Benefiting from Modularity within and across Firm Boundaries:Systems Integrators, Component Specialists, and the Role of Architectural and

Systemic Knowledge

Richard Tee

AbstractWhile existing research has shown the impact modularity can have on organizations, how firms themselves manage the interdependencies underlying modular designs is less well understood. This study addresses this, first by analyzing the role of architectural and systemic knowledge in changing product and organizational modularity. It then focuses on the extent to which development of modules takes place within or across firm boundaries and considers the drivers and outcomes of such decisions. In so doing, the paper connects research on modularity to the classic literature on product lifecycles, and extends this to current work on systems integration and platform ecosystems. Overall, the paper emphasizes the importance of intra and inter-firm modularity in terms of product and organizational mirroring, opportunities that emerge along the product life cycle, and how these can benefit systems integrators or modular firms.

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INTRODUCTION

A growing line of work on business ecosystems has drawn attention to the strategic

importance of the way interdependent firms create and capture value (Adner, 2017; Jacobides

et al., 2018). However, existing research typically takes inter-firm interdependencies as

given, thereby overlooking the role individual firms can play in recognizing and influencing

these interdependencies (Baldwin and Clark, 2000; Jacobides et al., 2006; Baldwin, 2008;

Garud and Munir, 2008). This study attempts to better understand the role individual firms

can play in managing such interdependencies when using modular designs. In particular, it

focuses on the dynamics of intra and inter-firm modularity (Schilling, 2000; Staudenmayer et

al., 2005), referring to the extent to which development of modules takes place within or

across firm boundaries. Understanding these dynamics is important given the strategic impact

they can have on individual firms. For instance, existing work has shown how modularity

may benefit specialized firms, as was the case in personal computing (Ferguson and Morris,

1993), or allow systems integrators to retain control, as happened in aero-engines (Prencipe,

1997) and automotive ( Jacobides et al., 2016).

This paper draws on the literature on modularity, a design property focused on managing

complexity by containing interdependencies within rather than across subsystems (Ulrich,

1995; Baldwin and Clark, 2000; Schilling, 2000). Its theoretical antecedents can be traced

back to Simon’s (1962) work on near-decomposability and Weick’s (1976) notion of

organizations as loosely coupled systems. Existing work on modularity has conceptualized

this construct at multiple levels, in particular products and organizations (Campagnolo and

Camuffo, 2010). In this study I develop a conceptual framework that draws on the modularity

literature, highlighting how architectural and systemic knowledge affect how firms can

manage modularity within and across firm boundaries.

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The key contributions of this paper are as follows. First, the study emphasizes the role firms

can play in shaping the interdependencies that underlie product and organizational

modularity. Such a perspective helps inform existing research that has examined how

architectures at different levels co-evolve (Brusoni and Prencipe, 2006). This relationship is

usually framed around the notion of product and organizational mirroring, referring to

technical dependencies and their corresponding organizational ties (Cabigiosu and Camuffo,

2012; Colfer and Baldwin, 2016; Sorkun and Furlan, 2017). My study builds on this line of

work and focuses on the role of a firm’s architectural and systemic knowledge in relation to

intra and inter-firm modularity. Specifically, it shows how firms can strategically manage

modularity within and across firm boundaries and how their ability to do so depends on both

architectural product knowledge (Henderson and Clark, 1990; Baldwin, 2018) and systemic

organizational knowledge (Puranam et al., 2012).

Second, the study draws on work on the life cycle of a product (Anderson and Tushman,

1990) and its design hierarchy (Clark, 1985; Murmann and Frenken, 2006) to understand

when and where firms may pursue modularization or integration. In so doing, key strategic

questions that emerge are to what degree and at what stage of the product lifecycle firms

might pursue modularization and whether to do so at the system or component level. The

ability to effectively address these challenges draws on work on knowledge and systems

integration (Brusoni et al., 2001; Prencipe et al., 2003; Tell et al., 2017) and platform

ecosystems (Gawer, 2014; Adner, 2017; Jacobides et al., 2018). My study helps synthesize

these literatures, framing this discussion around the dynamics of intra and inter-firm

modularity. In particular, it explains when systems integration is more likely to be effective,

when modular specialists can thrive or, most importantly, when they co-exist while focusing

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on different parts of the design hierarchy. Therefore, unlike existing work that typically

focuses on integration during a product’s early stages, and modularization occurring only

later (Christensen et al., 2002), my study highlights how opportunities for integration and

modularization may occur earlier as well as later in the product life cycle and can take place

at both the system and component level. Recognizing such opportunities is important, as over

time such decisions can affect the degree to which value accrues to systems integrators or

modular specialists (Jacobides et al., 2016).

Third, the conceptual framework can help reconcile contrasting views on the “vanishing

hand” hypothesis (Langlois, 2003; Sturgeon, 2002).1 Work in this area has pointed to the

increasing prevalence of embedded coordination via modular interfaces, as opposed to

explicit organizational coordination. The idea of the vanishing hand can be contrasted to

research on systems integration, which has suggested that modular interfaces may be an

imperfect substitute for coordination. Therefore, firm coordination remains important,

reflected in the role of systems integrators, who are responsible for integrating different

technological subsystems (Brusoni et al., 2001; Prencipe et al., 2003) The framework

introduced in this paper explains why these phenomena need not be contradictory and further

illustrates this by briefly highlighting differences in intra and inter-firm modularity as

observed in computing and automotive.

This paper is built up as follows. The next section examines relevant background literature,

focusing on modularity and how it has been applied to different levels. I then consider the

role of architectural and systemic knowledge in relation to product and organizational

modularity. Based on this, I develop a conceptual framework that focuses on the dynamics of

1 The phrase “vanishing hand” responds to Chandler’s (1977) work on the “visible hand” and the role of large corporations vis-à-vis market-based exchanges.

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intra- and inter-firm modularization and derive several propositions. The framework is

illustrated with two brief examples, followed by concluding remarks.

BACKGROUND LITERATURE

Existing work on modularity and architectural change has analyzed these concepts at

different levels, focusing in particular on the relation between products and organizations

(Henderson and Clark, 1990; Sanchez and Mahoney, 1996; Brusoni and Prencipe, 2006).

