The term modularity is widely used in studies of technological and organizational systems. Product systems are deemed “modular”, for example, when they can be decomposed into a number of components that may be mixed and matched in a variety of configurations.[1][2] The components are able to connect, interact, or exchange resources (such as energy or data) in some way, by adhering to a standardized interface. Unlike a tightly integrated product whereby each component is designed to work specifically (and often exclusively) with other particular components in a tightly coupled system, modular products are systems of components that are “loosely coupled.”[3]

In The Language of New Media, Lev Manovich proposes five “principles of new media”—to be understood “not as absolute laws but rather as general tendencies of a culture undergoing computerization.”[4] The five principles are numerical representation, modularity, automation, variability,and transcoding. Modularity within new media represents new media as being composed of several separate self-sufficient modules that can act independently or together in synchronisation to complete the new media object. In Photoshop, modularity is most evident in layers; a single image can be composed of many layers, each of which can be treated as an entirely independent and separate entity. Websites can be defined as being modular, their structure is formed in a format that allows their contents to be changed, removed or edited whilst still retaining the structure of the website, this is because the websites content operates separately to the website and does not define the structure of the site. The entire Web, Manovich notes, has a modular structure, composed of independent sites and pages, and each webpage itself is composed of elements and code that can be independently modified.[5]

Organizational systems are said to become increasingly modular when they begin to substitute loosely coupled forms for tightly integrated, hierarchical structures.[6] For instance, when the firm utilizes contract manufacturing rather than in-house manufacturing, it is using an organizational component that is more independent than building such capabilities in-house: the firm can switch between contract manufacturers that perform different functions, and the contract manufacturer can similarly work for different firms.[citation needed] As firms in a given industry begin to substitute loose coupling with organizational components that lie outside of firm boundaries for activities that were once conducted in-house, the entire production system (which may encompass many firms) becomes increasingly modular. The firms themselves become more specialized components. Using loosely-coupled structures enables firms to achieve greater scope flexibility and scale flexibility.[6] The firm can switch easily between different providers of these activities (e.g., between different contract manufacturers or alliance partners) compared to building the capabilities for all activities in house, thus responding to different market needs more quickly. However, these flexibility gains come with a price. Therefore the organization must assess the flexibility gains achievable, and any accompanying loss of performance, with each of these forms.

Modularization within firms leads to the disaggregation of the traditional form of hierarchical governance.[7][8][9] The firm is decomposed into relatively small autonomous organizational units (modules) to reduce complexity. Modularization leads to a structure, in which the modules integrate strongly interdependent tasks, while the interdependencies between the modules are weak. In this connection the dissemination of modular organizational forms has been facilitated by the widespread efforts of the majority of large firms to re-engineer, refocus and restructure. These efforts usually involve a strong process-orientation: the complete service-provision process of the business is split up into partial processes, which can then be handled autonomously by cross-functional teams within organizational units (modules). The co-ordination of the modules is often carried out by using internal market mechanisms, in particular by the implementation of profit centers. Overall, modularization enables more flexible and quicker reaction to changing general or market conditions. Building on the above principles, many alternative forms of modularization of firms are possible. However, it is crucial to note that modularization is not an independent and self-contained organizational concept, but rather consists of several basic ideas, which are integral parts of other organizational concepts. These central ideas can be found in every firm. Accordingly, it is not sensible to characterize a firm as "modular" or as "not modular", because firms are always modular to a greater or lesser degree.

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