Modularizing business models: between strategic flexibility and path dependence

The purpose of this paper is to explicate why and how modularization of business models can lead to path dependence or strategic flexibility, thus either inhibiting or favoring business model innovation.

Conceptual paper that depicts a model based on the extant literature. The derived implications for business model innovation are illustrated by several examples.

Modularity can be used as cognitive frame to explore issues of dynamics, evolution and transformation of business models. Thereby, the paper reveals drivers as well as barriers to business model innovation which sensitizes managers that modularity as a design principle is a two-edged sword: managers cannot simply rely on what they know about the benefits of modularity because this might lead to path dependence in the future.

The authors suggest that middle managers might best focus on managing modules and their direct relations. Senior management should put more emphasis on encouraging extra-modular thinking.

By outlining the concept of business model modularity, the authors add to the scarce literature that addresses modularity beyond the fields of products, production and organization design. The discussion also advances to the literature on drivers as well as barriers to managing business model innovation. While most of the extant literature has portrayed modularity as a means to increase flexibility, only a few studies have revealed the downside of modularity and explained how it gives rise to path dependence. In this respect, the authors highlight the relation between managerial action, self-reinforcing mechanisms and characteristics of the environment. Finally, the paper’s findings provide a lens to consider contradictory strategies simultaneously which is crucial for managing complex business models.