This relationship has more recently been framed around the idea of the “mirroring

hypothesis”, refering to the notion that the architecture of a product and its organization may

be isomorphic (Cabigiosu and Camuffo, 2012; Furlan et al., 2013; Colfer and Baldwin, 2016;

Sorkun and Furlan, 2017). Such a view supposes that integral products, which are

characterized by tightly coupled interdependencies, will be developed by tightly coupled

integral organizations. Conversely, modular products based on loosely coupled components

are expected to be developed by loosely coupled modular organizations. Such mirroring can

be effective as it reduces cognitive load and helps coordination, though as discussed later,

there are important exceptions when such mirroring is ineffective or less desirable (Prencipe

et al. 2001; Colfer and Baldwin, 2016). My study draws on this literature, focusing on the

dynamics of intra and inter-firm modularity and how individual firms can manage the

modularization process. Considering the degree to which firms rely on development of

systems or modules within or across firm boundaries is important, given the long-term

technological and strategic implications such decisions can have (Langlois and Robertson,

1992; Baldwin and Clark, 2000).

Simon’s (1962) seminal work on complex architectures emphasizes the prevalence of

hierarchical organization and near decomposability in such systems. Importantly, systems

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characterized by stronger interdependencies within, rather than across, subsystems are usually

more evolutionary robust (Simon, 1962). Drawing on this insight, research on modularity has

used various typologies to highlight different aspects of modular systems. For example,

Baldwin and Clark (2000) distinguish between modularity-in-use, allowing users to mix and

match modules; modularity-in-production, which focuses on the use of modules for product

development; and modularity-in-design, which examines design in terms of its underlying

task structure. Takeishi and Fujimoto (2003) distinguish modularization at the level of

product architecture, production, and inter-firm system. Based on this typology, they refer to

modularity in the automobile industry as “closed modularization”, which can be distinguished

from “open modularity” observed in e.g. the personal computer industry. In the former,

interfaces are closed and managed by the focal firm, while in the PC industry open interfaces

allows external development. This distinction is similar to work by Farrell et al. (1998), who

distinguish between components and systems organization. Further conceptualizations of

modularity include Langlois’ (2002) study of a modularity-based theory of the firm.

Contrasting markets from firm-based organizations, he analyzes how vertically integrated

firms initially developed computers in a non-modular or internally modular fashion, and

constrasts this with the subsequent trajectory characterized by external modularity. Similarly,

Chesbrough (2003) distinguishes between internal modularity and market modularity,

referring respectively to modularity within the firm and modularity at the industry level.

In sum, current work shows how the notion of modularity can be applied to different levels of

analysis. Importantly, existing work conceptualizes modularity in largely similar ways,

different terminology notwithstanding. For example, Takeishi and Fujimoto’s (2003) notion

of closed and open modularity appears to be similar to what Langlois (2002) refers to as non-

modular (or internallly modular) vs. externally modular, and what Chesbrough (2003)

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considers internal vs. market modularity. Yet, while the distinction between the intra and

inter-firm level is implicit in many of these conceptualizations, existing work has mostly

overlooked the role individual firms can play in driving shifts in modularity (Fine, 1998;

Chesbrough and Kusunoki, 2001) and has only recently started to examine this in more depth

(McDermott et al., 2013; Furlan et al. 2014). However, considering these firm level choices is

important as existing work has shown that intra and inter-firm modularity can have important

long-term strategic consequences (Baldwin and Clark, 2000; Schilling, 2000; Staudenmayer

et al., 2005). Therefore, this paper develops a framework that focuses on the dynamics of

intra and inter-firm modularity, focusing on how a firm’s knowledge of product and

organiational interdependencies affects this process.

CONCEPTUAL FRAMEWORK

In this section I develop a conceptual framework that focuses on product and organizational

architecture and the role of intra and inter-firm modularity. Given varying conceptualizations

of modularity and architecture, I define key constructs upfront. First, architecture refers to

“an abstract description of the entities of a system and the relationships between those

entities” (Whitney et al., 2004). Next, modularity is defined as a design principle that

advocates designing structures based on minimizing interdependence between subsystems

and maximizing interdependence within subsystems (Ethiraj and Levinthal, 2004). Drawing

on existing work I suggest that knowledge of product and organization-level

interdependencies is important to potentially increase modularity. Product architecture is

defined as “the scheme by which the function of a product is allocated to physical

components” (Ulrich, 1995). Modularity of product architectures can increase as knowledge

about interdependencies between functions and components accumulates. Organizational

architecture refers to “the scheme by which tasks are allocated to organizational units (...)”

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(Sako 2003). Organizational modularity can increase as knowledge about interdependencies

between tasks and organizational units accumulates.

My study draws on this foundational work and subsequently analyzes how firms can manage

the dynamics of intra and inter-firm modularity, distinguishing between architectural and

systemic knowledge. Architectural product knowledge refers to the firm’s understanding of a

product’s functional interdependencies and the impact of changes to the overall system or its

individual components (Henderson and Clark, 1990; Baldwin, 2018). In turn, systemic

organizational knowledge refers to an organization’s understanding of its task

interdependencies and the impact of changes to task boundaries and how these are allocated

(Puranam and Jacobides, 2006; Puranam et al., 2012). Finally, intra and inter-firm

modularity refers to the extent to which development of modules takes place within or across

firm boundaries (Schilling, 2000; Staudenmayer et al., 2005). An overview of these concepts

is given in Table 1.

<<< Insert Table 1 about here >>>

Product Modularity and Architectural Knowledge

This section focuses on product modularity and the role of architectural product knowledge to

understand interdependencies between product functions and components. I suggest that, at

this level, a key mechanism towards increasing modularity is codification. Here, codification

refers to the degree to which knowledge about function-to-component interdependencies (i.e.

functional interdependencies) becomes stabilized in standardized interfaces. Figure 1 depicts

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three interconnected stages that constitute this process: functional partitioning, building

architectural knowledge, and interface standardization.2

<<< Insert Figure 1 about here >>>

Partitioning of functional interdependencies. Product complexity can be managed through

decomposition (Simon, 1962) or task partitioning (Von Hippel, 1990), reducing the cognitive

complexity in understanding different functional interdependencies (Ulrich, 1995). The aim

in this partitioning stage is to maximize functional interdependencies within subsystems,

while minimizing interdependence between subsystems. This partitioning typically involves

trial-and-error (Nonaka, 1994), resulting in a greater understanding of partitioning over time.

