When do Industries Modularize? Firm Actions and the Role of Product and Organization Architecture

When industries modularize, the degree to which firms capture value can shift. This paper develops a conceptual framework to understand when industries modularize, and how firm actions influence such modularization. To do so, we first outline how modularity increases at the product and organizational level. We argue that industry modularity increases when product interfaces and organizational practices disseminate beyond the focal organization. Next, we highlight several moderating factors that influence this dissemination process. Overall, the paper attempts to contribute to the existing literature as follows. First, the framework highlights strategic actions at the product and organizational architecture level to understand changes in industry modularity, attempting to “endogenize” the structure of a given industry. Second, the conceptual framework suggests how industry architectures become more modular through dissemination of interfaces and practices, and proposes several moderating factors that influence this diffusion process. Third, the contingent perspective developed in the framework may reconcile diverging perspectives on the role of modularity and inter-firm coordination, in particular existing work on systems integration.