It is widely acknowledged that modularity, as an approach to both product design and organization design, provides product developing firms with dynamic capabilities that allow them to more effectively respond to changes in the environment. However, the innovation literature is silent on how such dynamic capabilities might require reconfiguration as firms in traditional industries embed digital technology into their products. Drawing on theories of modularity, capability, and software engineering, we therefore conducted a multi-level study of car navigation technology. On the industry level, we investigated how automakersâ traditional hierarchical control over the innovation process was challenged as they faced multiple digital options for navigation systems design. On the firm level, we investigated how one large automaker exploited these options by reconfiguring modularity and distributing control over the innovation process. The paper makes two inter-related contributions. First, we extend the innovation literature by identifying and characterizing a capability gap that product developing firms in traditional industries face if they merely accommodate digital technology within the confines of current approaches to modularity. Second, we present
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