CESPRI

Centro di Ricerca sui Processi di Innovazione e Internazionalizzazione

Università Commerciale “Luigi Bocconi”
Via R. Sarfatti, 25 – 20136 Milano
Tel. 02 58363395/7 – fax 02 58363399
http://www.cespri.unibocconi.it

Stefano Brusoni, Roberto Fontana

MODULARITY AS AN ENTRY STRATEGY:

THE INVASION OF NEW NICHES IN THE LAN EQUIPMENT INDUSTRY

WP n. 171 July 2005

Stampato in proprio da:

Università Commerciale Luigi Bocconi – CESPRI Via Sarfatti, 25 20136 Milano
Anno: 2005
 Modularity as an Entry Strategy:
The invasion of new niches in the LAN equipment industry

Stefano Brusoni † and Roberto Fontana‡

† CESPRI and CRORA, Bocconi University (I) and Silvio Tronchetti-Provera Foundation
‡ Department of Economics, University of Pavia and CESPRI, Bocconi University (I)

THIS VERSION: JULY 2005

ABSTRACT
This paper focuses on niche entry patterns in the LAN equipment industry in the 1990s. We
analyze an original data-set of LAN equipment consisting of more than 1,000 hubs and switches
marketed between 1990 and 1999. Modularity emerged as a design strategy that supported
incumbent firms’ efforts to enter new product niches in the hub segment. However, after the
emergence of switches as an alternative to hubs, coupled with the introduction of a new
standard, incumbents relying on a modular hub strategy were overtaken by a new comer (Cisco).
Moreover, the fastest followers were incumbents that had not previously relied on modular hub
architectures. Our interpretation is as follows: modularity offers advantages of speed when
changes occur within established boundaries. However, it also generates a ‘tunnel effect’ that
prevents firms from developing products based on different problem-solving strategies. Such
changes are more easily introduced by firms that do not rely on tightly-defined modular design
rules.

KEYWORDS : entry, modularity, LAN equipment

JEL CLASSIFICATION: O33, L63, D83

1
1. Introduction

Since the 1980s, modularity has emerged as a powerful product design strategy in

sectors as diverse as automotives (Womack et al., 1990), mainframes (Langlois, 1997),

micro computers (Langlois, 1992), workstations (Garud and Kumaraswamy, 1993),

personal computers (PC s) (Baldwin and Clark, 2000), software design (Cox, 1996; Kogut

and Metiu, 2001), hard disk drives (Chesbrough and Kusunoki, 2001), process

engineering (Brusoni, 2003), aero engines (Prencipe, 1997), and domestic house

appliances (Worren et al., 2002). The key promise modularity offers to managers is the

possibility of delivering a continuous stream of incremental innovations around a

common technological platform, or product architecture. Advantages would include

enhanced product variety and mass customization (Wheelwright and Clark, 1992), rapid

upgradability to meet changing customer needs (Garud and Kumaraswamy, 1995),

exploitation of economies of scale and scope at the platform level (Gawer and

Cusumano, 2002), increased pace and decreased costs of parallel experimentation

(Baldwin and Clark, 2000), decreased coordination costs for innovative projects

(Schilling, 2000), and ease of recombination of divisional resources to cope with

changing product-market domains (Galunic and Eisenhardt, 2001).

The aim of this paper is twofold. First, it provides empirical evidence for the hypothesis

that modularity facilitates upgradability, i.e. sequential entry in contiguous niches (e.g.

Garud and Kumaraswamy, 1995). Second, it investigates the impact of alternative

product design strategies (i.e. modular vs. non modular) on firms’ innovation strategies.

Modularity, like any design strategy, entails some trade offs. On the one side, it speeds

up learning by focusing it on well-defined modules (Baldwin and Clark, 2000). On the

2
other side, some argue that precisely because it gives learning processes a tightly

defined focus, modularity might induce rather myopic forms of learning which could

cause firms to lose sight of the system-wide implications of module-level improvements

(Chesbrough and Kusunoki, 2001). Thus, modularity would inherently lead firms to

incrementally exploit given trajectories while postponing the exploration of trajectories

based upon different problem-solving strategies.

