Toward a Conceptualization of

Organizational Modularity
Ayberk SOYER
Istanbul Technical University, Turkey

Umut ASAN
Istanbul Technical University, Turkey

Özgür Utkan ERİŞ

Istanbul Technical University, Turkey

ABSTRACT
Organizations are complex systems made up of many different elements interacting with each other. One
particular form of organizational design, emerging from the need to deal with organizational complexity
and environmental uncertainty, is modularity. There are several studies in the literature dealing with
organizational modularity. However, neither a common definition nor a complete measurement model is
proposed for this concept. What are the common properties of an organization characterized as highly
modular? How are these properties related to organizational design parameters? None of these questions
have been adequately addressed in the literature. Thus, this study aims to identify the common properties
of an organization which can be considered to be highly modular, and to propose a theoretical
conceptualization of organizational modularity based on a framework originally linking Baldwin &
Clark’s visible design rules (2000) with Mintzberg’s organizational design parameters (1979) and
provides a suggestion for operationalizing the concept of organizational modularity based on the
proposed theoretical framework.

Keywords: Organizational Structure, Design Rules, Carliss Y. Baldwin, Kim B. Clark, Organizational
Design Parameters, Henry Mintzberg, Conceptualization, Operationalization

INTRODUCTION
Organizations are complex systems made up of many different elements interacting with each other.
Understanding how organizations cope with complexity and adapt to their changing environments has
interested organizational theorists and practitioners for a long time. One prevalent way suggested to
manage a complex system is to divide it into smaller parts by considering the joints as nature does
(Baldwin & Clark, 2000; Alexander, 1964). Different structural configurations (see Mintzberg, 1979) are
used in practice to divide the work in an organization and to coordinate its different parts. Some of these
configurations helped organizations to manage complexity for quite a long time, at least to some extent.
However, organizations of the 21st century need to be more advanced than they were in the late 20th
century. Because of advancing technology, environmental uncertainty, and the need to more effectively
and efficiently utilize resources, organizations are getting more complex than ever. Increase in size, the

Please cite this paper as:

Soyer, A., Asan, U. and Eriş, Ö.U., 2018. Toward a Conceptualization of Organizational Modularity, Eds. Doğru, Ç.,
Handbook of Research on Contemporary Approaches in Management and Organizational Strategy, IGI Global, Hershey,
PA, pp. 355-382.
number of different types of activities, the number of units and employees, the diversity of products and
services, and the technological interdependences produce greater complexity in organizations. Despite
this, a considerable number of organizations still rely on hierarchical rigid structures regardless of their
appropriateness for them.
Over the last decades improvements in technology has increased the level of competition and allowed
firms to enter new markets. For example, advancements in production technology have shorten
organizational life cycles, creating pressure for both flexibility and efficiency (D. L. Nelson & Quick,
2013). Developments in information technology have enabled new ways of communicating, allowing
people work across organizational boundaries (Cohen & Mankin, 1998). These developments, however,
have let increase the complexity in organizations and created the need for increased integration and
coordination.
The ever-increasing complexity and dynamism of the business environment has also affected
organizational processes and design. In an uncertain business environment, it is unlikely that a given
organization can do everything that it needs to do excellently. They rather focus on those things they can
do uniquely well and outsource those functions that are not directly linked to their competences.
Organizations without a proper organizational design will hesitate to expand to new markets or to exploit
attractive opportunities because of the complexity related constraints imposed by their structures. The
costs and barriers to change the system make these organizations reluctant to take proactive steps to
utilize the opportunities in the environment. They are likely to be exposed to higher administrative
overheads to manage their processes properly and, depending on the level of complexity; this may
become even unaffordable (Andrews & Boyne, 2014).
In order to quickly adapt to changing customer requirements and technological advancements, and react
to new opportunities in the market, organizations need to review and reconfigure their complex structures
and processes. This requires the organizations to gain insight into the interdependencies and interactions
among their units. Knowledge of units and their interactions, in turn, helps establishing a set of
organizational design rules (c.f. Baldwin & Clark, 2000) that provide a means to deal with organizational
complexity.
One particular form of organizational design, emerging from the need to deal with organizational
complexity and environmental uncertainty, is modularity. Modularity is a special form of design that
decomposes a system into highly independent components by defining how these components will
interact and thus governs the ways in which system variants can be configured (Sanchez & Mahoney,
1996; Sanchez, 1999; Asan, Polat, & Sanchez, 2008). Many major theories in biology, physiology,
genetics, engineering, mathematics and management rely on modular design (Callebaut & Rasskin-
Gutman, 2005). The idea of interdependence within and independence across modules allows
organizations to make an architectural change in a sub-system, which does not entail a change in another
sub-system. This yields greater flexibility for organizations in both scope and scale (Schilling &
Steensma, 2001). In addition, an organization will have the opportunity to outsource some of its functions
and switch easily between different providers of these functions, which enables responding to different
market needs more quickly. However, it is crucial to note that, it is not reasonable to characterize an
organization as modular or not, because organizations are all modular to some extent.
There are several studies in the literature dealing with organizational modularity. However, neither a
common definition nor a complete measurement model is proposed for this concept. The definitions
suggested in the literature are rather incomplete or consider only specific aspects of the concept. The
current methods for measuring the level of organizational modularity rely on a variety of restrictive
assumptions. Most of them attempt to evaluate inter-organizational modularity and ignore important
aspects originally rooted in the organization. Moreover, in the context of organizational design,
modularity is not an independent and self-contained organizational concept as handled in the literature,
but rather consists of several basic ideas that are integral parts of other organizational design concepts.
Thus, this paper aims to identify the common properties of an organization that can be considered to be
highly modular, and to propose a theoretical conceptualization of organizational modularity based on a
framework originally linking Baldwin & Clark’s visible design rules (Baldwin & Clark, 2000) with
Mintzberg’s organizational design parameters (Mintzberg, 1979). This theoretical framework underpins
the model suggested for measuring organizational modularity.

THEORETICAL OVERVIEW
Although, organizational modularity is a frequently mentioned concept in organization theory, neither a
common definition nor a measurement model exists for this concept. In order to address this issue, a
conceptual definition together with the common properties of organizational modularity will be
introduced based on the relationship established between the organizational design parameters of
Mintzberg (1979) and visible design rules of Baldwin and Clark (1997). To serve this purpose, this
section provides a comprehensive literature review conducted on organizational modularity and some
related concepts, such as, modularity, product modularity, mirroring hypothesis, and organization design.

