The Dual Role of Modularity: Innovation and Imitation

Management Science, Vol. 54, No. 5, pp. 939-955

48 Pages Posted: 5 Apr 2007 Last revised: 9 Jun 2014

Sendil K. Ethiraj

University of Michigan - Stephen M. Ross School of Business

Daniel Levinthal

University of Pennsylvania - Management Department

Rishi R. Roy

McKinsey & Co. Inc.

Abstract

What makes competitive advantage enduring and prevents its imitation is a central question in strategy research. In this paper, we investigate how and why complexity deters imitation efforts. We argue that design complexity captures the ease of making localized changes without affecting the whole organization. Based on this idea of complexity we identify three organizational structural types: fully modular, nearly modular and non-modular. The three designs differ in the extent to which they encapsulate interdependencies. We show that the potential for incremental innovation in an organization increases when one moves from non-modular to modular structures. In contrast, the potential for an organization to deter imitation decreases from non-modular to modular structures. We elaborate how and why design complexity affects the nature of the trade-off between innovation and imitation deterrence and thereby help address questions about the effective allocation of imitation energies, either for imitating firms to increase the efficacy of their imitation efforts or for innovating firms to effectively deter imitation. We discuss how our analyses shed light on several contemporary examples of innovation and imitation deterrence, such as the emergence of low-cost airlines and the rise of IBM in the mainframe computer industry.

Keywords: modularity, innovation, imitation, firm strategy

JEL Classification: D21, D23, L21, M10

Suggested Citation

Ethiraj, Sendil K. and Levinthal, Daniel and Roy, Rishi R., The Dual Role of Modularity: Innovation and Imitation. Management Science, Vol. 54, No. 5, pp. 939-955. Available at SSRN: https://ssrn.com/abstract=978293

Sendil K. Ethiraj (Contact Author)

University of Michigan - Stephen M. Ross School of Business ( email )

701 Tappan Street
R4442
Ann Arbor, MI 48109
United States
734-764-1230 (Phone)

Daniel A. Levinthal

University of Pennsylvania - Management Department ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States
215-898-6826 (Phone)
215-898-0401 (Fax)

Rishi R. Roy

McKinsey & Co. Inc. ( email )

Konigsallee 60C
Chicago, IL Quebec 60603
United States

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