This paper examines technological innovation and entry in the Local Area Network

(LAN) equipment industry throughout the period 1990-99. In this period, the LAN

equipment industry was characterized by continual introduction of both incremental

and radical innovations and the emergence of new product niches. Throughout the

1990s, new entrants challenged incumbent firms as the sector underwent enormous

growth in its customer base and traffic, coupled with rapid technological and

institutional change wrought by the emergence of new standards for the exchange of

electronic data. This paper looks at this very complex phase in the history of the LAN

equipment industry, building upon an original data-set of more than 1,000 hubs and

switches (key components of any LAN) marketed between 1990 and 1999. The data -set

reports information on each product’s fundamental technical characteristics, date of

market introduction, and manufacturer. Based on this we define the ‘design space’

(Stankiewicz, 2000) explored by the main actors in terms of new transmission standards

(e.g. Ethernet, FDDI – Fibre Distributed Data Interface, etc) and product characteristics

(e.g. single bus hubs, multiple bus hubs, etc.). The combination of standards and

characteristics defines a grid, which in turn identifies specific niches, or market

segments as they emerged during the 1990s.

3
This paper is structured as follows. The next section reviews the relevant literature on

modularity as a design and problem-solving strategy to identify the key working

hypotheses that will be empirically tested. Section 3 describes the technological

evolution of the industry, identifying the key dimensions used to define the LAN

equipment design space. Section 4 presents the data we use in our study, and Section 5

the results of the empirical analysis. Implications from the empirical results are

discussed in Section 6. Conclusions are drawn in Section 7.

2. Innovation, niches and modularity

Modularity is a design strategy aimed at decomposing complex products into simpler,

self-contained modules. It is based upon a tw o-pronged approach. First, standardized

interfaces across components. Second, all components being designed in such a way that

each performs only one function. To practitioners, modularity offers tools and

guidelines to create value in ever more complex and fast changing environments. Garud

and Kumaraswamy (1995) argued that in such contexts the key advantage delivered by

modular design strategies is the possibility to reap the benefits of ‘economies of

substitution’ (p. 93). That is to say, innovation in complex technical systems, made up of

heterogeneous components that change at different rates, can be achieved by replacing

certain modules, while retaining others. In their words:

‘The potential for such economies [of substitution] increases if

technological systems are modularly upgradable. By designing

modularly upgradable systems, firms can reduce product

4
 development time, leverage their past investments, and provide

customers with continuity’ (p. 93).

By adopting modular design strategies, firms can decouple the design and development

of separate modules, through the standardization of their interfaces. Thus, they can

develop new products more quickly, as integration of the final product is a matter of

mix and match of ‘black boxes’ (Baldwin and Clark, 2001; Sanchez and Mahoney, 1996).

Advanced technological knowledge about component interactions is used to fully

specify and standardize component interfaces and, therefore, to decouple the design of

the product architecture (i.e. arrangement of functional elements) from the design of

each module. Another major advantage of modularity in fast changing contexts is the

reduction in development costs made possible by shifting the level of experimentation

from an entire system to a single module. Modularity renders complexity manageable

by enabling experiments to be run at the level of modules, rather than for an entire

artifact, and to be run in parallel (Baldwin and Clark, 2001).

As stressed by Garud and Kumaraswamy (1995), in fast changing environments

modular upgradability becomes a key source of competitive advantage for two related

reasons. First, on the supply side manufacturers are able to introduce new developments

into existing products that produce gains in performance, functionality (and

complexity). Second, on the demand side, by simply buying a new module customers

can enjoy the benefit of successive developments to previously adopted products

without having to completely change their installed base. Avoiding cannibalization, and

allowing customers to continuously upgrade their installed base while acquiring new

5
customers, has been a major driver of competition in all network industries, and in

telecommunication equipment in particular. Thus, in minimizing the costs and risks of

being locked into early, and inferior, technologies, modularity provides manufacturers

with the incentive for continual development of their products; and users with the

incentive to become early adopters, since they can acquire new modular upgrades.

On the basis of the above, we put forward the following hypothesis.

Hypothesis 1: Manufacturers that market modular products upgrade their products

through the introduction of new functionalities and characteristics, more quickly than

those manufacturers that produce non-modular products.

However, like all design strategies, modularity entails costs and trade offs. First, the

creation and dissemination of design rules is a rather expensive activity and

experimentation and testing on different modules is also costly. The costs of design rules

deserve particular attention. Developing modular products is more difficult than

developing integral ones. Achieving modularity requires a very precise understanding

of product functionalities, how they are allocated to components, and how the

components interact as well as a determined choice in terms of the specific problem-

solving strategies adopted. Thus, the choice of product architecture should be related to

a company’s product strategy. Ulrich (1995) argued that if a company wants to stress

product performance, then the most appropriate choice would be an integral

architecture, since this type of architecture optimizes global performance characteristics.