Modularity
One of the most common ways to manage complex systems is dividing them into smaller subsystems and
components. In this context, modularity is one of the main approaches that can be used to reduce such
interdependencies and manage complexity effectively. The history of modular design, which can be
considered as an attempt to understand systems as integrations of partially independent interacting units,
dates back to early Mesopotamian era. In that period, by using smaller and simpler stones (i.e., modular
entities) the ancient Greeks and Egyptians managed to create more sophisticated (complex) structures, in
contrast to the monolithic structure which represented the architectural style of the period and built using
large and single pieces of stones (Jones, 2011).
One of the first studies not directly using the term modularity but meaning it is the seminal work of
Simon (1962). In his paper, Simon investigates the architecture of complexity in biological, physical and
social systems and proposes a matrix approach to manage the interdependencies among the units of the
systems. Thereafter, the modularity concept was investigated for designing the architecture of products by
several researchers, especially in the computer industry (Baldwin & Clark, 2000).
Before explaining the modularity concept, it would be useful to define the term module first. Baldwin and
Clark (2000) defined a module as “a unit whose elements are highly connected among themselves and
relatively weakly connected to the other units’ elements”. Based upon this definition, modularity can be
described as a system property that is obtained by minimizing the interdependencies among modules and
maximizing the interdependencies within modules, which provides opportunities to create new
configurations by means of mixing and matching modules, without losing performance or functionality
(Campagnolo & Camuffo, 2009; Baldwin & Clark, 2000). As a special form of design, modular design
intentionally creates a high degree of independence or loose coupling between component designs by
standardizing component interface specifications (Sanchez & Mahoney, 1996).
Thereby, changes to be made in any component of a system will not affect the rest of the system, or at
least will affect it at a low level. This feature greatly increases the manageability of the changes and
innovations in a module.
The implementation of this design approach, which is still valid today, has become more critical,
especially in today’s conditions, where products and processes became even more complex. In this
context, modularity is a design strategy aiming the effective development of complex products and
processes. Modular systems are composed of components that can be designed independently, but
function together as a whole (Baldwin & Clark, 1997). Baldwin and Clark (1997) argues that there exists
three visible design rules for a modular system design: (i) architecture specifying the modules that will be
part of the system and the functions of these modules, (ii) standards for testing the conformity of the
modules to the design rules and for measuring module performances relative to the other modules, and
(iii) interfaces that describe how the modules will interact (i.e., how they will fit together, connect, and
communicate). Langlois (2002) referred to the set of these visible design rules as modularization. Rather
than a design goal that is achieved and stabilized, modularization is an evolutionary process, which
advances gradually and can never be fully completed (MacDuffie, 2013).
According to Zhang and Gao (2010), modularity is a special case of nearly decomposability, in which the
interdependencies between modules are specified by specific design rules, and the degree of modularity is
defined by the level of near decomposability -the extent to which inter-module dependencies are
specified. Therefore, modularity can be defined as the degree to which a system's components can be
separated and recombined (Schilling, 2000). Wolters (2002) summarized the features of a modular system
as:

 distinctiveness of components
 loose coupling between modules; tight coupling within modules
 clarity of mapping between functions and components
 standardization of interfaces
 low levels of coordination (components are self-organizing; coordination embedded in the
architecture)

Combining the above mentioned features, Wolters (2002) made a single definition about modularity as:
“a system is modular when it consists of distinct (autonomous) components, which are loosely coupled
with each other, with a clear relationship between each component and its function(s) and well-defined,
standardized interfaces connecting the components, which require low levels of coordination”. The
modularity level of a system decreases as one or more of these features do not exist.
Although there are various methods that can be used to design a modular system, such as, axiomatic
design (AD), functional modeling, design structure matrix (DSM), modular function deployment (MFD)
and variant mode and effects analysis (VMEA) (Ostrosi, Stjepandić, Fukuda, & Kurth, 2014), this process
focusing on the design of the architecture, interfaces and standards for a system, may require a quite
considerable commitment in terms of time and effort. Additionally, compatibility of system components
with each other and their total performance level are among the points of criticism relating to modular
design. The high individual performance of the components of a system taken separately, does not
necessarily imply that the system will systematically generate a certain level of overall performance
(Zirpoli & Becker, 2011). Therefore, specifying the contribution of each individual component to the
overall system performance and coupling the system components in a suitable manner that avoids
compatibility issues and increases the overall performance level, is not an easy process (Levinthal, 1997).

Organizational Design Parameters

The literature on organizational structuring focuses on the mechanisms that can be used by organizations
to design their structure .The structure of an organization can be defined simply as the sum total of the
ways in which it divides its labor into distinct tasks and then achieves coordination among them
(Mintzberg, 1979). In his seminal work on organizational structures, Henry Mintzberg, one of the most
prominent organization and management analysts, synthesized the empirical literature currently available
on organizational structuring in a comprehensive manner and summarized the basic components of
organizational structure into nine design parameters that can be grouped into four basic categories (1979)
(see Table 1). The design parameters, in the context of organization theory, are the basic components of
organization structure that influence how the organization functions.
Table 1. Design parameters of organizational design (Mintzberg, 1979)

Group Design Parameter Related Concepts

Design of positions Job specialization Basic division of labor
Behavior formalization Standardization of work content
System of regulated flows
Training and indoctrination Standardization of skills
Design of Unit grouping Direct supervision
superstructure Administrative division of labor
Systems of formal authority, regulated flows,
informal communication, and work constellations
Organigram
Unit size System of informal communication
Direct supervision
Span of control
Design of lateral Planning and control Standardization of outputs
linkages systems System of regulated flows
Liaison devices Mutual adjustment
Systems of informal communication, work
constellations, and ad hoc decision processes
Design of decision- Vertical decentralization Administrative division of labor
making system Systems of formal authority, regulated flows, work
constellations, and ad hoc decision processes
Horizontal decentralization Administrative division of labor
Systems of informal communication, work
constellations, and ad hoc decision processes

As mentioned before, in this study it is aimed to provide a conceptual definition of the organizational
modularity concept by relating organizational design parameters of Mintzberg (1979) and visible design
rules of Baldwin and Clark (2000). For that reason, it would be helpful to provide a brief introduction to
the fundamental properties of these organizational design parameters (Mintzberg, 1979):

• Job specialization: Concerns the number and breadth of tasks of a given position (horizontal job
specialization) and the incumbent's control over these tasks (vertical job specialization).
Horizontal job specialization separates work by function whereas vertical job specialization
separates the performance of the work from the administration of it. Typically, unskilled jobs are
highly specialized in both dimensions, whereas, professional jobs are specialized only
horizontally.
• Behavior formalization: Refers to the extent of formal specification and standardization of work
processes through job descriptions, work flows, and rules. Formalization reduces the variability
of behavior and hence increases the control over it. Organization structures that rely on
formalization of behavior for coordination are referred as bureaucratic.
• Training and indoctrination: Is the design parameter by which the required knowledge and
skills, together with the norms that must be acquired, are standardized through formal
instructional programs for each position. This parameter is associated with the internalization of
the desired behaviors by all employees.
• Unit grouping: Deals with the bases by which positions are clustered into units and units into
more comprehensive units, until all are clustered together under the strategic apex. In general,
positions in an organization can be grouped according to (i) the knowledge and skills of
employees; (ii) work processes and functions; (iii) products and services; (iv) clients; and (v)
 geographical regions in which the organization operates. By unit grouping, formal authority is
established and the hierarchy of the organization is built. Therefore, it is the design parameter by
which direct supervision is most importantly effected.
• Unit size: Refers to the number of positions (or subunits) that are grouped into a single unit. Unit
size defines the span of control for the managers and also the shape of the organization. If
standardization is used for coordination, the unit size increases; on the other hand, if mutual
adjustment is used for coordination, the unit size decreases. In other words, the unit size has an
impact on coordination mechanisms.
• Planning and control systems: Are used to standardize the products produced and/or services
rendered. There are two different kinds of planning and control systems: (i) action planning and
(ii) performance control. Action planning aims to regulate specific actions by predetermining the
outputs of specific decisions or actions, while performance control focuses on the regulation of
overall performance by measuring the performance of the relevant decisions or actions.
• The liaison devices: Are the mechanisms by which the organization encourages mutual
adjustment within and between units. Liaison positions, task forces that are formed to deal with
specific issues, standing committees that work on ongoing organizational issues, integrating
managers and matrix structures are among the liaison devices that can be used to facilitate the
coordination and communication.
• Vertical decentralization: Refers to the dispersal of decision-making power down to the chain
of line authority, from the strategic apex into the middle line.
• Horizontal decentralization: Refers to the extent to which decision making power flows
informally outside the chain of line authority (i.e., to the nonmanagers, such as, analysts, support
staffers, and operators in the operating core). As a result, horizontal decentralization brings the
rest of the structure, apart from the strategic apex and middle line, into the power system.

