Modularity and Innovation in Complex Systems

The problem of designing, coordinating, and managing complex systems has been central to the management and organizations literature. Recent writings have tended to offer modularity as, at least, a partial solution to this design problem. However, little attention has been paid to the problem of identifying what constitutes an appropriate modularization of a complex system. We develop a formal simulation model that allows us to carefully examine the dynamics of innovation and performance in complex systems. The model points to the trade-off between the destabilizing effects of overly refined modularization and the modest levels of search and a premature fixation on inferior designs that can result from excessive levels of integration. The analysis highlights an asymmetry in this trade-off, with excessively refined modules leading to cycling behavior and a lack of performance improvement. We discuss the implications of these arguments for product and organization design.

Allocation of inventive effort in complex product systems

This paper examines the allocation of inventive effort in complex product systems. I argue that complex product systems, e.g., personal computers (PCs), are distinguished by functional interaction among several components, each guided by a relatively autonomous bundle of technical and economic characteristics. I try to explore whether the dynamics of such interactions between components of complex product systems can help us understand changes in the relative allocation of inventive effort. I advance and empirically test three hypotheses: (1) emergence of component constraints (bottlenecks) in product systems will trigger research and development (R&D) investment to resolve the constraints; (2) slack component firms have a strong incentive to invest in resolving component constraints; and (3) the incentive of slack component firms to invest in resolving component constraints is increasing in their prior sunk R&D investments in slack components. In sum, I argue that interactions between components in a product system conditions the R&D incentives of firms and also that the incentives are increasing in their prior investments or capabilities. Using product reviews from technical journals, I trace the constraint components in the PC from 1981 to 1998 and attempt to predict shifts in the allocation of inventive effort in the subsequent period. The empirical results strongly support all three hypotheses. This study highlights the paradoxical effect of modularity in complex product systems. Modular design architectures, while contributing to accelerating the pace of technical change, also tend to limit the economic benefits of firms' component R&D efforts, especially when different components technologies are progressing at different rates. This often creates an impetus to enlarge the scope of firm R&D activities beyond the component product markets that firms operate in. Other implications for R&D decision making are discussed. Copyright © 2007 John Wiley & Sons, Ltd.Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/56000/1/622_ftp.pd

Performance effects of imitative entry

This article examines how waiting to imitate a product affects the performance of the imitator compared to the innovator. Specifically, we address two research questions. Under what conditions does imitation erode the advantage of the innovator? What strategies of imitators help overcome the innovator's advantage? Our main argument is that the increasing availability of information on the innovator's product increases the imitator's returns to waiting. With this increasing availability of information, imitators' products transition from those that are horizontally differentiated (products are similar in quality but differ in their attributes) to those that are vertically differentiated (products differ in quality). Thus, we hypothesize that shifts in the nature of competition over time from horizontal differentiation to vertical differentiation account for why the innovator's advantage is not preserved. Imitation timing simply reflects the uncertainty inherent in imitation efforts. One such uncertainty is the extent of product differentiation that the imitator can achieve. We develop several hypotheses that elaborate this basic intuition. We obtained detailed data on innovator-imitator competition in the branded drug industry to test the hypotheses. All our hypotheses are supported. The main contribution of the article is in showing that the nature of product differentiation in product categories is endogenous to the imitative entry decisions of firms. Copyright © 2008 John Wiley & Sons, Ltd.Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/60219/1/696_ftp.pd

Bounded Rationality and the Search for Organizational Architecture: An Evolutionary Perspective on the Design of Organizations and Their Evolvability

We employ a computational model of organizational adaptation to answer three research questions: (1) How does the architecture or structure of complexity affect the feasibility and usefulness of boundedly rational design efforts? (2) Do efforts to adapt organizational forms complicate or complement the effectiveness of first-order change efforts? and (3) To what extent does the rate of environmental change nullify the usefulness of design efforts? We employ a computational model of organizational adaptation to examine these questions. Our results, in identifying the boundary conditions around successful design efforts, suggest that the underlying architecture of complexity of organizations, particularly the presence of hierarchy, is a critical determinant of the feasibility and effectiveness of design efforts. We also find that design efforts are generally complementary to efforts at local performance improvement and identify specific contingencies that determine the extent of complementarity. We discuss the implications of our findings for organization theory and design and the literature on modularity in products and organizations

Does complexity deter customer‐focus?

Economic models suggest that firms use a simple cost‐benefit calculation to evaluate customer requests for new product features, but an extensive organizational literature shows the decision to implement innovation is more nuanced. We address this theoretical tension by studying how firms respond to customer requests for incremental product innovations, and how these responses change when the requested innovation is complex. Using large sample empirical analyses combined with detailed qualitative data drawn from interviews, we find considerable variance in the relationship between customer demands, complexity, and investments in incremental innovations. The qualitative study revealed the importance of organization structures, competitive pressures, and incentives for resource allocation processes. Copyright © 2011 John Wiley & Sons, Ltd.Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/89508/1/947_ftp.pd

Four essays on innovation and performance in complex systems

Recent years have witnessed burgeoning social science research interest in the design and management of complex systems. Much of the organizations literature has tended to ignore interdependence between elements of a system, assuming instead that people, products, and organizations are reducible or decomposable into their lower order elements. This dissertation is an attempt to introduce the complex systems analytical apparatus into mainstream organizational research. In four interrelated essays, the dissertation explores how interdependence—a key feature of complex systems—affects organizational strategy and performance. The first essay investigates the relationship between degree of modularity and effectiveness of innovation in complex systems using a formal computational model. The analyses point to the trade-off between the virtues of parallelism that modularity offers and the destabilizing effects of overly refined modularization. The second essay, extending the first, examines how module architectures evolve and how this interacts with the innovation process. The results indicate that boundedly rational designers, with fairly simple rules guiding their behavior, are able to converge and stabilize on the true structure as long as systems are hierarchical. An interesting and important finding is that discovering the true architecture is not a necessary pre-condition for realizing the benefits of modularity. The third essay examines how interdependence between component technologies in complex technological systems affects the allocation of inventive effort. The empirical analysis finds a 6–9 percent shift in the allocation of inventive effort toward component(s) that pose constraint(s) to system performance. This shift results in a relatively large increase in resource allocation for more peripheral components, while representing a relatively modest change for components that already have a high base rate of R&D activity. Finally, the last essay examines the performance implications of R&D activity in complex technological systems. The study estimates firm productivity growth as a function of the depth and breadth of R&D activity. After controlling for input-side differences, the study finds that firms adopting a balanced strategy of moderate levels of depth and breadth in their R&D activity tend to outperform firms at either extremes, i.e., excessive depth or breadth