® Academy of Management Journal 2001, Vol. 44, No. 6, 1149-1168. THE USE OF MODULAR ORGANIZATIONAL FORMS: AN INDUSTRY-LEVEL ANALYSIS MELISSA A. SCHILLING New York University H. KEVIN STEENSMA University of Washington In many industries, integrated hierarchical organizations have been replaced by nonhierarchical entities that are permeable, interconnected, and modular. Other in- dustries, however, maintain relatively high levels of integration. We use the logic of general systems modularity to explain why in some industries there is a greater use of modular organizational forms, including contract manufacturing, alternative work arrangements, and alliances, than in other industries. This model was tested using data from 330 U.S. manufacturing industries. In the past two decades, we have witnessed dra- matic changes in the nature of many firms. Large and hierarchical entities have been, in many cases, replaced by loosely interconnected organizational components with semipermeable boundaries (Ash- kenas, Ulrich, Jick, & Kerr, 1995; Ghoshal & Bar- tlett, 1997; Snow, Miles, & Coleman, 1992; Zenger & Hesterly, 1997). The locus of production is no longer within the boundaries of a single firm, but occurs instead at the nexus of relationships be- tween a variety of parties that contribute to the production function. Achrol vividly summed up this transformation: Large-scale downsizing, vertical disaggregation and outsourcing, and elimination of layers of manage- ment have gutted the mighty multidivisional organ- izations of the 20th century. Replacing them are leaner, more fiexible firms focused on a core tech- nology and process, laced in a network of strategic alliances and partnerships with suppliers, distribu- tors, and competitors. The magnitude of the socio- economic change that network organization por- tends may be as great as the Industrial Revolution. (1997: 56-57, 61) A variety of terms have been used to describe this phenomenon, including "virtual organizations" (Chesbrough & Teece, 1996; Churbuck & Young, We wish to gratefully acknowledge Rita McGrath, Gas- sandra Vasco, Wilvy Sy, John Henderson, Steve Hippie, Wayne Gray, Zvi Griliches, Dale Jorgenson, Jan Rivkin, P. R. Balasubramanian, Jonathan Hibbard, Tammy Mad- sen, Jackson Nickerson, Rajiv Dant, Rob Dixon, Paul Berger, several anonymous reviewers, and Boston Uni- versity's System Research Genter for their generous help and support. 1992; Davidow & Malone, 1992), "network organi- zations" (Jones, Hesterly & Borgatti, 1997; Miles & Snow, 1986, 1992), and "modular organizations" (Lei, Hitt & Goldhar, 1996; Sanchez, 1995; Sanchez & Mahoney, 1996). Although the terms are some- times invoked in slightly different ways, they all describe the phenomenon whereby the role of a tightly integrated hierarchy is supplanted by "loosely coupled" networks of organizational ac- tors (Orton & Weick, 1990). The loosely coupled organizational forms allow organizational components to be flexibly recom- bined into a variety of configurations, much as a modular product system enables multiple end- product configurations ftom a given set of compo- nents. Common examples occur in the computer and apparel industries, where leaders such as Mi- crosoft, Dell Computers, and Reebok have demon- strated the advantages of gaining access to neces- sary organizational components through strategic alliances and outsourcing (Langlois, 1992). To bet- ter understand this phenomenon, authors have de- veloped descriptive typologies of different types of network organizations (Achrol, 1997) and have studied the nature of dyadic business relationships (Anderson, Hakansson, & Johanson, 1994; Iaco- bucci & Hopkins, 1992) and the governance of in- terorganizational links (Jones et al., 1997). Some researchers have also examined the impact of such arrangements on the transfer of learning within and between organizations (Kogut, Shan, & Walker, 1993; Matusik & Hifl, 1998; Powefl, 1998) and the implications of trust and social embeddedness in relational exchange (Jones & Bowie, 1998, Uzzi, 1997). However, despite the wealth of attention being paid to the disaggregation of firms and the 1149