During the 1990s, a major, invisible battle was fought over the standards for Internet access. The objective was simple: given the exponential growth in Internet traffic, congestion had to be reduced by augmenting the network's ability to compress, encode and transfer information. Major companies, like IBM and Motorola, battled a myriad of smaller innovative organizations on two fronts. On on side, various standards for high speed access to Internet competed with each other (e.g. Fddi, Atm, Ethernet, and finally the one that emerged as winner, i.e. Fast Ethernet). On the other, electronic components that embody these standards and physically connect our computers to local networks and the Internet (hubs, and then switches) radically changed, gaining speed and complexity. Companies that differed in history, size and skills bet on different standards and product architectures. Who won the battle and why?
In those years, two main strategies were played. The first strategy was enacted by those who exclusively focused on the improvement of standards, i.e those rules for the codification, compression and transfer of data: a strategy focusing on software innovation. The second was the strategy of those focusing on hardware innovation, acting on the physical architecture of hubs and switches.
In Does Modularity Facilitate Entry? Evidence from the LAN Industry, by analyzing a database of products covering the whole population of hubs and switches (and associated standards) launched on the market during the 1990s, the evolutionary trajectories of entry strategies by large and small firms become apparent. Firstly, firms exclusively focusing on standards as a way to reduce congestion adopted modular product strategies. They thus created products that could adopt different standards simply by substituting the physical component embodying the standard. This way, customers could switch from Ethernet to Fast Ethernet by physically substituting the electronic component inserted into the hub. The modularization of the physical product has allowed the introduction of new standards, without cannibalizing the installed product base, thus giving an advantage to those firms which adopted this strategy.
However, and this is the second interesting results, the introduction of high speed standards has turned the hardware side into a bottleneck. Firms which bet on a less modular strategy have implemented more radical innovations in hubs and were able to enter the more sophisticated market for switches ahead of the competition. In this supercompetitive sector, being there first means enjoying a great advantage. What about modular producers: how have they fared? Many have disappeared, as they proved unable to restructure to produce innovation on the physical side of the product. But others, and this is interesting, have managed to shift to the switches trajectory, but adopting more modular architectures than competitors. Their stubborness seems to have paid off, since the few modular hub producers who managed to shift to switches have a higher probability of surviving in the new market.
The interpretation is this: modularity confers great advantages in the ability of introducing, rapidly and systematically, incremental innovation. At the same time, it brings disadvantages when one needs to jump on a new technological trajectory, since, by leading to specialization, it creates a sort of blinkered vision. However, if the firm manages to cast off such blinkers and sees the new trajectory, modularizing the new project gives an immediate competitive advantage which seemingly offsets the disadvantage of not being first comers.