Organizational Modularity
As the response of organizations to the changing environmental conditions will be to reorganize
themselves by redesigning the relationships of organizational units to each other and to the external units,
the need for a modularity approach specific to organizations becomes inevitable. Modular design is not
limited to products and processes; it can also be applied to the whole organization to comply with the
rapid changes in its environment. The importance of this holistic approach has further increased, as
organizations mostly do not have the necessary resources and skills to keep pace with inevitable changes
occurring in the business environment.
Some of the studies in the literature focusing on organizational modularity or modular organizations
investigate the relationship between product modularity and organizational modularity (Colfer &
Baldwin, 2010) while some others investigate the meaning of organizational modularity (Hoetker, 2006).
Most of the researchers in the organizational modularity field underline that either the conceptualization
of the term or the clarification of distinctive properties of a modular organization (i.e., conceptual and
operational dimensions) is lacking. Given this argument, it becomes crucial to clarify what organizational
modularity is and what the different aspects and properties of organizational modularity are.
It is widely accepted in the literature that the organizations characterized by high modularity, can be
decomposed into a number of units, which may be mixed and matched in a variety of configurations, or in
other words, can be reconfigured. Benassi (2009) indicates that there are two different perspectives
regarding the organizational modularity concept. The first perspective takes modularity as a generic
property of organizations (A. Nelson & Byers, 2005); while the second perspective considers modular
organizations as a distinct organizational form, and argue that modular organizations differ from other
types of organizations with respect to a number of characteristics. According to this perspective, some
rules, which are listed below, must be set to investigate the characteristics of modular organizations
(Benassi, 2009):

 Level of analysis must be identified.

 Distinctive features should be clarified.
 Similarities and differences with pre-existing forms should be specified.
 The specific advantages and disadvantages should be clarified.
 The conditions that are necessary for modular forms to exist and their effects should be evaluated.

The modular approach aims to increase the reconfigurability of the organization as a system readily by
substituting functional process variations into the process architecture (Sanchez, 1997). When modularity
is discussed in terms of organizations, “autonomy in decision making (for each unit) together with low
inter-unit dependencies” stand out as one of the most important design rules. Even if the units of an
organization are designed independently with respect to this design rule, and hence have low level of
interaction among each other, organizational hierarchy and decision mechanisms may not be suitable for
this situation. In other words, such kind of design rules, which reveal the architecture of a system, do not
ensure that units are completely independent from each other. Therefore, it is generally not possible to
create completely independent modules regarding the autonomy of decision-making. Under these
conditions, rather than being considered as a property of an organization that may or may not exist in the
organization, modularity should be considered as a property that may exist at different levels.
Furlan, Cabigiosu, and Camuffo (2013) stated that organizational modularity is related to the complexity,
intensity and frequency of information sharing between organizations. According to another definition
taking the inter-organizational relationships, organizational modularity is the degree of firms’ usage of
organizational arrangements (e.g., mergers, cooperation or acquisition) with external business units to
minimize overall production and transaction costs and increase value (Cheng, 2005).
A. Nelson and Byers (2005), who dealt with organizational units and the relationships among these units,
claimed that a modular organization is an organization in which administrative interdependence and
hierarchical structures are minimized, while cross-unit awareness and bottom-up processes are
maximized. Parallel to this definition, Ernst and Kamrad (2000), and Schilling and Steensma (2001)
stated that organizations have a high degree of modularity when their units can be disaggregated and
recombined into new configurations with little loss of functionality. The units of these organizations are
relatively independent of one another and if they are compatible with the overall system architecture, they
may be easily recombined with one another (Schilling & Steensma, 2001; Baldwin & Clark, 2000;
Sanchez, 1995)). Similarly, Hoetker (2006) indicated that organizational modularity implies that various
units in the organization are loosely coupled, can operate autonomously, and can be easily reconfigured.
As organizations become modular, "loosely coupled" networks take the place of tightly integrated
hierarchies. These loosely coupled organizational forms allow organizational units to be flexibly
recombined into a variety of configurations (Schilling & Steensma, 2001; Orton & Weick, 1990).
A. Nelson and Byers (2005) regarded organizational modularity as a property focusing on the structures
of organizations (i.e., relationships within an organization), rather than inter-organizational relationships.
In contrast to this view, Schilling and Steensma (2001) measured the use of modular organizational forms
by considering the inter-organizational relationships, such as alliances, use of alternative work
arrangements, and contract manufacturing. These loosely coupled organizational forms enable
organizations to specialize in their high-return activities and to combine them with other organizations'
activities in a variety of configurations. Benassi (2009) also investigated the modular organizations and
presented some valuable findings about the properties of modular organizations. Some of the properties
mentioned in this study include, high degree of autonomy in decision-making, flatter structures, and
managing the relationships with external suppliers directly.
Campagnolo and Camuffo (2009) made a literature review on the concept of modularity and classified the
use of modularity in management studies into three main streams: (i) product design modularity, (ii)
production system modularity and (iii) organizational design modularity. They emphasized that the
drivers of modularization have not been investigated in the studies dealing with modularity in
organization design and literature is missing on how and when modular organizational structures should
be used.
Although, the concept of organizational modularity is frequently mentioned in the literature of
organization theory, apart from product modularity, neither a common definition nor a measurement
model exists for this concept. Current definitions in the literature are limited in scope, focusing only on
certain aspects of modularity. Therefore, in order to address this gap in the literature, a conceptual
definition of organizational modularity, based on both the visible design rules of Baldwin and Clark
(1997) and organizational design parameters of Mintzberg (1979), is proposed as given:

Organizational modularity implies a loosely coupled network of autonomously operating self-contained

units, having low level of interaction but high level of awareness among each other through standard
interfaces, which can be flexibly recombined into a variety of organizational configurations.

According to the definition given above, high organizational modularity is observed if:

 the hierarchical organizational units are replaced with loosely coupled ones, which are
surrounded by semi-permeable boundaries (flat structure) and can easily be reconfigured so as to
adapt to the changing environmental conditions and market demands (reconfigurability);
 the units of an organization can take their decisions independently without substantially affecting
each other (autonomy) and maintain their own activities without necessitating other units’
activities (self-containedness);
 creating a new unit or maintaining the operations of the existing ones is compatible with the
system architecture and standards;
 interfaces enabling the communication among units are clearly defined and standardized (low
interaction level, awareness, output standards); and
 organizations can easily adapt interactions and collaborations with other external business units.

