Organizational Responses to Product Cycles

Product cycles entail the mass production of new—and often increasingly complex—products on a regular basis. How do firms manage these changes? We use granular daily data from a leading automobile manufacturer to study the organizational impacts of introducing new models to the auto assembly line. We show that the numbers of vehicles and parts do not change after a new model is introduced; the main change is a large, discontinuous increase in new parts. The product cycle thus necessitates dealing with new complex problems: we accordingly show that defects increase substantially after the production change, then decrease to prior levels over about three weeks. We next ask how the firm’s organization facilitates this problem-solving. We find that the firm trains and promotes mid-level employees to manage the production of new parts, but waits to back-fill mid-level positions until after defect rates recover. That is, the firm reduces the distance—in terms of knowledge layers—between front-line workers, who are dealing with these new tasks, and managers further up the hierarchy, who have the necessary knowledge to solve complex problems. This organizational response is unique to the product cycle: when the firm increases the scale of production of existing models, it adds layers to the hierarchy without increasing average skills, as predicted by canonical models of knowledge-based hierarchies. We develop an extension to this theory that reconciles our novel empirical results on product cycle responses.