Accumulating architectural knowledge. Next, actors build architectural knowledge, which

allows functional interdependencies to be specified more explicitly (Nonaka, 1994). As

knowledge about relevant functional interdependencies accumulates, partitioning will be

adjusted accordingly, which in turn affects the degree of architectural product knowledge

(Henderson and Clark, 1990; Baldwin, 2018). This process of knowledge accumulation has

been referred to as “interim modularity” (Chuma, 2006), as this knowledge cannot be fully

specified ex ante but only becomes clear during the development stage.

Codification into standardized interfaces. The final step towards increasing product

architecture modularity constitutes standardization, referring to codifying knowledge about

functional interdependencies in standardized interfaces (Ulrich, 1995; Baldwin and Clark,

2000; Chesbrough, 2003). Codification involves explicating knowledge about functional

2 In practice these stages will of course overlap and be characterized by mutual adjustment. The feedback arrows in figures 1 and 2 highlight the iterative nature of this process.

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interdependencies that was previously tacit. There are different ways in which knowledge can

be codified, e.g. through manuals, databases, or other repositories. Importantly, there may be

inherent limits to the extent that knowledge of functional interdependencies can be effectively

codified (Sako, 2003; MacDuffie, 2013), as well as differences in architectural knowledge

between firms.3

Organizational Modularity and Systemic Knowledge

This section considers how organizational architectures become more modular and the role

systemic organizational knowledge plays here. At this level, modularity refers to

interdependencies between tasks and organizational units (i.e. task interdependencies). Figure

2 visualizes the iterative stages comprising this process: organizational partitioning; build-up

of systemic knowledge; and emergence of a consistent task division.

<<< Insert Figure 2 about here >>>

Organizational partitioning. At the intra-firm level, organizational units refer to teams or

departments (Sako, 2003), while for inter-firm organizations the units can also comprise

entire firms themselves (Schilling and Steensma, 2001).4 In either case, the aim is to

maximize task interdependencies within organizational units, and minimize task

interdependencies between units.5 This balance between independence and interdependence

3 There might also be broader factors that limit codification. For example, in Dunbar, Garud and Kotha’s (1995) study on Steinway pianos, customer expectations regarding product “performance” (e.g. warmth of the sound, physical touch of the keys) set limits on the extent to which relevant interdependencies can be fully codified. In this case, a more modular design could be created but would lead to significant performance limitations.4 Note therefore that this section focuses on organizational modularity in more general terms. The next section narrows this case by taking the firm as the focal organizational unit, focusing on within and across firm boundary choices. I thank an anonymous reviewer for helping me explicate this distinction more clearly.5 At the product level I noted that even though most complex systems will be developed by teams, there can also be instances where complex systems are developed by individuals (e.g. software development). Organizational partitioning of course makes most sense when the organization outnumbers a single individual.

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has been discussed in terms of tightly vs. loosely coupled organizations (Weick, 1976). How

to divisionalize is a complex process (Ethiraj and Levinthal, 2004) and similarly to the

product level, there may not be equifinality in terms of decomposition. While technological

and scientific knowledge enforce a degree of homogeneity for product architectures, at the

organizational level these ‘natural’ limitations apply much less. Though institutional

isomorphism (DiMaggio and Powell, 1983) might impose decompositional limitations,

organization design is a design problem exactly because organizations have many degrees of

freedom in setting up different organizational structures. In particular, task interdependencies

are not just “discovered”, but organizations can actively manipulate these (Levinthal and

Warglien, 1999; Marengo et al., 2000; Fang and Kim, 2018).

Accumulation of systemic knowledge. As organizations gain experience in decomposition,

they build their stock of systemic knowledge, referring to an organization’s understanding of

task interdependencies and how these are allocated (Puranam and Jacobides, 2006; Puranam

et al., 2012). Systemic knowledge allows the organization to divide tasks based on

standardized procedures, as opposed to having to rely on ongoing coordination. Creating

systemic knowledge may require an initial stage of rich communication (Puranam and

Jacobides, 2006), also referred to as integrated problem solving (Von Hippel, 1998) or

technical dialog (Monteverde, 1995). Related to the notion of systemic knowledge is the

concept of common ground, defined as “the sum of their mutual, common or joint

knowledge, beliefs and suppositions” (Clark, 1996). Common ground can be regarded as both

a by-product of accumulating systemic knowledge and a pre-requisite for coordination.6

6 As in the case of product-level partitioning, these are mutually constitutive processes, though for simplicity I assume here that a structural element (i.e. partitioning) precedes the modularization processes that follow this. I thank an anonymous reviewer for highlighting this point.

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Emergence of a consistent task division. The last step towards increasing organizational

modularity involves standardization in terms of establishing a consistent task division.

Organizational architectures become more modular when they interact based on simple,

standardized exchanges (Schilling and Steensma, 2001), allowing organizational units to

specialize and operate with a narrow focus (Ulrich 1995). The resulting standardized

practices, which might be articulated in design rules, plans or schedules, act as the

organizational equivalent of interfaces (Woodard and West, 2011). They reduce the need for

ongoing communication and help regulate expectations among organizational actors

(Langlois and Savage 2000), thereby allowing a consistent task division to emerge

(Narduzzo, Rocco and Warglien, 2000).

In sum, products can become more modular as firms build architectural knowledge, while

organizational modularity increases as firms build systemic knowledge. However, while

increasing modularity may be useful at both levels, which degree of modularity to pursue is in

part a choice individual actors can make. Therefore, firms may decide to focus on more

integral rather than modular architectures, and this choice may depend on the extent to which

they operate within or across firm boundaries. The next section further discusses the role that

intra and inter-firm level modularity plays in relation to those decisions.