According to the given conceptual definition and explanations the following common properties of
organizational modularity are proposed (these properties will be explained in Section 3): Self-
containedness, Reconfigurability, Low number of hierarchical level, Autonomy, Defined output
standards, Awareness, and Low level of interaction. The theoretical framework given in Table 2
represents the relationship between Baldwin and Clark (1997)’s visible design rules and Mintzberg
(1979)’s organizational design parameters, and how the proposed properties relate to these rules and
parameters.
Table 2. Relationship between properties of organizational modularity, organizational design
parameters, and modular design rules

Baldwin and Clark (1997)’s Mintzberg (1979)’s Properties of organizational

modular design rules organizational design modularity
parameters
Architecture Unit Grouping - Self-containedness
- Reconfigurability
Unit Size - Low number of hierarchical
level (Flat structure)
Vertical Decentralization - Autonomy (Independent
decisions)
Standards Planning and Control Systems - Defined output standards
Interfaces Liaison Devices - Awareness
- Low level of interaction

Mirroring Hypothesis
As modularity is one of the most important features of product architecture (Ulrich & Eppinger, 1995),
organizational modularity is among the most essential features of organizational structure. In some of the
studies on modularity, it is emphasized that designing modular products requires some changes to be
made in the structure and processes of the organizations. This relationship between product modularity
and organizational modularity, has been tried to be explained by the mirroring hypothesis (Colfer &
Baldwin, 2010; Hoetker, 2006). The fundamental principle underlying the mirroring hypothesis is that
each module of a system is informationally self-sufficient, and hence can be designed independently from
the rest of the system. This implies that even though independent individuals, teams or organizations can
separately design different modules, these independent modules can all work together as a whole.
Consequently, this one-to-one mapping from designers to modules indicates a structural correspondence
between technical and organizational networks (Colfer & Baldwin, 2010; Baldwin & Clark, 2000). Even
though, mirroring hypothesis predicts a correspondence between product modularity and organizational
modularity, it does not impose a direction of causality. There are a limited number of theoretical and
empirical studies in the literature questioning the validity of this assertion. Only a part of these studies
concluded that there is a significant relationship between product modularity and organizational
modularity (e.g., Baldwin & Clark, 2000; Takeishi, 2002; Tiwana, 2008; MacCormack, Baldwin, &
Rusnak, 2012; Nepal, Monplaisir, & Famuyiwa, 2012), whereas some of them did not find any evidence
for the hypothesis (Brusoni, Prencipe, & Pavitt, 2001; Brusoni & Prencipe, 2001; Hoetker, 2006;
MacCormack, Rusnak, & Baldwin, 2006; Wang, Chen, & Li, 2008). Therefore, it can be concluded that
there exists no consensus regarding the relationship between product modularity and organizational
modularity.
The studies theoretically examining the relationship between product modularity and organizational
modularity (e.g., Sanchez, 1995; Sanchez & Mahoney, 1996; Baldwin & Clark, 2000) suggests that rather
than exercising managerial authority, standardized component interfaces can be used to achieve
embedded coordination. Based on this argument, integrated product designs will generally require
development processes carried out in a tightly coupled organization structure that is coordinated by a
managerial authority, while, modular product designs are typically carried out by loosely coupled
organization structures.
In an empirical study performed by Nepal et al. (2012), the relationship between product architecture
strategies and supply chain configurations is investigated and it is concluded that switching from an
integrated product architecture to a modular product architecture directly affects the supply chain
configuration, which is a conclusion that supports the mirroring hypothesis. They also claimed that
modular product architectures are much more flexible than integrated product architectures, and often
result in lower total supply chain costs.
Similarly, MacCormack et al. (2012) explored this relationship in the software industry for five different
types of applications (i.e., financial management, word processing, spreadsheet, operating system, and
database applications) developed by both commercial software firms and open source software
communities. In this study, they used the Design Structure Matrix (DSM) technique to compare the
design of products developed by loosely coupled and tightly coupled organizations, and concluded that
loosely coupled organizations tend to develop more modular products than tightly coupled organizations
for all the cases they studied.
Although, a direct relationship between product modularity and organizational modularity is reported in
the studies mentioned above Hoetker (2006), Wang et al. (2008) and Benassi (2009), among others, stated
that there is no direct relationship between these concepts. For example, Hoetker (2006) indicated that
increased product modularity enhances reconfigurability of organizations, which is considered as one of
the several properties of organizational modularity; but does not allow organizations to move activities
out of their hierarchy, which is also considered as another property of organizational modularity. When
the structures and processes of the organizations that design and manufacture modular products are
examined, it can be seen that some of these organizations are not modular. Similarly, Press and Geipel
(2010) concluded that modularity fosters the development of independent units (i.e., disintegration), but
on the other side, benefits that can be obtained from modularity or disintegration, depend on the level of
entry and exit for the relevant industry. Accordingly, Press and Geipel (2010) emphasized that there exists
a conditional relationship between product modularity and organizational modularity. Especially for the
industries that are associated with high levels of entry and exit, as new industry entrants commonly
imitate the top performer, industry level product quality increases while differentiation decreases. In an
another study, Takeishi (2002), indicated that for automobile companies, which perform regular projects
that do not involve new technologies, architectural knowledge is more important rather than component-
specific knowledge, as such kind of knowledge is supposed to be provided by the suppliers. Conversely,
component-specific knowledge is more important than architectural knowledge for the projects involving
new technology. Eventually, Takeishi (2002) concluded that there exist a conditional relationship between
product modularity organizational modularity, as Press and Geipel (2010) did. This result, indicating a
conditional relationship, also had been observed in other studies that were performed in different
industries (e.g., Prencipe, 1997; Chesbrough & Kusunoki, 2001)
Brusoni and Prencipe (2001) conducted a study to explore aircraft engine manufacturers and indicated
that these systems integrator firms outsource the detailed design and manufacturing processes to
specialized suppliers, while they maintain in-house concept design and systems integration capabilities to
coordinate the work. And consequently, they concluded that there is no direct relationship between
product modularity and organizational modularity. MacCormack et al. (2006), compared the architectures
of the Linux operating system and the Mozilla Web browser and have reached similar results with
Brusoni and Prencipe (2001)’s study. Linux is an open source software that has numerous developers in
many different locations all around the world. Despite the fact that Mozilla also is an open source
software, there is a collocated team of developers responsible from the development process. Therefore,
Linux is supposed to have higher organizational modularity when compared to Mozilla. This finding
seems to support the hypothesis that assumes a direct relationship between product modularity and
organizational modularity. In 1998, as a result of managerial choice, a group of Mozilla's core developers
carried out a redesign effort with the aim of making Mozilla more modular. In their study, MacCormack
et al. (2006) compared the redesigned version of Mozilla with a comparable version of Linux by using the
metrics defined to compare the structures of different designs, and concluded that the redesign effort had
succeeded in making Mozilla more modular than Linux. Consequently, they have ascertained that product
modularity can be increased, though the organization structure remain unchanged, and managerial actions
have a significant impact in adapting a design's structure.
The results of the above mentioned studies investigating the relationship between product modularity and
organizational modularity are summarized in Table 1. As it can be seen in Table 1, for the theoretical
studies in the literature there is a general tendency to assume a direct relationship between product
modularity and organizational modularity. However, empirical investigations generally do not strongly
support a causal relationship and state that the relationship is much more complex than the theoretical
assumptions. Consequently, product modularity is not treated as a property or direct cause of
organizational modularity; rather it is treated as a facilitator for organizational modularity.

