The power and limits of modularity: A replication and reconciliation

Abstract

Research Summary: We ask two questions: First, what are the underlying mechanisms that explain the power of modularity? Second, is the power of modularity robust in nonmodular problems? We replicate and then reconcile the key results in two prior models on modularity: E&L and S‐search. Our results yield several important insights. First, a significant portion of the advantage enjoyed by S‐search is attributed to multi‐bit mutation. Second, organization‐evaluation needs to be used in combination with multi‐bit mutation. Third, when the underlying problem structure becomes nonmodular, S‐search outperforms E&L search, even though the advantage is reduced. More generally, organizational designers need to pay close attention to how different elements of modular search interact, and avoid making incremental adjustments. Managerial Summary: Modularity in product or organizational design is an approach that divides a system into smaller modules and attempts to augment the system level performance by experimenting with new modules. Because of its potential benefits such as parallel problem solving, adaptability in turbulent environment, or high speed in experimentation, both scholars and practitioners subscribed to the “power of modularity” thesis. Despite its popularity, there are significant number of cases where the superiority of modular design does not hold. We compare and contrast two representative prior studies that had different views on modeling organizational evolution under a modular design principle. By doing so, we are able to uncover what contributes to the superiority of modular design. Our results suggest that, when conducting experimentation under a modular design, it is important to (a) experiment multiple decision components simultaneously within a single module; and (b) allow evaluation of the changes to be made by the module‐level manager not by the organization‐level manager. When the manager does not know whether the modularity in organizational design fits with the modularity in the task, it is advised to do multiple experimentation in a single module at a time while allowing the organization‐level manager to evaluate the changes.

Two Faces of Decomposability in Search: Evidence from the Recorded Music Industry 1995-2015

“…Our finding highlights that the performance target plays an essential role in search, especially under imperfect evaluation. With these findings, this study bridges two core tenets of the behavioral theory of the firm: the tenet of the architecture on complexity (e.g., Simon 1962, Ethiraj and Levinthal, 2004, Fang and Kim, 2018 and the tenet of the performance target and aspiration level (e.g., Cyert andMarch, 1963, Greve, 2003).…”

“…Subsequent theoretical studies have shown that decomposability helps firms discover a promising option by facilitating module-level experimentations (i.e., producing more variations) (Kogut and Bowman, 1995, Baldwin and Clark, 2000, Marengo, Dosi, Legrenzi, & Pasquali, 2000, Ethiraj and Levinthal, 2004, Fang and Kim, 2018. As Knudsen and Levinthal (2007) note, a critical facet has been largely underexplored in this tradition, namely, how firms select and retain the promising ones among experimented options.…”

Does supplier involvement enhance financial performance? The encapsulation effects of product modularity and smartness

“…The NK model describes the rugged fitness landscape of complex problems, where the peaks represent alternative solutions generated by decision sets (N) and their interdependencies (K) (Levinthal, 1997;Caner et al, 2017;Fang and Kim, 2018). According to the NK model, new product development comprises complex problems that cause high task uncertainties with high information processing requirements (Tushman and Nadler, 1978;Fleming and Sorenson, 2001;Ethiraj and Levinthal, 2004;Baumann et al, 2019).…”

Focus in Searching Core–Periphery Structures

“…Hierarchy and decomposability, in turn, are key drivers for the efficacy of search (Ethiraj and Levinthal 2004a, c;Simon 1962). Interestingly, while prior research has emphasized the importance of near decomposability (Fang and Ji-hyun 2018;Simon 2002), research on hierarchy has not similarly examined the effects of different "degrees of hierarchy". This is the more surprising given that most organizations in real world contexts are only nearly hierarchical rather than fully hierarchical (see, Rivkin and Siggelkow (2002) or Black et al (1999) for examples).…”