Intra-Firm and Inter-Firm Modularity and Implications for Mirroring

After considering the role of architectural and systemic knowledge in relation to product and

organizational modularity respectively, this section focuses on modularity at the intra-firm

and inter-firm level. As mentioned previously, this is an important but sometimes overlooked

dimension to understanding how firms can strategically manage modular designs. Intra- and

inter-firm modularity refers to the extent to which development of modules takes place within

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or across firm boundaries (Schilling, 2000; Staudenmayer et al., 2005).7 Distinguishing

between more integral vs. more modular product architectures and intra vs inter-firm

development, Figure 3 depicts a 2x2 framework constituting four quadrants. For each

quadrant, I analyze how choices in terms of product and organizational architecture affect the

degree to which we observe mirroring (or not) and how these are different for development at

the intra and inter-firm level.8

<<< Insert Figure 3 about here >>>

Quadrant A: integral product architecture – intra-firm development

This quadrant constitutes a more integral product architecture, i.e. characterized by many

functional interdependencies across subsystems. At the intra-firm level, effective product

development is facilitated by ongoing communication and coordination. This suggests that

the organizational architecture benefits from a low degree of modularity. Therefore, a high

degree of mirroring will be observed, where integral products are developed by integral

organizations. Examples of this include the activities of small teams developing customized

craft-oriented products (e.g. watchmaking, musical instruments), new-to-the-world products

based on technological innovation (e.g. the original Segway personal transportation device),

or large-scale diversified firms developing complex products, as described by e.g. Chandler

(1977).

7 It is important to note that across-firm boundary decisions, beyond the issue of modularity, are informed by an economic calculus that has been addressed by transaction cost economics (Williamson, 1975) and the resource based view (Barney, 1991). This discussion is beyond the scope of my study, but I refer to Baldwin (2008) for a comprehensive overview of modularity in the context of transactions and firm boundaries. I thank an anonymous reviewer for highlighting this point.8 As is typical for such 2x2 frameworks, the point is not to suggest that the associated phenomena can be neatly divided into these four segments, but that these ideal types provide a useful way to think about relative differences and dynamics.

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Quadrant B: integral product architecture – inter-firm development

This quadrant refers to more integral product architectures based on inter-firm development.

Here, the organizational architecture can be characterized by a combination of integral and

modular architectures. In particular, a more integral organizational architecture may initially

be required to build architectural knowledge (Henderson and Clark, 1990; Baldwin, 2018)

and understand different functional interdependencies, a role typically performed by systems

integrators (Brusoni et al., 2001; Prencipe et al., 2003; Hobday et al., 2005). These firms need

to actively coordinate and communicate with other organizations involved in developing the

product. However, in doing so, such integrators can facilitate a more consistent task division

that partially increases organizational modularity at the inter-firm level. Therefore, here we

observe what has been called partial mirror breaking (Colfer and Baldwin, 2016), where an

integral product architecture requires both modular and integral organizational architectures.

This is reflected in the relatively modular organizational architecture of the inter-firm supply

chain, while the systems integrator firm managing this development is characterized by a

more integral organizational architecture (Brusoni et al., 2001). Examples of this include

large-scale complex products, where no single firm has the required capabilities to develop

the product by itself. They may constitute the ongoing development of products based on

supply chains (Ro et al., 2007) or a one-off project involving the delivery of a complex

product system (Davies and Hobday, 2005).

Quadrant C: modular product architecture – intra-firm development

This quadrant constitutes modular product architectures developed at the intra-firm level.

Given that functional interdependencies are more standardized and codified, the

organizational architecture can in turn also be more modular. However, the development of

such modular product architectures may initially require more integral organizational

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architecture. This process has also been described as strategic mirror breaking (Colfer and

Baldwin, 2016), allowing firms to develop modular products through non-modular

organization (Brusoni and Prencipe, 2006). Examples of this include firms that have

developed internal product platforms (Gawer, 2014) that allows them to introduce

differentiated products based on recombination of modules (Pil and Cohen, 2006), including

e.g. the Sony Walkman (Sanderson and Uzumeri, 1995) and Black & Decker and its portfolio

of DIY products (Sawhney, 1998).

Quadrant D: modular product architecture – inter-firm development

In this quadrant the product architecture is more modular, while development takes place at

the inter-firm level. We can distinguish two general types of organizational architectures,

which depend on the overall degree of product modularity. For products characterized by a

very high degree of modularity (especially at the system level), the organizational

architecture too is generally expected to be more modular. Here, standardized interfaces have

widely diffused thereby allowing a type of embedded coordination (Sanchez and Mahoney,

1996) to emerge. Settings where this high degree of mirroring has been observed have also

been referred to as modular clusters (Baldwin and Clark, 1995; Baldwin and Woodard, 2007)

or modular production networks (Sturgeon, 2002). This quadrant therefore encompasses the

frequently mentioned examples of highly modular products such as desktop PCs, stereo

systems, and bicycles (Langlois and Robertson, 1992). However, beyond these archetypical

illustrations, it is also important to consider alternative cases of product modularity. In

particular, products can exhibit a high degree of modularity, yet functional interdependencies

remain that require explicit inter-firm coordination. In these situations, modular product

architectures are not necessarily mirrored at the organizational level. Instead, systems

integrators continue to play a key role even for relatively modular product architectures.

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Examples include high-tech industries where specific firms are responsible for the integration

of various components, for instance gaming consoles and smartphones (Hagiu, 2014). I refer

to these types of settings as systems integrator-led ecosystems, which can be understood as a

specific type of business ecosystem (Adner, 2017; Jacobides et al., 2018). This contrast with

modular clusters exemplified in the case of PCs, stereo systems, and bicycles, where

ecosystems are based on embedded coordination. Explicitly distinguishing these types is

useful given the implications for how value is created and captured among firms operating in

these different types of ecosystems (Jacobides et al., 2016).

Intra and Inter-firm Dynamics across the Product Lifecycle and Design Hierarchy

Having introduced the main quadrants that comprise the framework and their implications for

mirroring, I now consider dynamics between quadrants. I focus on how firms can navigate

both changes in product architecture (in pursuing a more integral or modular architecture)

and shifts between intra or inter-firm development. Therefore, two types of modularization

processes can be distinguished: from more integral to modular product architectures (and vice

versa); and from intra-firm to inter-firm development (and vice versa). I focus on

opportunities that arise in terms of their location in the design hierarchy, i.e. at the system or

component level (Clark, 1985) and consider at what stage of the product lifecycle (Anderson

and Tushman, 1990) they may be more feasible.9 I end each subsection with a proposition.