Table 3. Studies investigating the relationship between product modularity and organizational modularity

Type of Relationship Between Product

Study Study Modularity & Org. Modularity
Sanchez (1995) Theoretical Strong relationship
Baldwin and Clark (2000) Theoretical Strong relationship
Sanchez and Mahoney (1996) Theoretical Strong relationship
Benassi (2009) Theoretical No direct relationship
MacCormack et al. (2012) Empirical Strong relationship
Nepal et al. (2012) Empirical Strong relationship
Tiwana (2008) Empirical Strong relationship
Takeishi (2002) Empirical Conditional relationship
Press and Geipel (2010) Empirical Conditional relationship
Brusoni et al. (2001) Empirical No direct relationship
Brusoni and Prencipe (2001) Empirical No direct relationship
Hoetker (2006) Empirical No direct relationship
MacCormack et al. (2006) Empirical No direct relationship
Wang et al. (2008) Empirical No direct relationship

PROPERTIES OF ORGANIZATIONAL MODULARITY

Hoetker (2006), in his study, has claimed that modular organizations do not organize their production
around internal or long-term suppliers, since modularity reduces the requirement for internal suppliers and
allows quickly switching to new suppliers. Although, long-term relationships with external suppliers
increase the risk of losing knowledge about both individual components and the overall system, the effect
of switching to new suppliers is expected to be relatively small for modular organizations. In this context,
in order to measure the organizational modularity concept, Hoetker (2006) used two fundamental
properties given below:

 moving from tight hierarchies to ‘loosely coupled networks’ (organization of production around
external suppliers)
 creating ‘reconfigurable organizations’ (ability to add new suppliers and drop existing suppliers)

Schilling and Steensma (2001), examined three properties of modular organizations (i.e., ‘contract
manufacturing’, ‘alternative work arrangements’, and ‘alliance formation’), which are supposed to reduce
the inertia that cause an organization to adapt more slowly to the changing environmental conditions, and
increase flexibility. Some other properties of modular organizations, such as, autonomous business units
and other network forms are not considered in their study. A. Nelson and Byers (2005), explored the
intra-organizational relationships between the technology transfer and entrepreneurship education units at
Stanford University, and they used ‘autonomy in decision making’ and ‘cross unit awareness’ properties
to measure the organizational modularity of these units. Worren, Moore, and Cardona (2002), developed a
conceptual model for investigating the relationship between modular product architectures, strategic
flexibility and firm performance, in which innovation orientation and organizational architecture concepts
were taken as mediating variables. Modular structure and modular processes were identified as sub-
dimensions of organizational architecture and in order to measure the modular structure property, items
about the existence of ‘small, autonomous units’ and ‘rotation of personnel’ were used. Karim (2006)
compared the reconfiguration of internally developed and acquired units of an organization and concluded
that the acquired units are reconfigured sooner than the internally developed units are. The reason of this
result can be the organizations’ lack of familiarity with acquired units’ resources and the motivation to
generate greater benefits from acquisitions.
Properties of organizational modularity concept identified in the theoretical and empirical studies
published in the literature are summarized in Table 4.
Units of modular organizations can communicate with each other and with the external units only through
standardized interfaces within a standardized architecture; and when compared to the integrated
organizational forms, they can communicate with other external units much more easily. The main issue
that the organizational architecture deals with is the design of the relationships of organizational units
with each other and external units. Therefore, relationships with external organizations are considered
more important for the design of modular organizations, when compared to the design of traditional
organizations. The reason for this is that modular organizations typically outsource their non-core
activities. From this point of view, Benassi (2009)stated that modularity at an intra-organizational level is
used mostly by analogy with inter-organizational modularity, and Schilling (2000) derived a model of
interfirm product modularity. In his study, Wolters (2002) distinguished between intra- and inter-
organizational processes and claimed that they possess different features. According to Wolters (2002),
processes refer to the technologies and procedures used to produce or deliver products or services within
an organization while a supply chain refers to the choice and design of the network surrounding an
organization. Therefore, processes describe the ways products are produced, while supply chains describe
who does it and how they interact with each other. Both concepts are obviously interconnected, but
separated as well.
When the empirical and theoretical studies mentioned above are taken into consideration, it is clearly
observed that modular organizations may have various properties. These properties considered in
previous studies were used as a basis to identify the properties of organizational modularity given below:

 Self-containedness
 Reconfigurability
 Low number of hierarchical level (Flat structure)
 Autonomy (Independent decisions)
 Defined output standards
 Awareness
 Low level of interaction
 Outsourcing capacity
 Supplier switching capacity
 Alternative work arrangement capacity
 Alliance formation capacity

When these properties are examined in terms of their scope, it can be seen that the first seven properties
(i.e., self-containedness, reconfigurability, low number of hierarchical level, autonomy, defined output
standards, awareness, and low level of interaction) concern the interactions between organizational units,
while the last four properties (i.e., outsourcing capacity, supplier switching capacity, alternative work
arrangement capacity, and alliance formation capacity) concern the interactions with external units. In the
following sections, a brief introduction to each of these properties is given.

Table 4. Properties of organizational modularity

Study Type of Study Properties of Organizational

Modularity
Sanchez (1997) Theoretical Self-managing
Autonomy
Reconfigurability
Loosely coupling
Sanchez and Mahoney (1996) Theoretical Embedded coordination
Defined output
Nearly decomposability
Little managerial authority.
Baldwin and Clark (2000) Theoretical Low interaction
Low interdependency
Decomposability
Langlois (2002) Theoretical Low interdependency
Decomposability
Hoetker (2006) Empirical Reconfigurability
Loosely coupled networks
A. Nelson and Byers (2005) Empirical Autonomy
Awareness
Worren et al. (2002) Empirical Autonomy
Standardization of work processes
across organizational units
Schilling and Steensma (2001) Empirical Alliances
Contract manufacturing
Alternative work arrangements
Cheng (2005) Empirical Alliances
Contract manufacturing
Alternative work arrangements
Helfat and Eisenhardt (2004) Empirical Decentralization
Reconfigurability
Karim (2006) Empirical Reconfigurability
Benassi (2009) Empirical Loosely coupling
Autonomous decisions
Self-contained units
Todorova and Durisin (2009) Empirical Autonomous units
Standardization of work processes
across organizational units

Properties of Organizational Modularity Concerning the Interactions between

Organizational Units
This section provides an overview of the organizational modularity properties concerning the interactions
between organizational units.
Self-containedness
From the organization design perspective, Mintzberg (1979) mentioned about unit grouping based on
workflow interdependencies, in which the whole workflow is grouped into a single unit, under a unit
work-flow supervisor and refers to a study of Thompson (1967). According to Thompson (1967), the
organizational units are formed according to reciprocal interdependencies, where the work flows between
tasks. If there exists no reciprocal interdependency, sequential interdependencies are taken into
consideration, and if neither of them exist, then organizational units are formed according to the shared
resources.
From the modularity perspective, Miller and Elgard (1998), who tried to clarify the module, modularity
and modularization concepts, indicated that a unit could only be treated as a module when it contains self-
contained functionality. Accordingly, Baldwin and Clark (2000) stated that the modules that will be a part
of a system and the functions of these modules are specified by the architecture, and they emphasized that
the modularity is a design rule, which deals with intra- and inter-module dependencies.
By definition, since a system is composed of a set of components that act and interact together,
organizations, which are referred to as complex social systems, are composed of discrete business units in
which there exists individuals performing functional tasks. Therefore, a distinctive property of a modular
organization is consisting of units, which are self-contained. These units should maintain their own
activities without necessitating other units’ activities.

