Modularity and Economic Organization:

This paper addresses modularity as a basis for organizing economic activity. We first define the key concepts of architecture and of modularity as a special form of architecture. We then suggest how modular systems of all types may exhibit several properties of fundamental importance to the organization of economic activities, including greater adaptability and evolvability than systems that lack modular properties. We draw extensively on our original 1996 paper on modularity and subsequent research to suggest broad theoretical implications of modularity for (i) firms' product strategies and the nature of product market competition, (ii) the organization designs firms may adopt and the industry structures that can result when significant numbers of firms adopt modular product architectures, and (iii) learning processes and knowledge structures at the firm and industry levels in modular product markets. We also discuss an evolutionary perspective on modularity as an emergent phenomenon in firms and industries. We explain how modularity as a relatively new field of strategy and economic research may provide a new theoretical perspective on economic organizing that has significant potential for achieving important integrations of microeconomic and macroeconomic theory. We suggest some areas for further research that may be especially fruitful in this regard. We thank Peter Galvin and Norbert Bach for helpful discussions on industry architectures, and Anna Grandori and Chiu Liu for their insightful comments on earlier drafts of the paper. The usual disclaimers apply. Published: 2012 URL: http://www.business.illinois.edu/Working_Papers/papers/12−0101.pdf Pa ge 1 Modularity and Economic Organization: Concepts, Theory, Observations, and Predictions Ron Sanchez Professor of Management Department of Innovation and Organizational Economics Copenhagen Business School Kilevej 14A 3rd Floor DK-2000 Frederiksberg, Denmark [email protected] Joseph T. Mahoney Professor of Strategic Management Caterpillar Chair of Business, & Director of Graduate Studies Department of Business Administration College of Business University of Illinois at Urbana-Champaign 140C Wohlers Hall 1206 South Sixth Street Champaign, IL 61820 (217) 244-8257 [email protected] We thank Peter Galvin and Norbert Bach for helpful discussions on industry architectures, and Anna Grandori and Chiu Liu for their insightful comments on earlier drafts of the paper. The usual disclaimers apply.