Haas Business School, University of California, Berkeley, USA
The literature on modularity (or more precisely, of what Schilling terms 'product modularity') 1 documents a close correspondence between the technical structure of a complex good, and the organizational structure of the firm producing that good (Simon 1962 ; Garud and Kumaraswamy 1995 ; Sanchez 1995). Economic theories have shown how standards can emerge out of a competition between rival standards (e.g. Farrell and Saloner 1986 ; Katz and Shapiro 1986), and the process of competing within standards fosters focused competitive strategies (Rotemberg and Saloner 1994 ; Baldwin and Clark 2000). This leads to vibrant innovation within the industry, with thousands of companies all competing within the modular structure of the industry.
These accounts certainly help to explain the external basis of innovation within industries such as the personal computer industry (Langlois 1992 ; Langlois and Robertson 1995). Other work has documented increasingly modular technologies and organizations in aircraft engines and chemical engineering (Brusoni and Prencipe 2001), aerospace (O'Sullivan 2001), disc drives (Christensen and Chesbrough 1999 ; Chesbrough and Kusunoki 2001), and consumer electronics (Sanchez 1995). A recent integrative treatment showed the effect of modularity on industry structure, positing a progression from vertically integrated structures to horizontally organized, modular players (Baldwin and Clark 2000).
While we have certainly made real progress in opening the 'black box' of modularity (Brusoni and Prencipe 2001), much remains to be done. This chapter will focus on some areas where our understanding is underdeveloped, and where the conclusions reached to date raise important issues that have not been addressed. It will attempt to lay some groundwork for advances in those areas, and offer an empirical analysis that might motivate additional empirical work in future.