Reconfigurability
As Mintzberg (1979) stated, given a set of positions in an organization, to be able to design organizational
structure, firstly, it should be decided on how to group these positions into units (i.e., unit grouping,
which is one of the nine organizational design parameters). Unit grouping has an important impact on
coordination, resource sharing, and performance measures.
In this context, Karim (2006) defined reconfigurability as adding new units to the organization, deleting
units from the organization, and recombining units within the organizations. Reconfiguration has the
potential to create synergy, which in turn improves the productivity of each unit and enhances
innovativeness. It is worth to mention here that reconfigurability term is used in a broader sense including
also the recombination term. In his study, Hoetker (2006) mentioned some of the advantages of
organizational modularity and one of them was ease of reconfigurability, which allows an organization to
select the best supplier for a given component at a given time. Waard and Kramer (2008) investigated the
deployment strategy of the Dutch Armed Forces and found that their organizational structure allows them
to reconfigure 90 different functional components into a variety of constellations. They also claim that,
modularly designed parent organizations (e.g., Dutch Armed Forces) can mobilize different kinds of
temporary organizations through the reconfiguration of its own organizational parts. Therefore, as
reconfiguration of organizational structure increases the flexibility of organizations, these organizations
are better able to quickly respond to the changing market conditions.

Low number of hierarchical level

Low number of hierarchical level, i.e., flat structure corresponds to a shorter chain of command from the
strategic apex to the operating core. On the other hand, long chain of command corresponds to more
managerial workload and more complexity and interaction. When organizational modularity is high,
autonomous decisions take place in modular designed units. Autonomous decisions are related to the
organization structure and characteristics of the tasks. Units are expressed as flat hierarchies in
organizational modularity, and this flat structure does not only include low number of hierarchical levels
but also includes participation of organizational units to the decision making process (Benassi, 2009).
Mintzberg (1979) had stated two fundamental assumptions describing the effects of unit size to the
organization structure: (i) increasing standardization for coordination will result in bigger working groups
(ii) more reciprocal relationships require organizations to have smaller unit size (due to interdependencies
among complex tasks). In a modular designed organization, coordination activities are usually more
standardized. Thus, interdependencies are grouped into modular designed units and decisions are taken
independently. As unit size increases, the number of hierarchical levels decreases.
In vertical hierarchies, as the number of employees reporting to each manager tends to be smaller,
managers usually have the opportunity to supervise and monitor employees, and satisfy the security needs
of them. However, in this type of organizations, employees, especially the ones who ask for autonomy,
can feel that they are under tight control (Porter & Lawler, 1964). Ivancevich and Donnelly (1975) study
of salespersons found that salespersons in flat organizations perceive more satisfaction with respect to
self-actualization and autonomy, and lower amounts of anxiety-stress when compared to those working in
tall organizations. Thus, autonomous decisions, which is a fundamental aspect of organizational
modularity, is directly related to the hierarchical structure of the organizations. In general, decisions that
are more autonomous are expected to be taken in less hierarchical structures.

Autonomy (Independent decisions)

Self-managed teams are responsible for their internal activities, can set their priorities and have decision-
making power over their own functional areas (Vaccaro, Jansen, Van Den Bosch, & Volberda, 2012).
Mintzberg (1979) defined vertical decentralization as delegating decision-making power to lower level
staff down the chain of authority. Parallel decentralization in the vertical dimension eliminates the
decision interdependencies especially for the units that are grouped based on market or industry. Each
organizational unit is decoupled from the others and delegated with the decision-making power for those
decisions affecting its own products, services, or geographical areas. Therefore, parallel vertical
decentralization is the only way to delegate market-based organizational units the power that is needed to
act freely (i.e., to function in a quasi-autonomous manner).
Benassi (2009) stated that modular organizations are based upon small organizational units, which (i)
have a specific domain; (ii) correspond to a specific product, a sub-system, a component or a part of a
process; (iii) can make decisions on various business issues; (iv) deal directly with suppliers; (v) are
characterized by a flat structure, and (vi) can make autonomous decisions to accomplish their tasks.
Similarly, A. Nelson and Byers (2005) indicated that if units of an organization retain autonomy in
decision-making and are not dependent on other units to complete their goals, they are said to be modular.
N. Argyres and Bigelow (2011) investigated the relationship between modularity and vertical
deintegration with reference to the mirroring hypothesis, which claims that organizational design tends to
reflect product design; and consequently, they claimed that modularity has a positive and significant
impact on vertical disintegration. Jacobides (2005) stated that new generation CEOs do not believe in
integration as they think decentralized organizations run more efficiently than centralized ones, and they
emphasized that decentralization within organizations paves the way for disintegration.

Defined output standards

If standardization and customization are considered to be on the opposite ends of a continuum,
customized standardization (i.e., modularization) can be placed in the middle of the continuum (Lampel
& Mintzberg, 1996). Miller and Elgard (1998) described modularity as a means for balancing
standardization and customization. In this respect, modularity implies the customization of the
standardized modules, and necessitates that the resulting customized modules conform to the visible
information behind the organizational design, namely, the architecture, interfaces and defined output
standards. Therefore, output standards, which can be applied in order to reduce variety and facilitate
compatibility between organizational units and/or across organizations, is a fundamental property for
enabling modularity (Johansson, 2013). In modular organizations, each organizational unit delivers its
outputs to other organizational units by means of interfaces, which describe how the modules will
interact. Therefore, defining the output standards ensures that the outputs are produced in accordance with
the predetermined standards and expected performance levels.
Organization design literature suggests two ways for organizations to control the output: (i) action
planning, which is used to determine the required decisions or actions sooner, and (ii) performance
control, which is used to measure the results of the actions taken and to make necessary changes
(Mintzberg, 1979). In this context, action planning and performance control should be regarded as a
means of standardizing outputs.

