Limits to Modularity: Reflections on Recent Developments in Chip Design

Research on “modularity” has made an important contribution to the study of technical change and economic institutions. It demonstrates that progress in the division of labor in design (technical modularity) has created new opportunities for the organization of firms beyond vertical integration, by fostering vertical specialization in both manufacturing and innovation. However, a small, but growing revisionist literature contends that the enthusiasm for modularity has gone too far. Instead of exploring challenges and difficulties that management is facing in implementing modularity, there is a tendency in the “modularity” literature to generalize empirical observations that are context-specific and to confound them with prescription as well as prediction. This paper sides with the revisionist literature in cautioning against claims of pervasive modularity. The objective is not to propose an alternative theory. More modestly, I am aiming to move the debate away from polemics to a scholarly discourse that asks what forces might constrain the convergence of technical, organizational and market modularity. A related objective is to explore what management can do to overcome these limits. I examine new evidence from a cutting-edge industry, semiconductors, that is often cited by modularity proponents as an indicator of broader industry trends. The paper shows that, even in this industry, there are powerful counter-forces causing organizational structures to become more integrated, not more arm's length. Evidence from chip design is used to analyze how competitive dynamics and cognitive complexity create modularity limits, and to examine management responses. I demonstrate that inter-firm collaboration requires more (not less) coordination through corporate management, if codification does not reduce complexity—which it fails to do when technologies keep changing fast and unpredictably.