Figure 4 provides a visual illustration of these different dynamics.

<<< Insert Figure 4 about here >>>

9 For simplicity, I focus on two levels within a design hierarchy: (1) the overall system level and (2) the underlying components that comprise the system. Of course in practice products often comprise multiple levels, from the system, to sub-system, to sub-sub-system, and so forth.

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Quadrants A–C: Intra-firm development of integral or modular product architecture

A key reason to pursue a more modular product architecture is to reduce complexity (Ulrich,

1995) and enable product flexibility (Schilling, 2000; Pil and Cohen, 2006). To do so, firms

require architectural knowledge of the functional interdependencies that comprise the product

architecture (Henderson and Clark, 1990), which typically only accumulates over time.

Therefore, in the nascent stages of a product innovation, an integral architecture will be most

effective, while opportunities to pursue product modularization are expected to arise in the

later stages of the product lifecycle (Christensen et al., 2002; Chesbrough, 2003).

In turn, firms may introduce a more integral product when such an architecture allows

performance-based differentiation from its competitors. These situations arise when firms

build architectural knowledge that allows it to introduce a product architecture based on tight

coupling of components that results in superior performance (Baldwin, 2018). An example of

this is provided by Fixson and Park (2008), who analyze how Shimano introduced a superior

bicycle drivetrain, which was previously based on modular components. This illustrates that,

as firms develop architectural knowledge, they may realize that a lower degree of product

modularity can be more competitive than a more modular design. It is therefore important to

recognize that integral product architectures can be effective in different periods of the

product lifecycle, not just during its early stages (Christensen et al., 2002). Further

emphasizing this, Cacciatori and Jacobides (2005) show how a mature industry (UK

construction) eventually shifted towards re-integration, driven by a combination of individual

firms’ capabilities and broader institutional changes.

In both cases, a key challenge for firms attempting to pursue a more integral or modular

product design is to recognize which configuration of modules will be important

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technologically and strategically, and whether to focus on the system or component level in

doing so (Clark, 1985; Murmann and Frenken, 2006). Firms that have the requisite

architectural knowledge are better positioned to recognize when a window of opportunity

opens to pursue modularization or integration, and at what level of the design hierarchy to

achieve this. Overall, this leads to the following proposition:

(P1) At the intra-firm level, in periods of technological change firms can draw on

architectural product knowledge to consider:

what degree of modularity to pursue across the product lifecycle

whether to prioritize system or component development

Quadrants B–D: Inter-firm development of integral or modular product architecture

At the inter-firm level, firms will focus on product modularity when opportunities emerge to

pursue such architectures in conjunction with other organizations. There are different ways to

pursue such a strategy. Firms might focus on control and ownership of key modules, also

referred to as bottlenecks, that allows them capture profits (Jacobides and Tae, 2015;

Baldwin, 2018). An alternative approach is to follow a strategy based on opening up these

control points (Alexy et al., 2013; Henkel et al., 2014). Firms may benefit from such

openness when, for instance, its business model allows it to capture value in other parts of the

architecture. As further illustrated in the case of the PC, the perception of such opportunities

may be heterogeneously distributed. In-depth architectural knowledge can help firms to

effectively pursue such opportunities. However, as shown in the automotive industry, firms

may err in their attempts to modularize, based on incorrect assumptions about module

boundaries and interactions with suppliers (MacDuffie, 2013).

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Conversely, inter-firm development may move to integral product designs when complexity

persists, yet no single firm has the requisite capabilities to develop the entire product. Such

situations are common in high-tech industries, where the rate of change in knowledge bases

usually necessitates inter-firm development. When products are relatively integral, systems

integrators are essential to coordinate tightly coupled subsystems of which the underlying

knowledge may nevertheless be distinct (Pavitt, 2003). The literature on systems integration

has focused on the capabilities required to effectively fulfill this role (Prencipe et al., 2003).

While cyclical views on technological change suggest that product architectures generally

start more integrated and become more modular over time (Fine, 1998), it is important to note

that product architectures may continue to remain relatively integral even as the industry

matures. Similar to the intra-level, it is therefore important to recognize at what level in the

design hierarchy opportunities for integration or modularization emerge. Such decisions can

be even more challenging at the inter-firm level, given that knowledge is unevenly distributed

across firms. As highlighted by Brusoni et al. (2001), this is a key reason why systems

integrators need to have knowledge bases in excess of what they themselves develop. These

dynamics can be summarized in the following proposition:

(P2) At the inter-firm level, in periods of technological change firms can draw on

architectural product knowledge to consider:

whether product interdependencies enables control through systems integration

whether value will accrue to systems integrators or modular specialists

whether opportunities emerge to strategically control or open up control points

Quadrants A–B: Integral product architecture through intra or inter-firm development

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Integral product architectures may shift to the intra-firm level when there are concerns

relating to proprietary knowledge or trade secrets that preclude inter-firm collaboration. This

is the case when knowledge is complex and patenting is difficult (Spender and Grant, 1996).

Such situations may be especially prevalent in new-to-the-world innovations, where both the

product architecture is usually more integral, and concerns about knowledge spillovers may

be particularly pronounced. Such situations are more likely in the early stages of the product

lifecycle. The extent to which this mode of development is feasible also depends on a firm’s

scale and scope (Chandler, 1990). In settings where large conglomerates are common, shifts

towards intra-firm development are expected to occur more frequently.

In contrast, integral product architectures will move to inter-firm development when IP

related spillovers are less of a concern. Here firms need to develop a “shared grammar”

(Argyres, 1999) or common ground (Srikanth and Puranam, 2011) that allows them to

collaborate even in the absence of modular designs. In these situations, collaborative

capabilities are required, which may be built up through cumulative experience across

projects (Prencipe and Tell, 2001). While in some of these collaborations there is no clear

lead partner, often a systems integrator will be required to coordinate such efforts. All else

equal, it is more likely in the later stages of the product lifecycle for these collaborations to

occur, given the time it takes to establish such an inter-firm task division. This suggests the

following proposition:

(P3) For integral product architectures, in periods of technological change firms can draw

on systemic organizational knowledge to consider:

the risk of knowledge spillovers beyond the focal firm’s boundaries

whether the firm can effectively partition tasks to enable inter-firm collaboration

20

Quadrants C–D: Modular product architecture through intra or inter-firm development

Modular product architectures may move to the intra-firm level when a single firm is able to

effectively modularize a product architecture and develop its individual components. This

usually requires scale and scope, as well as substantial architectural and systemic knowledge.

