Strategic Modularity and the Architecture of Multinational Firm

Multinational enterprises ( MNEs ) are increasingly recognizing the importance of utilizing knowledge and capabilities from a wider innovation ecosystem beyond their corporate network of subsidiaries. In order to manage the complexity associated with setting up and running such international networks of practice, they devolve responsibility for significant activities to external agents. They accomplish this by designing or reengineering their products or services as modular subassemblies that can be parceled out to a network of partner organizations. The extent to which such modularization occurs varies depending on technical/engineering drivers and strategic considerations. It differs between process and product industries and varies depending on output variety, batch size, and the balance of bargaining power between supplier and buyers in the value chain. This ensures that the observed level of modularization varies across industries. However, we also observe that it varies across firms within industries. Depending on their capabilities, firms may implement a strategy leaning toward vertical integration and integration or specialization and modularization.