The Power of Integrality: Linkages between Product Architecture, Innovation, and Industry Structure

Abstract

A substantial literature stream suggests that many products are becoming more modular over time, and that this development is often associated with a change in industry structure towards higher degrees of specialization. These developments can have strong implications for an industry’s competition as the history of the PC industry illustrates. To add to our understanding of the linkages between product architecture, innovation, and industry structure we develop detailed product architecture measurements based on a previously proposed method (Fixson, 2005) and study an unusual case in which a firm – through decreasing its product modularity – turned its formerly competitive industry into a near-monopoly. Using this case study we explore how existing theories on modularity explain the observed phenomenon, and show that most consider technological change in rather long-term dimensions, and tend to focus on efficiencyrelated arguments to explain the resulting forces on competition. We add three critical aspects to the theory that connects technological change and industry dynamics. First, we suggest integrating as a new design operator to explain product architecture genesis. Second, we argue that a finer-grained analysis of the product architecture shows the existence of multiple linkages between product architecture and industry structure, and that these different linkages help explain the observed intra-industry heterogeneity across firms. Third, we propose that the firm boundary choice can also be a pre-condition of the origin of architectural innovation, not only an outcome of efficiency considerations.