Here, the focal firm needs to be able to have knowledge of both the system level and

individual components to be able to effectively modularize the product. This mode of

development is feasible in for products that are relatively non-complex, as in the

aforementioned examples of the Sony Walkman and Black & Decker’s DIY tools. Firms

might also benefit from “permeable” architectures that help structure activities in its value

chain (Jacobides and Billinger, 2006).

Conversely, modular product architectures move to the inter-firm level for a variety of

reasons. First, inter-firm development is facilitated by the presence of standardized interfaces.

As observed in the case of the IBM PC, the diffusion of such interfaces may be unanticipated

and occur involuntarily. This may happen in particular when other firms see opportunities to

profit from developing particular components of the design hierarchy. Such opportunities to

shape the overall system architecture are particularly prevalent in the early stages of the

product lifecycle, when the technological architecture is in flux, though the competitive

landscape is also highly uncertain at this stage (Mumann and Frenken, 2006). Second, when

there are gains from trade, inter-firm collaboration is more likely to occur (Jacobides, 2005).

Diffusion of interfaces may of course also be voluntary. In particular, when knowledge can

be protected by modularization in self-contained subsystems (Grunwald and Kieser, 2007;

Henkel et al., 2013), inter-firm development can take place. Based on this I formulate the

following proposition:

21

(P4) For modular product architectures, in periods of technological change firms can draw

on systemic organizational knowledge to consider:

whether it can compete through intra-firm systems integration

whether standardized interfaces drive inter-firm modular specialization

ILLUSTRATING INTRA AND INTER-FIRM MODULARITY:

COMPUTING AND AUTOMOTIVE

This section introduces two brief empirical illustrations that show how modularity was used

in computing and automotive. These settings were chosen as they can be regarded as

canonical cases that have informed our understanding of modularity (MacDuffie, 2013) and

can therefore help elucidate contrasting dynamics of intra and inter-firm modularity.

Personal Computers (PCs)

The initial architecture of computers, as is typical for technologically innovative products,

was more integral (Baldwin and Clark, 2000) and can originally be located in quadrant A.

Over time, functional interdependencies became increasingly standardized and codified.

Around the time of the micro-computing market segment in the late 1970s (Langlois and

Robertson, 1992) the product architecture started to become increasingly modular, thereby

positioning the product in quadrant C.

When IBM launched its personal computer in 1981, it too pursued a modular architecture,

using a combination of intra and inter-firm development. In particular, it outsourced

development of the chipset and operating system to Intel and Microsoft respectively.

Therefore this stage involves a combination of quadrants C and D. Once a rival PC maker

(Compaq) reverse engineered IBM’s proprietary BIOS in 1982, the product architecture

22

further modularized and development became increasingly concentrated at the inter-firm

level (Baldwin and Woodard, 2009). The resulting model, which can be located in quadrant

D, exemplifies a modular cluster, where each component in the product architecture is

mirrored at the organizational level by one or more firms.10 The PC case shows the

importance of having control over key components, and how misinformed perceptions may

have major long-term strategic consequences for the firms involved. Here, IBM perceived –

incorrectly – that the BIOS subsystem would allow it to maintain control of the product

architecture (Baldwin and Woodard, 2009) and eventually exited the PC market altogether.

More recent developments in personal computing, in particular the laptop segment, show a

move towards less modular product designs (Kawakami, 2011). Inter-firm development still

plays an important role, thereby locating this market in Quadrants C and D. Apple, a firm that

compared to the IBM PC adopted a more integral product architecture from the outset

(Baldwin and Woodard, 2009), faced challenges creating and capturing value when Intel and

Microsoft dominated the PC industry. However, as the market matured, Apple’s more

integrated approach turned out to be a profitable model in the later stages of the PC market

(Worstall, 2013).

Overall, while the PC industry is generally known for being highly modular, both at the

product level and in terms of inter-firm modularity, other patterns can also be observed. We

have seen movement towards increased product modularity, but more recently also in the

other direction. Further, each development model may be profitable depending factors such

as the stage of the product life cycle and shifts in market preferences. This setting also shows

10 Helpfully for Intel and Microsoft, each firm ended up dominating their respective segments, allowing them to reap a substantial share of overall industry profits (West, 2003).

23

unanticipated shifts from intra to inter-firm development, and how such misperceptions can

have long-term strategic implications.

Automotive

Next, we consider the use of modularity in the automotive industry, which provides a useful

contrast to computing. Not only is its product architecture less modular, there were attempts,

partly inspired by the PC industry, to increase product and organizational modularity. In

considering changes in modularity in the automotive industry, I focus on the period starting

in the early 1990s.11 Initially, we can plot the product architecture of the automobile in

quadrant A, where a largely integral product architecture was based mostly on intra-firm

development. Managers in the automotive industry were interested in modularizing the

product architecture based on then-recent changes in the PC industry. The goal was to focus

more on inter-firm development, in particular outsourcing, as well as an increased focus on

product modularity (MacDuffie, 2013). This trajectory would locate the automotive industry

in quadrant D rather than A.

However, as described in detail in several studies (Sako, 2003; Zirpoli and Becker, 2011;

MacDuffie, 2013) these attempts in moving towards quadrant D were not entirely successful.

In particular, Ford attempted, mostly unsuccessfully, to define modules (referred to as

“chunks” by managers), which consolidated mega suppliers would develop. Furthermore,

unlike in the PC market, industry-wide standards did not emerge. Importantly, several key

interdependencies turned out to be impossible to resolve through standardized interfaces, in

particular around a vehicle’s performance characteristics such as noise, vibration, and

11 Many of these insights have been derived from research associated with the IMVP network, a multi-year research project that focused explicitly on modularity in the global automotive industry The origins of this project is described in more detail in MacDuffie (2013).

