A model proposal for measuring organizational modularity and investigating its relationship with strategic flexibility

Increasing use of information technologies provide organizations with opportunities to shorten the new product and service development cycles. As a result, these organizations have the chance to bring their products rapidly to the market and to meet the customer demands. In parallel to the developments in information technologies, advances in transportation capabilities lead organizations to enter into new geographies and markets quickly and at low costs. Due to these new conditions, both the internal processes and external relationships of organizations are getting more complex than ever before. Therefore, organizations are reconfiguring their structures and/or making alliances and acquisitions in order to seize the opportunities in international markets and respond to the increasing international competition. Meeting the stated performance goals and being successful, and consequently gaining competitive advantage, necessitates managing these reconfigurations and cooperations effectively. To accomplish this, intended resources and capabilities of the new units and organizations that is being cooperated or acquired, should be adapted and integrated quickly to the internal individual units and organization as a whole. By this way, the capabilities that can be hardly developed or even cannot be developed internally can be obtained from third parties, relatively in a short period. As a result, organizations need a new type of organization structure, which can effectively respond to these environmental changes and provide flexibility. For this reason, an increasing amount of attention is being paid in the literature to organizational modularity and strategic flexibility concepts, which correspond to the mentioned properties of the dynamic organizations. In this study, an extensive literature review is conducted to define and analyze the organizational modularity and strategic flexibility concepts. According to the results of this review, it is clear that a comprehensive definition of organizational modularity concept has not been established yet. Therefore, a new comprehensive definition of organizational modularity concept is proposed in this study, by considering Baldwin and Clark's (2000) visible modular design rules and some other organizational modularity specific aspects, such as reconfigurability and independent decisions. Thereafter, organizational modularity measurement models are also investigated and it is concluded that the current measurement models include only limited number of sub-dimensions of organizational modularity concept. In summary, none of the current measurement models covers all aspects of organizational modularity, and most of these models use Schilling and Steensma (2001)'s study as a basis and consider only the external properties of organizational modularity. Before developing an organizational modularity measurement model, the relationship between product modularity and organizational modularity, which is called as "mirroring hypothesis" in the literature, is also investigated. Although, there is a general tendency to assume a direct relationship between product modularity and organizational modularity theoretically in the literature, empirical investigations generally do not support this direct relationship and state that the relationship is much more complex than the theoretical assumptions. Therefore, product modularity is not treated as a property or direct cause of organizational modularity; rather it is treated as a facilitator for organizational modularity, in this study. Consequently, properties of organizational modularity are listed and explained in detail and classified into two groups as internal and external for the purpose of developing a new measurement model. Internal organizational modularity includes eight sub-dimensions such as self-containedness, reconfigurability, independent decisions, less hierarchical levels, defined process standards, defined output standards, awareness, and low level of interaction. On the other hand, external organizational modularity includes four sub-dimensions such as supplier replacement capability; outsource usage capacity, alternative work arrangements usage capacity and alliance formation capacity. The above listed internal properties of organizational modularity are analyzed regarding Mintzberg's organizational design parameters and Baldwin and Clark's modular visible design rules. By this means, properties of organizational modularity and their relationship with the organization literature is justified. Regarding this issue there exists no study in the literature that investigates the organizational design parameters and modular visible design rules together with organizational modularity properties. Properties of external organizational modularity identified in this study are mainly from Schilling and Steensma (2001)'s study, but some additional properties are extracted from other studies (e.g., dependency to the suppliers from Hoetker (2006)'s study). External organizational modularity properties such as alliance formation, alternative work arrangements, and outsourcing are evaluated by considering the capacity of the organizations rather than their current usage levels. This point is critical, as the main idea of organizational modularity is having several real options that can be used when needed. The options available are not obligatory in nature; rather, they can be regarded as rights that can be used to comply with the requirements. Strategic flexibility literature is also reviewed in this study, and by taking the dimensions and questions related to strategic flexibility from different studies in the literature as a basis, a new strategic flexibility measurement model consisting of four dimensions (i.e., product/service variety, competition capability, adaptability to change, and preparedness to opportunities/threats) is developed. Finally, a structural model, which consists of the above mentioned measurement models of organizational modularity and strategic flexibility, is proposed. This structural model is used to examine the relationship between organizational modularity and strategic flexibility, which is the main research question of this study. Then, in order to measure internal organizational modularity, external organizational modularity, and strategic flexibility concepts, a self-administered questionnaire is prepared. It is worth to mention here that, both the developed model and related questionnaire instrument are not sector or geography specific. Software industry, which is extensively studied in product modularity researches, is chosen as the industry to be examined in terms of empirically validating the proposed conceptual model and testing the hypotheses. Software industry is very dynamic in its nature, and one of the few industries, where product modularity is being applied. Modular design initiatives in software industry is as old as the coding of punch cards. There are some researches in the literature, which investigates product modularity and organizational modularity of software organizations, and concludes that there is no direct or causal relationship between them In most of the studies in the literature, it is obviously seen that product modularity acts as a facilitator for organizational modularity. Therefore, the relevant questionnaire is applied to Turkish software companies. Out of 260 companies, 230 valid questionnaires, which can be statistically analyzed, are collected. After performing the multivariate normality tests to identify outliers in the data set, nine of the questionnaires are excluded and the final analyses are performed on 221 cases. SPSS program is used for the descriptive and normality tests of the data, and R program (Lavaan and semTools packages) is used to solve the structural equation model. R program is widely used by statisticians and researchers as it has an open source and comprehensive library for different areas of the statistics. Results indicate that although organizational modularity is slightly better defined by external organizational modularity, internal and external organizational modularity dimensions both significantly defined organizational modularity. Most of the sub-dimensions of internal organizational modularity, except independent decisions and low level of interaction, are loaded highly to moderately highly on the internal organizational modularity factor. Similarly, all sub-dimensions of external organizational modularity, except dependency to the suppliers, are loaded highly on the external organizational modularity factor. Sub-dimensions that are not loaded highly on the relevant factors should be investigated further in future studies. For the strategic flexibility construct, product/service variety, competitive capability, adaptability to change, and preparedness to the opportunities/threats dimensions are all loaded highly on the strategic flexibility factor. Fit indices and power assessment test values of each measurement model and the structural model as well, were all acceptable when compared to the threshold values. As the developed model has a strong theoretical background, it is decided not to make any modifications in the model regarding the modification indices. Based on the results, the main hypothesis, which indicates that 'organizational modularity affects strategic flexibility', is supported.