Competition through Institutional Form: the Case of Cluster Tool Standards

Richard Langlois, Professor of Economics, The University of Connecticut

1/01/2005
(Original Publish Date: 2004)

Industrial economists tend to think of competition as occurring between atomic units called "firms." Theorists of organization tend to think about the choice among various kinds of organizational structures - what Langlois and Robertson (1995) call "business institutions." But few have thought about the choice of business institution as a competitive weapon. This essay will examine, and attempt to learn from, a case in which choice of organizational form is in fact a major element of competition.Cluster tools, a type of equipment for manufacturing semiconductors, are becoming increasingly important as manufacturers attempt to pack more and more circuits on a chip. Within the U. S. industry, competition for these devices is divided between a large vertically integrated firm, Applied Materials, that designs and builds largely internally according to its own specifications and a large fringe of smaller, more specialized competitors. These latter have responded to the competition from Applied by creating a common set of technical interface standards, called the Modular Equipment Standards Committee (MESC) standards. Rather than a battle of the standards, the current situation might best be thought of as a battle of alternative development paths: the closed system of Applied Materials, with its significant internal economies of scale and scope, and the open modular system of the competitive fringe, driven by external economies of standardization. At this point, the forces favoring the integrated development path are more-or-less evenly balanced against the forces favoring the path of technical standardization. I analyze these forces in terms of the tradeoff between the benefits of systemic innovation and systemic coordination on the one hand and the benefits of external economies of scope and modular innovation on the other. Although standards have so far kept the competitive fringe in the ballgame, modularity in the industry may ultimately take a different, and somewhat more familiar, form, as some of the larger firms adhering to the standards become broadly capable systems integrators who outsource manufacturing to specialized suppliers of subsystems.