On the other hand, companies wanting to emphasize product change and variety,

6
flexibility and upgradability, may well choose a modular architecture. As the next

section will argue, this latter strategy was adopted by most LAN equipment

manufacturers during the era of the ‘battle of standards’.

There are other costs involved in developing a modular architecture. For example,

Ethiraj and Levinthal (2003) caution against the dangers of overmodularization when

the ‘real’ decomposition scheme of the problem at hand is uncertain. In particular, the

costs of the opportunities that might have been exploited by adopting different problem

solving strategies must be considered. This is particularly cogent in an innovative

context. The change in the unit of selection implied by modularity imply in relation to an

integral system is crucial: having ‘fine’ rather than ‘coarse’ units of selection makes the

search process faster (selection operates on the finer scale of modules and therefore the

selection environment is in a sense ‘richer’), but essentially ‘local’ and quickly tends to

lock-into a local optimum. In an integral system the search is global, which implies that

there is no lock-in, but it is much slower and in complex space there is a lot of wasteful

search as nonsensical options can be generated (Marengo et al. 2004). In other words,

modular design strategies seem capable of providing incremental solutions along given

trajectories which embody specific problem solving strategies. However, this could lead

to myopic learning processes that make firms incapable of looking beyond the

boundaries set by the pursued trajectory. Looking at how Fujitsu managed to maintain

its competitive leadership through a major technological revolution, Chesbrough and

Kusunoki (2001) provide an insightful analysis of the kind of ‘tunnel effect’ that can be

induced by excessively modular strategies.

7
On the basis of the above discussion, we propose the following hypothesis.

Hypothesis 2: Manufacturers that market modular products are slower than

manufacturers that market non modular products to explore the design space toward

different technological solutions.

By ‘technological solution’ we mean the problem-solving principle adopted to solve a

technical problem. The next two sections will argue that the main technical problem

LAN producers had to solve was traffic congestion. Two technological solutions were

available, i.e. data sharing and data switching. The former was embodied in hubs; the

latter in switches. Both could be either modular or fixed. The choice of a hub architecture

explains the delay in the adoption of the second – more advanced – technological

solution. We argue that producers of modular hubs were slower to adopt the new

technological solution.

3. Background on the LAN equipment industry in the 1990s and modularity

3.1. The evolution of LAN equipment in the 1990s

The evolution of LAN equipment and standards is well suited to investigating the

effects that modular design strategies have on the innovativeness of firms competing in

fast growing and rapidly changing environments. LANs constitute the infrastructure

that enables computers, other types of end stations and/or peripherals, to be linked to

form a network connecting different users within an area of relatively narrow extent

such as a university campus or different buildings on a company site. The functioning of

8
LANs can be described as follows. A computer wanting to send some information

breaks the data into packets. The packets are sent to the LAN through adapter cards

which physically connect the computer to the channel. Once sent to the channel, packets

travel first either to a hub or a switch. In early LANs, packets normally travelled to a

hub. Hubs are simple devices that send the packets they receive to all users connected to

a specific LAN segment so that each user can ‘see’ the packets. Switches, on the other

hand, are more sophisticated in that they are capable of selecting the specific user to

whom packets are to be sent. Finally, there is another type of equipment called router

that is even more sophisticated than switches. Routers are both capable of selecting the

specific user to whom packets are to be sent and the shortest path to reach the selected

user. They are generally used to connect multiple LANs and/or to interface the LAN

with the Wide Area Network (WAN) or the internet.

Congestion is the key bottleneck that LAN engineers struggled to eliminate throughout

the 1990s. Two solution paths were followed by manufacturers to tackle congestion

problems. First, new standards were introduced, often in competition with each other.

Indeed, one solution to congestion problems consisted of implementing higher speed

standards so as to increase the amount of data traffic that could be carried over the

network (i.e. increasing total network throughput), without changing the equipment

architecture. At the beginning of the 1990s, several high speed standards (FDDI, Fast

Ethernet, ATM – Asynchronous Transfer Mode and 100VG-AnyLAN) were ‘battling’ to

become the main successor of Ethernet, the most widely adopted standard at the time.

After a period of uncertainty about which of the alternatives would eventually succeed

in the market place the battle ended in 1995 with the triumph of Fast Ethernet.

