2003/15 | LEM Working Paper Series | |
Modularity and Innovation in Complex Systems |
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Sendil K Ethiraj, Daniel Levinthal
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Abstract | ||
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.
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