Awareness
In some cases, direct supervision and three forms of standardization (i.e., standardization of work
processes, outputs and skills) remain insufficient to satisfy the coordination requirement of organizations
(Mintzberg, 1979). Wolters (2002) stated that having an architecture that provides embedded coordination
reduce the level of coordination required, and can be treated as one of the properties of modular
organizations. As interactions among organizational units increase, complexity of the work processes
performed in these units also increase, and consequently, out goes the need for a managerial coordination
and an organizational structure incorporating an authority hierarchy. However, for modular organizations,
which have standardized interfaces between its units, the need for managerial authority and authority
hierarchy decreases, and these organizations can be guided by embedded coordination (Sanchez, 1995).
It was observed in most of the studies in the literature that even though the interdependencies among the
modules are tried to be eliminated in modular design, typically, it is not possible to eliminate them
completely. Therefore, instead of trying to eliminate these interdependencies, organizations must
concentrate on the management of them as they emerge (Staudenmayer, Tripsas, & Tucci, 2005).
One of the points criticized in the literature about organizational modularity is that, it enables
organizational units to advance in their own operations, and consequently, the knowledge of each
organizational unit is limited to their own work processes. In connection with this, Hahn and Turowski
(2005) indicated that ‘information hiding (among the units of an organization and across organizations)’
is a characteristic of modular organizations, which, potentially, limits the awareness of modules.
Therefore, modular design is regarded as particularly suitable for incremental innovations rather than for
radical innovations. In this respect, Brusoni and Prencipe (2006) stated that, the changes in unit
configurations should be shared among all organizational units in a coordinated and timely manner, since
these changes are mostly associated with new connections both within and across organizational units. In
other words, awareness of modules should be increased to make way for radical change processes to be
designed. Similarly, Baldwin and Henkel (2012) also indicated that sharing general architecture
knowledge and operational knowledge is a requirement for innovation. Therefore, to manage intra- and
inter-module dependencies, each module in a system should communicate directly to each other by means
of interfaces, and should be aware of the changes occurring in other modules, which are related to the
operations of the relevant module and general architecture of the system.
In general, organizations have a tendency to use internal units instead of external suppliers, especially in
case of large measurement costs (i.e., the agency costs incurred when something is purchased from the
market). For that reason, organizations more often prefer hierarchical organizations to contracting with
(semi-) autonomous external agencies in order to overcome inherent transaction costs and bargaining
problems, and to have control over all activities. (N. S. Argyres, 1999). Developing a mechanism for
creating and/or increasing awareness of modules, provides easier access to information contained each
organizational unit, helps to decrease the measurement costs, and remove the barriers complicating
outsourcing arrangements.
In their study, Colfer and Baldwin (2010) stated that there exists three different levels of transparency that
collaborating units can achieve: (i) material transparency denoting the disclosure of information, (ii)
conceptual transparency by which all units access information and make sense of it, and (iii) actionable
transparency by which all units access information, make sense of it, and can act on the design itself. All
kinds of transparency is important with respect to organizational modularity, as they increase the
awareness of each unit. Although, all these arguments seem to conflict with some of the fundamental
requirements of modularity, as A. Nelson and Byers (2005) stated, a synergy between organizational units
must be developed so that each unit will be aware of other units.

Low level of interaction

Ethiraj and Levinthal (2004) stated that organizational units often depend on each other for inputs, what
Thompson (1967) termed reciprocal dependence. As mentioned in previous sections, one of the ultimate
aims of modular design is minimizing the inter-module dependencies, which could be possible only when
a simplified interface is designed in between modules. For this purpose, tools, such as, design and task
structure matrices, could be used to identify and eliminate the interactions among modules (Baldwin &
Clark, 2000). Modularity increases the range of manageable complexity by limiting the scope of
interaction between organizational units, and thereby reduces the effort and time spent on design or
production processes (Baldwin & Clark, 2000).
The degree of loosely coupling, which is among the properties of organizational modularity, is a function
of the strength of inter-unit interactions. If there exists no interactions between organizational units, then
the organization is said to be fully decoupled, or modular. In this context, Simon (1962) underlined that, it
is important to highlight who interacts with whom, rather than, who locates closer to whom, for defining
social hierarchies.
Regarding the level of interaction between organizational units, Mintzberg (1979) suggested that liaison
devices could be used, especially when, work processes are highly complex, horizontally specialized and
highly interdependent. However, there are also some other mechanisms that would allow handling such
kind of situations (e.g., increasing awareness of modules).

Properties of organizational modularity concerning the interactions with external

units
This section provides an overview of the organizational modularity properties concerning the interactions
with external units.

Outsourcing capacity
To be able to outsource some activities or units, there should be “thin crossing points” between these
activities/units and the remaining ones in the organization (Baldwin & Clark, 2006; Hoetker, 2006).
When crossing points become thicker, the level of vulnerability of the remaining activities/units increases.
In order to replace the regulation function of hierarchies for internal units with outsourcing contracts,
contractual governance will be useful where transfers in crossing points can be identified, measured and
compensated (Blair, O’Hara O’Connor, & Kirchhoefer, 2011).
Here, it is assumed that a more modular organization will have a higher outsourcing capacity. Notice,
however, that an organization with high level of outsourcing could be less modular than an organization
with more internal suppliers. In some cases, organizations that use outsourcing are not capable of
changing their supplier because of their non-modular design. If organizations could not change their
decisions according to the new conditions, then it is not possible to mention about the options they have.
Therefore, it is important to measure the capacity of outsourcing instead of actual outsourcing. This is an
important assumption underlying the role of outsourcing in organizational modularity. Capacity can tell
us whether it is possible to take an action or to give up when it is necessary. Thus, the capacities should
be considered in order to understand whether an organization is flexible to adapt to the changing
environmental conditions and able to change the decisions when it is required. Note that the same idea
applies to supplier switching, alternative work arrangements and alliance formation.
Despite the advantages of outsourcing, organizations should ensure that organizations are still holding the
intra-organizational control power and inter-organizational control power (transaction cost power, quality
control, technology control, etc.) (Wu & Park, 2009). Moreover, to utilize outsourcing efficiently, it
should be considered that external units (e.g., suppliers) are capable to adapt this kind of work style. They
should have the abilities to take the ownership of the corresponding module’s activities and deliver its
expected output with the determined specifications on time. The design and management capacity of the
external unit should be carefully considered.

Supplier switching capacity

This property can serve as a measure of the effect of past relationships with the suppliers for a new deal.
Relationship with the suppliers can be managed with contracts if the activities, which is performed by the
supplier, is clear. In this case, the firm can switch between contract suppliers that perform different
activities, and the contract supplier can similarly work for different firms. Thus, as firms in a given
industry begin resourcing organizational units that lie outside of organization boundaries for activities that
were once conducted in-house, the system becomes increasingly modular, and this particular type of
organizational design helps decreasing the number of interactions within the organization and between
organizations, and thereby, decreases the importance of past relationship with the suppliers.
However, most of the long-term relationships with the suppliers are largely uncertain and open-ended. In
this case, trust becomes the organizing principle for managing the complex relationships (Sinha & Van de
Ven, 2005). Relying on trust, however, to manage the relationships with a supplier is risky. It complicates
both changing the supplier for an existing activity and eliminates the objectivity in order to evaluate the
alternative suppliers for new deals. In addition, a supplier with a long-term relationship gains the
communication advantage. A common language is developed in order to discuss the technical details.
This type of language is especially important for implicit knowledge transfer. However, increased
standardization and less need for communication will decrease the importance of implicit knowledge
transfer and using common language. Thus, past relationships with suppliers is expected to be less
important for higher level of organizational modularity (Hoetker, 2006).

Alternative work arrangement capacity

Alternative work arrangements, i.e., recruiting contract based or temporary employees in organizations,
allows organizations to increase or decrease their scope and capacity in different situations (Schilling &
Steensma, 2001).
Using temporary employees is an advantage, in terms of cost and flexibility. However, employee loyalty
and hands on experience is low when compared to the long-term employees (Sinha & Van de Ven, 2005).
It is important to define the processes and skills required for the tasks and standardize the activities in
order to utilize alternative work arrangements. Capacity for alternative work arrangements is an important
indicator of organizational modularity, since it helps understanding the capability of responding to
demand changes in the market.
Alternative work arrangement is possible when organizations convert the implicit knowledge to explicit
nature. In this way, it is possible to split the information into pieces regarding the proprietary information
and to assign the tasks to the contract-based employee with the limited proprietary information without
sharing all details. It also facilitates finding and hiring process of alternative labor force.

