The Limits to Specialization: Problem Solving and Coordination in ‘Modular Networks’

Abstract

This paper builds upon current research into the organizational implications of ‘modularity’. Advocates of modularity argue that the ‘invisible hand’ of markets is reaching activities previously controlled through the visible hand of hierarchies. This paper argues that there are cognitive limits to the extent of division of labour: what kinds of problems firms solve, and how they solve them, set limits to the extent of division of labour, irrespective of the extent of the market. This paper analyses the cognitive limits to the division of labour, relying on an in-depth case study of engineering design activities. On this basis, it explains why coordinating increasingly specialized bodies of knowledge, and increasingly distributed learning processes, requires the presence of knowledge-integrating firms even in the presence of modular products. Such firms, relying on their wide in-house scientific and technological capabilities, have the ‘authority’ to identify, propose and implement solutions to complex problems. In so doing, they coordinate networks of suppliers of both components and specialized competencies.