NETWORKS AND INNOVATION IN A MODULAR SYSTEM - LESSONS FROM THE MICROCOMPUTER AND STEREO COMPONENT INDUSTRIES

In this paper we examine theoretically and through case studies the phenomenon of the modular system, which we distinguish from a product conceived of as a prepackaged entity or appliance. We argue that such systems offer benefits on both the demand side and the supply side. Supply-side benefits include the potential for autonomous innovation, which is driven by the division of labor and provides the opportunity for rapid trial-and-error learning. Demand-side benefits include the ability to fine-tune the product to consumer needs and therefore blanket the product space more completely. Both of our case studies suggest that innovation in a modular system can lead to vertical and horizontal disintegration, as firms can often best appropriate the rents of innovation by opening their technology to an outside network of competing and cooperating firms. We conclude by speculating on the increased importance of modular systems in the future, since flexible manufacturing and rising incomes are likely to increase the driving requisites of modular systems: low economies of scale in assembly and sophisticated consumer tastes.