Alliance formation capacity

Organizations can use alliances to access to the critical capabilities that they do not have and/or they
cannot create quickly. Usually, these critical capabilities have the potential to provide flexibility to adapt
to the changing environmental conditions (Schilling & Steensma, 2001). Managers are engaged in
activities related to alliance formation, such as, regulating the resources and knowledge transfer between
units, specifying required organizational arrangements (Mingo, 2013). Spending less effort of managers
and less resource for these activities are related to the organizational design. It is expected that more
modular organizations are easier to adapt alliance formations.
Tiwana (2008) researched the effects of modularity, process control and output control on the alliance
performance, and found a positive relationship between organizational modularity and outsource
performance. Alliance formation capacity is an important indicator for an organization whether its
processes and units are designed in modular fashion or not. Easily and quickly forming an alliance with
other parties is critical to respond to the new opportunities in the environment; especially, when internal
reconfiguration is not economically feasible and/or not capable of satisfying all the necessary
requirements.

A Suggestion for Operationalizing the Concept of Organizational Modularity

Studies in the literature are highly limited and differ considerably in the dimensions they consider to
operationalize the organizational modularity concept, as it can be concluded from Table 5. There is no
study critically examining these differences and suggesting a complete measurement model. In this
respect, this study provides a valuable contribution for the first steps of the operationalization of the
concept of organizational modularity.

Table 5. Dimensions used for measuring organizational modularity

Study Dimensions
Schilling (2000); Schilling and > Contract manufacturing
Steensma (2001) > Alternative work arrangements
> Alliances
Worren et al. (2002) > Modular structure
> Modular processes
A. Nelson and Byers (2005) > Cross-unit dependence
> Awareness
Karim (2006) > Reconfigurability
Hoetker (2006) > Preference for Internal suppliers
> Prior transactions with suppliers
Todorova and Durisin (2009) > Modularity of organizational structure
> Modularity of organizational processes
Furlan et al. (2013) Buyer–supplier information sharing related to:
> new product development
> contract and price negotiation
> logistics

Operationalization of any concept first requires conceptualizing the concept by identifying its meaning in
theoretical terms, which has been done for the concept of organizational modularity in Section 2.3. This
definition provides the means for measuring organizational modularity. The common properties described
in the preceding subsections help understanding the different conceptual dimensions of organizational
modularity. Typically, these dimensions are then connected to observations by means of operational
indicators, but this is beyond the scope of this paper. Indicators allow observing or measuring the value of
the determined dimensions and, thereby, the value of the concept. As a further research, the suggested
model can be empirically tested by employing a confirmatory factor analysis. The suggested model is
depicted in Figure 1.
Figure 1. Organizational modularity measurement model
CONCLUSION
Although, organizational modularity concept is frequently mentioned in the literature of organization
theory, neither a common definition nor a measurement model exists for this concept. Nevertheless,
according to the results of the literature review conducted in this study, it is observed that there exist two
main streams of thought considering the definitions and characteristics of organizational modularity. One
stream extends the definition of product modularity to organizations, while the other stream takes inter-
organizational relationships as a basis. The theoretical framework introduced in this study to
conceptualize organizational modularity grounds on the internal characteristics of an organization,
however, takes also the characteristics related to inter-organizational relationships into account. To be
more precise, the organizational modularity concept is tried to be described with respect to the link
developed between visible design rules and organizational design parameters, while regarding the
relationships across organizations. Thus, originally, and differently from the current literature, this study
conceptualizes the organizational modularity concept within the frame of organization theory, and reveals
the common properties of modular organizations. The suggested theoretical framework and common
properties of organizational modularity underpin the model developed for measuring organizational
modularity.
It is worth to mention that, by definition, all organizations are open systems that exchange material,
energy, people, information, etc., with its environment in order to survive. In this respect, since
organizations differ from products, the concept of organizational modularity should incorporate inter-
organizational relationships. Therefore, simply extending the definition of product modularity to
organizations with respect to the mirroring hypothesis is not sufficient. Moreover, recent studies have
shown that the relationship between product design and organizational structure depends on the external
conditions and factors.

FUTURE RESEARCH DIRECTIONS

This study can be considered as a theoretical attempt to conceptualize organizational modularity.
Therefore, as a future study, properties of organizational modularity can be operationalized by identifying
their relevant indicators, and thereafter the suggested model can be empirically tested. This would allow
examining the content of organizational modularity empirically, and revealing the properties, which are
statistically significant. Furthermore, the measurement model would provide the opportunity to test the
mirroring hypothesis, and thereby, the relationship between product modularity and organizational
modularity. Finally, the measurement model could be used to investigate the effect of organizational
modularity on financial and/or non-financial performance.

ACKNOWLEDGMENT
This work was supported by Research Fund of the Istanbul Technical University (Project Number:37966)

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ADDITIONAL READING
Ron Sanchez, (2012), Architecting Organizations: A Dynamic Strategic Contingency Perspective, in Ron
Sanchez, & Aimé Heene (Eds.) A Focused Issue on Competence Perspectives on New Industry
Dynamics (Research in Competence-Based Management, Volume 6) (pp. 7-48), Emerald Group
Publishing Limited.
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of modular architectures. Journal of Evolutionary Economics, 22(5), 935-956.
Ulrich K. (1994) Fundamentals of Product Modularity, in Sriram Dasu, & Charles Eastman (Eds.)
Management of Design (pp. 219-231). Dordrecht: Springer.
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your corporation. Iowa, USA: Adams & Steele Pub.
Albert, D. (2018). Organizational Module Design and Architectural Inertia: Evidence from Structural
Recombination of Business Divisions. Organization Science.
Tee, R., Davies, A., & Whyte, J. (2018). Modular designs and integrating practices: Managing
collaboration through coordination and cooperation. Research Policy.
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source software development. International Journal of Production Research, 1-15.

KEY TERMS AND DEFINITIONS

Architecture: The structure specifying which modules will be part of a system together with their
functions.

Conceptualization: The process involving the identification of the meaning of a concept, or construct,
(i.e., ideas that represent the phenomenon) in theoretical terms.

Interfaces: The coupling protocols among modules of a system that describe how they will interact.

Mirroring Hypothesis: The claim that the structure of an organization mirrors the architecture of the
products it develops.

Modularity: A special form of design that decomposes a system into highly independent components by
defining how these components will interact and thus governs the ways in which system variants can be
configured (Sanchez & Mahoney, 1996; Sanchez, 1999; Asan et al., 2008)

Organizational Design Parameters: The basic elements defined by Henry Mintzberg for designing
organizational structures within which work is divided and coordinated to establish stable patterns of
behavior.

Organizational Modularity: A loosely coupled network of autonomously operating self-contained units,

having low level of interaction but high level of awareness among each other through standard interfaces,
which can be flexibly recombined into a variety of organizational configurations.

Standards: The procedures used for testing the conformity of the modules to the design rules and for
measuring module performances.

Visible Design Rules: The global, unhidden assumptions that affect design decisions by defining the
components of a system, the interaction of these components with each other, and their performance.