for the separation of front/back office in order to improve management efficiency. This structure is particularly suited for supporting decision-making processes in a flat organizational structure (such as the cooperative one), as it clarifies the workflow processes and responsibilities. Thirdly, it empirically applies the theoretical results to situations of long-term care with customer uncertainty and shows how services should be designed in order to maintain a low level of unexpected production costs.