Abstract

Modularity theory (Baldwin & Clark, 2000) identifies two archetypal sector roles – systems integrator and component supplier – and ascribes superior strategic opportunities to systems integrators. Our theory is that the benefits and risks associated with a firm’s sector role are contingent on environmental conditions. Where environmental conditions are favorable, the best opportunities are available to firms that operate closest to the favorable impact. Where environmental conditions are unfavorable, firms that operate furthest from the unfavorable impact are subject to the least risk. Because systems integrators produce final products that are used by individuals and organizations, they can be said to operate closer to the market than component suppliers. As a consequence, we expect systems integrators to benefit more than component suppliers from favorable market-based exogenous shocks, and to be a greater risk than component suppliers from unfavorable market-based exogenous shocks.

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