Factors Driving the Adoption of Increasingly Modular or Increasingly Integrated Forms

Many systems migrate towards increasing or decreasing modularity, yet no explicit causal models exist to explain this process. This paper builds upon a general theory of modular systems (Schilling 2000), to explain the migration of systems towards or away from increasingly modular forms. It then applies this model to a specific context: the adoption of modular organizational forms. In many industries, integrated hierarchical organizations are being replaced by non-hierarchical entities that are permeable and interconnected. This paper applies the logic of general systems modularity to explain why in some industries we may expect greater use of modular organizational forms such as contract manufacturing, contingent workers, and alliances than in other industries. The paper then presents data from 330 manufacturing industries that was used to test this model (Schilling & Steensma 2001). An examination of technology trajectories in a wide range of industries indicates that many product systems migrate towards increasing modularity. Product systems that were once tightly integrated may be disaggregated into loosely coupled components that may be mixed and matched, allowing much greater flexibility in end configurations. For instance, personal computers were originally introduced as all-in-one packages (such as Intel’s MCS-4, the Kenback-1, the Apple II or the Commodore PET), but rapidly evolved into modular systems that enable the mixing and matching of components from different vendors. Publishers have also embraced modularity, by utilizing recent information technology advances to enable instructors to assemble their own textbooks from book chapters, articles, cases or their own materials. Even large home appliance manufacturers now offer their products in modular configurations—for example some stoves now offer customers the ability to remove the burners and plug in other cooking devices such as barbecue grills and pancake griddles. Recent research also indicates that a similar phenomenon may be manifest in the emergence of new organizational designs. In many industries, integrated hierarchical organizations have been replaced by non-hierarchical entities that are permeable, interconnected, and modular in nature. A variety of terms have been used to describe this phenomenon, including “virtual organizations” (Davidow & Malone 1992), “network organizations” (Miles & Snow 1986), and “modular organizations” (Lei, Hitt & Goldhar 1996; Sanchez 1995; Sanchez & Mahoney 1996). Although the terms are sometimes invoked in slightly different ways, they all describe the phenomenon whereby the role of the tightly-integrated hierarchical organization is supplanted by loosely coupled networks of organizational actors. Because modularity exponentially increases the number of possible configurations achievable from a given set of inputs, is it easy to conclude that modular forms will typically displace less modular forms. However, some systems appear to follow a path towards increasing integration. In product systems, for example, sets of components which were once easily mixed and matched may sometimes be bundled into a single integrated package that does not allow (or discourages) substitution of other components. Many commonly used software applications are now bundled into “software suites” that promote seamless integration. Though they do not prohibit using other vendor components, they discourage it by offering dramatically improved performance through the combination of the particular set of applications. Even bicycle componentry—once typically sold by individual components such as brakes, gear sets, cranks and derailleurs--is now predominantly sold in integrated component bundles that may not be mixed and matched. In organizational systems, it has also been noted that while in many industries firms appear to be disaggregating, other industries (e.g., banking , healthcare) are characterized by increasing consolidation and integration. Presumably if we were to undertake a detailed study of how the concepts of modularity and integration are used in the many disciplines that study systems, we would find many other examples of systems that had migrated towards or away from increasing modularity. From: AAAI Technical Report SS-03-02. Compilation copyright © 2003, AAAI (www.aaai.org). All rights reserved.