24

harshness. Hyundai Motor’s approach to modularization provides a partial contrast to this, as

it was able to more effectively define several distinct modules that its suppliers would focus

on. Contrasting with Ford, Hyundai recognized that integration remained crucial around

many components, and that ongoing coordination often continued to be important

(MacDuffie, 2013).

As such, instead of a direct move from quadrant A to D, we can best characterize the

modularization process in the automotive industry as moving from quadrant A to both

quadrants B and C. Quadrant B applies to activities at the overall system level, where the

systems integrator remains crucial for ongoing coordination of the supply chain. Quadrant C

is relevant given that for specific subsystems and components, relatively modular

standardized intra-firm platforms were used. Overall, the automotive industry provides an

important counterpoint to understanding the dynamics of intra and inter-firm modularity.

While certainly modular designs are used in the automotive industry, particularly at the

component level, the ongoing need for integration at the overall system level means that

inter-firm dynamics are quite different from those observed in computing.

CONCLUDING REMARKS

This paper has developed a conceptual framework to understand the dynamics of intra and

inter-firm modularization and how firms can strategically manage this process. In so doing, it

synthesizes various literatures that inform these decisions, connecting the modularity

literature (Sanchez and Mahoney, 1996; Baldwin and Clark, 2000) to work on knowledge and

systems integration (Brusoni et al., 2001; Prencipe et al., 2003; Tell et al., 2017), product

lifecycles and design hierarchy (Anderson and Tushman, 1990; Clark, 1985), and platform

25

ecosystems (Gawer, 2014; Adner, 2017; Jacobides et al., 2018). Overall, the key

contributions of this paper can be summarized as follows.

First, this study introduces a simple 2x2 framework that both draws on and helps integrate

existing literature on product and organizational modularity. In particular, the framework

focuses on the sometimes overlooked process of modularization at the intra and inter-firm

level (Baldwin and Clark, 2000; Schilling, 2000; Staudenmayer et al., 2005), highlighting the

strategic implications for firms navigating these settings. This framework also helps inform

recent work on mirroring between products and organizations (Cabigiosu and Camuffo, 2012;

Colfer and Baldwin, 2016; Sorkun and Furlan, 2017). In particular, it shows why in the case

of inter-firm development of modular product architectures, mirroring may not be effective,

especially when systems integration remains crucial. It is important to recognize that the

different quadrants need not be mutually exclusive as over time activities may co-exist in

multiple quadrants. This study also helps connect work on modularity to differences in the

way firms navigate platform ecosystems (Gawer, 2014; Adner, 2017; Jacobides et al., 2018).

In particular, the framework shows why the way ecosystems are managed can differ in ways

that may appear small but can be highly significant. This is key when systems integrators

remain crucial for managing subsystems, as opposed to embedded coordination through

standardized interfaces. In the case of integrator-led ecosystems, systems integrators may be

able to retain strategic control of the technological trajectory of the ecosystem. In turn, in

modular clusters such as the PC industry, modular specialists can have control in terms of

technology and value capture. The contrasting dynamics in computing and automotive

(MacDuffie, 2013) show the importance of recognizing which pattern more closely matches

the setting in which a firm operates.

26

Second, the paper focuses on modularization as a process rather than outcome (MacDuffie,

2013) and shows how a product’s lifecycle and design hierarchy play a key role in affecting

these dynamics. Architectural opportunities for both modularization and integration can arise

at different stages of the product lifecycle (Anderson and Tushman, 1990). In turn, a

product’s design hierarchy in terms of systems and components (Clark, 1985) affects where

modularization takes place, thereby recognizing that modularity and integration may co-exist

at different levels of the design hierarchy. This strategic perspective on how firms manage

interdependencies draws from the well-established literature on technology lifecycles and

dominant designs (Utterback and Abernathy, 1975; Murmann and Frenken, 2006) and

connects this to more current work on knowledge and systems integration (Brusoni et al.,

2001; Prencipe et al., 2003; Tell et al., 2017). In particular, it focuses on understanding at

what stage in the product lifecycle opportunities for integration or modularization emerge,

and at what level of the design hierarchy these opportunities manifest themselves. By drawing

attention to these “when and where” questions, it helps explain why, in the same industry,

firms focused on systems integration may co-exist with specialized modular firms, and how

their relative effectiveness can shift over time. This view helps extend existing work that

assumes integration in the initial stages of a new technology and modularity for more mature

technologies (Christensen et al., 2002).

Therefore, this perspective on deciding at what stage of the product lifecycle to focus on

modularity or integration, and whether to do so at the systems or component level, points to

the intricacies of modularization and explains why navigating this process can be so

challenging. As emphasized in the product lifecycle literature, the early stages of product

innovation are typically characterized by a high variety of technological designs, which can

later converge into a dominant design (Murmann and Frenken, 2006). As such, while

27

opportunities to define key elements of a product architecture (whether at the system or

component level) are higher at the early stages of the product lifecycle, this nascent period is

also characterized by a great level of uncertainty (Santos and Eisenhardt, 2009; Benner and

Tripsas, 2012; Hannah and Eisenhardt, 2017). Operating in such settings can therefore be

daunting, hence the importance of developing both architectural and systemic knowledge.

Architectural product knowledge is crucial to understand at which level and to what extent

modularization can be effectively pursued. In turn, systemic organizational knowledge helps

firms consider how to organize such tasks, and which combination of intra or inter-firm

development can be most suitable to achieve this.

This view on architectural change also helps explain different firm actions observed in our

empirical illustrations. In IBM’s case, it intended to capture value by a system focus at the

intra-firm level, while unforeseen actions by competitors enabled its evolution towards a

component focus at the inter-firm level. In the automotive industry, car makers anticipated

they could introduce modularity at the overall system level, whereas this turned out to be

more feasible at the component level. These challenges demonstrate the importance of

architectural and systemic knowledge in helping firms navigate the turbulent dynamics

during periods of rapid technological change.

