Innovation, Modularity, and Vertical Deintegration: Evidence from the Early U.S. Auto Industry

Abstract

Although vertical integration choices have been found to significantly affect firm performance, there has been little empirical study of how such choices are affected by the stage of industry evolution in which firms find themselves. We empirically investigate two possible impacts of increasing modularity on a firm's vertical integration choices. First, we hypothesize that increasing modularity is associated with vertical deintegration because of the high-level standardization of components that dominant designs tend to promote. Second, we posit that firms selling in higher market segments, because they are attempting to differentiate their products by incorporating unique components with less-modular interfaces with other components, will tend to be more vertically integrated than their lower-price rivals. We find evidence for both of these effects in data from the early U.S. auto industry.

Persistence of Integration in the Face of Specialization: How Firms Navigated the Winds of Disintegration and Shaped the Architecture of the Semiconductor Industry

“…Many industries, however, are characterized by a continued persistence of integrated firms despite a trend towards vertical disintegration (Christensen et al, 2002;Argyres and Bigelow, 2010;Helfat and Campo-Rembado, 2010;Kapoor and Adner, 2011). In this study, I explore the underlying drivers of such persistence by considering how integrated incumbents may respond to shift in the industry's vertical structure by reconfiguring their capabilities and reshaping their boundaries in order to achieve a better fit with the new environment.…”

“…Consistent with this view, scholars have provided empirical evidence from a number of industries showing that integrated incumbents either conform to the specialized mode as industry matures or risk inferior performance and industry failure (e.g., Langlois, 1992;Langlois and Robertson, 1992;Christensen, 1993;Fine, 1998;Jacobides, 2005). Many industries, however, are characterized by a continued persistence of integrated firms despite a trend towards vertical specialization (e.g., Argyres and Bigelow, 2010;Helfat and Campo-Rembado, 2010;Kapoor and Adner, 2011;Qian, Agarwal and Hoetker, 2011). Hence, while the stylized pattern of the shift from integration to specialization over the 3 industry's life cycle appears to hold across numerous contexts, there seems to be significant variance across industries in the extent of this shift.…”

“…First, it is inconsistent with the fact that many industries are characterized by the coexistence of both vertically integrated and specialized firms over extended periods of time (Helfat and Campo-Rembado, 2010;Kapoor and Adner, 2011;Colfer and Baldwin, 2010;Argyres and Bigelow, 2010;Qian et al, 2011). Christensen et al (2002) and Argyres and Bigelow (2010) have argued and provided evidence that integrated and specialized firms can coexist in the same industry by pursuing distinct competitive positions that focus on either low cost or product differentiation.…”

“…Christensen et al (2002) and Argyres and Bigelow (2010) have argued and provided evidence that integrated and specialized firms can coexist in the same industry by pursuing distinct competitive positions that focus on either low cost or product differentiation. A complementary explanation has been provided by Helfat and Campo-Rembado (2010) who distinguish between capabilities within each stage of production and integrative capabilities that are required to coordinate the different stages of production.…”

Managing Technological Change in the Digital Age: The Role of Architectural Frames

“…Specialized suppliers are in a much better position than the product-developing firm to offer low unit prices as their fixed costs can be distributed across a higher volume (Sturgeon 2002). Even though market segmentation matters for integration decisions (Argyres and Bigelow 2010), decomposition of products provides the basis for vertical disintegration (Christensen 2006) and allows firms to benefit "from the external capabilities of the entire economy" (Langlois 2003, p. 375). As a result, the 1990s witnessed the emergence of modular clusters (Baldwin and Clark 2000) and modular production networks (Sturgeon 2002) that Garud and Kumaraswamy (1995) succinctly refer to as an economics of substitution.…”