Third, the contingent perspective developed in the framework may reconcile diverging

perspectives on the role of modularity and inter-firm coordination. Here, several authors have

emphasized how modular interfaces may substitute for organizational coordination (Sanchez

and Mahoney, 1996; Sturgeon, 2002), further exemplified in the “vanishing hand” hypothesis

introduced by Langlois (2003). This can be contrasted with studies that have noted the

ongoing importance of firms that need to coordinate disparate knowledge bases and

28

technological subsystems (Pavitt, 2003), in particular in research on systems integrators

(Brusoni et al., 2001). The framework developed in this paper instead proposes a contingent

perspective: both perspectives can be true, but may depend on product or industry related

characteristics. For example, industries marked by higher degree of interface codification

(e.g. IT or electronics based industries) have often been the focus of research emphasizing

increases in modularity (e.g. Langlois and Robertson, 1992; Sturgeon, 2002). This contrasts

with settings characterized by lower degree of standardization in interface codification, such

as aerospace and automotive, settings investigated in research on systems integration

(Prencipe et al., 2003). In these latter cases, ongoing mechanical interdependencies – as

opposed to informational – continue to play a key role.

This paper also has implications for practitioners. While managers may intuitively grasp that

there are important sectoral differences in modularity, the framework can give theoretical

grounding to understand these differences, and consider at what level modularity or

integration can best be applied. As always, there are limitations to this study, and similar

boundary conditions apply to the framework introduced in this paper. First, most of the

settings the paper focuses on are characterized by a relatively high degree of complexity and

a rapid rate of technological change. It also focuses on products rather than service based

industries. Therefore, for settings where these characteristics are different, the framework

may be less relevant. Second, the framework has largely ignored public policy and socio-

economic implications of modularization. For example, an underlying motivation for

increasing modularity at the product or organizational level might be to facilitate outsourcing

or offshoring to lower wage countries, which may lead to employee resistance.12 For

example, the term modularity was met with great resistance in the automotive industry, since

12 However, firms might also modularize organizational processes without relying on external suppliers (Hoetker, 2006).

29

it was perceived by labor unions as a euphemism for offshoring (Sako, 2003). Further,

offshoring may have longer-term implications for the innovative potential of regional

clusters, further highlighting potential macro-level policy questions (Pisano and Shih, 2009).

Finally, the framework points to multiple avenues for further work. First, this paper has

focused on the modularization process in terms of degree of modularity and intra or inter-firm

development. Such a view presupposes some degree of change, though in some sectors

persistence of architectures rather than change may be the norm. Future studies could more

explicitly consider what drives the persistence of integral or modular designs, which may be

theoretically distinct from shifts towards higher or lower degrees of modularity. Second,

future work on inter-firm modularity could also draw more deeply on the burgeoning

literature on open strategies. Besides the literature on open innovation (Chesbrough, 2006),

one stream of work has focused specifically on when firms might focus on opening up

modules (Alexy et al., 2013; Henkel et al., 2014), rather than owning and controlling these.

Such a strategy is predicated on both inter-firm development as well as some degree of

product modularity. Further studies could draw on the framework to analyze under what

conditions firms might effectively pursue such a strategy.

30

TABLES AND FIGURES

Table 1: Key conceptsConcept Description Illustrations Key

referencesArchitectural Product Knowledge

Understanding of a product’s functional interdependencies and the impact of changes to the overall system or its individual components

Allows firms to identify a system’s technical or strategic bottlenecks (Microsoft and DOS) or opportunities for bundling and integration of components (Shimano bicycle drivetrain)

Henderson & Clark (1990); Baldwin, (2018)

Systemic Organizational Knowledge

Understanding of an organization’s task interdependencies and the impact of changes to task boundaries and how these are allocated

Allows firms to identify task boundaries (organization design choices, e.g. divisionalization) and their internal and external prioritization (influencing decisions around e.g. “open innovation”)

Puranam & Jacobides (2006); Puranam et al. (2012)

Intra and inter-firm modularity

The extent to which development of a system and its components takes place within and/or across firm boundaries

Shaped by the focal firm’s knowledge and capabilities (e.g. Apple and integration into mobile chipsets), affecting e.g. partnerships and outsourcing decisions of systems and components (e.g. Apple’s manufacturing partners)

Schilling (2000); Staudenmayer et al. (2005)

Figure 1: Product modularity and architectural knowledge

Partitioningof functional

interdependencies

Codification into standardized

interfaces

Accumulation of architectural knowledge

Figure 2: Organizational modularity and systemic knowledge

Organizational partitioning (e.g. divisionalization)

Accumulation of systemic

knowledge

Emergence of consistent

task division

31

Figure 3: Intra and inter-firm modularity: examples and implications for mirroring

Focus onIntra-FirmDevelopment

Focus onInter-Firm

Development

Customized Products:Crafts-Based Products (e.g. watchmaking, musical instruments)New-to-the-world Innovations(e.g. Segway)

High degree of mirroring: integral product and organizational architecture

Modular Clusters:Modular products allowing modularity-in-use(e.g. Personal Computer, stereo systems)High degree of mirroring: modular product and organizational architecture

Complex Product Systems:Development of complex products through e.g. supply chains or project-based organization (e.g. automobiles)Partial mirror breaking: integral product architecture; organizational architecture based on systems integrator firm and modular inter-firm development

Internal Product Platforms:Differentiated products based on modular product architectures (e.g. Sony Walkman)

Strategic mirror breaking: modular product architecture enabled by integral organizational architecture

Integrator-Led Ecosystems:Modular products developed by systems integrators(e.g. gaming consoles, smartphones)Partial mirror breaking: modular product architecture; organizational architecture based on systems integrator firm and modular inter-firm development

A B

C D

Product ArchitectureMore Integral

Product ArchitectureMore Modular

Figure 4: Intra and inter-firm modularity: dynamics and the role of architectural and systemic knowledge

Focus onIntra-FirmDevelopment

Focus onInter-Firm

Development

A B

C D

Product ArchitectureMore Integral

Product ArchitectureMore Modular

(P1) Develop architectural product

knowledge to understand degree of

product modularity and whether to prioritize system or component

development

(P2) Develop architectural product

knowledge to understand whether to

pursue opportunities for integration or modularization

(P3) Develop systemic organizational knowledge to understand risk of knowledge spillovers and opportunitiesfor inter-firm collaboration

(P4) Develop systemic organizational knowledge to understand whether firm has

capabilities for systems integration or standardized interfaces drive

modular specialization

32

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