9
Implementing one of these high speed standards, could increase in the amount of

bandwidth allocable to end stations although each would continue to use only a

percentage of the total available bandwidth. Second, manufacturers improved

equipment hardware to increase the amount of data traffic that each end station, PCs

and/or workstations, could transmit and receive from the network (i.e. they increased

the node throughput). The technological trajectory of hub equipment consisted of a series

of innovating events which took place between the mid-1980s and the mid-1990s.

The major technical changes occurred in the first half of the 1990s as a consequence of

the problem-solving activity that followed the implementation of high speed standards.

Hubs had first been introduced in 1985. Their design revolved around a single bus along

which data travelled to and from connected end stations. When two end stations were

connected by this type of hub they had access to an amount of bandwidth which had to

be shared among them. The presence of a single bus backplane limited the capability of

hubs to cope with the expansion of LAN systems that occurred at the beginning of the

1990s. One way out of this problems involved allocating new and/or existing users to

different LAN segments. Some manufacturers thought that designing hubs supporting

multiple buses was a way of achieving this goal. This principle inspired the

development of so-called segmentable (or multi-segment) hubs that were first

introduced in 1990 (Brown and Molloy, 1991: p. 44). As congestion problems kept

increasing, problems with the multi-segment architecture emerged (Ben-Yosef, 1996;

McConnell, 1994). Tackling these issues eventually required the introduction of further

modifications to the design of existing hubs. Two solutions were found. The first

10
represented an extension of the hub trajectory while the second implied a radical

departure from it.

Some manufacturers chose to implement a combination of hardware and software

innovations to reduce congestion which entailed only incremental modific ations to the

existing design. This solution, firstly introduced in 1991 and known as ‘port

reconfiguration’, enabled a fixed and dedicated connection to be established between

two end stations belonging to different segments of the same segmentable hub and

‘dynamic’ reallocation of users across segments, while the bandwidth continued to be

shared within each segment. A more radical solution would have involved the

development of a switched rather than a shared bus. This design involved a reduction in

the number of buses to just one per segment in contrast to the increased number of buses

in the ‘segmentable’ approach and the establishment of a dedicated path between the

end stations along the bus therefore reducing congestion (Greenfield, 1992: p.44).

Since the early days of the industry, LAN functioning had been based on the principle

that the communication channel had to be shared among the users who wanted access to

it. Some manufacturers thought that implementing a switched bus in equipment such as

hubs, which had always been quite simple from the technological viewpoint, might be

difficult and encounter user resistance. Moreover, most of the available chipsets for hubs

had been designed to work with LAN standards such as Ethernet which, because of the

way they functioned, naturally supported a shared bus design. Implementing these chip

sets in a switched bus design would have made the equipment less efficient. Because of

these concerns, manufacturers’ differed in their choice of solution. In particular, the

11
‘switched’ solution was adopted first by start-ups, namely Kalpana Inc. and Synernetics

Inc. while the incumbents initially opted for the more conservative solution.

It is important to stress that innovations in switch equipment were radical, because they

entailed a departure from an established trajectory, but not disruptive in terms of

capabilities. Indeed, switches embodied a different technological solution to congestion

problems which originated from the recombination and reapplication to data

communications of well known concepts and principles widely used in the field of

telephony. In particular, the design of switch equipment was based on circuit switching,

which had been developed in telephone networks (but not applied in the production of

hub equipment), and its functioning was modelled on the forwarding principle

originally implemented in other types of LAN products known as bridges (Bhardwaj,

1990; Breindenbach, 1998). This new design did not require a great leap forward in terms

of either the type or amount of knowledge needed by manufacturers to develop

switches. However, it led to the creation of a new market by addressing unsatisfied

customer needs (Levinthal, 1998).

3.2. The role of modularity in managing technical changes

The major consequence of the innovations described above was the emergence of some

functional overlapping among equipment, as switches became imperfect substitutes for

hubs in the market. This outcome, however, was gradual. Changes were incremental,

occurred slowly and resulted from the combination of changes in the product

architecture and the implementation of new high speed standards. The use of a modular

design played an important role in facilitating these changes. The design of modular

12
hubs revolved around a chassis with several slots which could host the modules

responsible for connectivity. The backplane of chassis-based hubs was initially

organized in sections to separate the management and the data processing functions.

The task of the management section was to move information between the connectivity

and the management modules while data travelled along the other sections of the

backplane. This data section could support a fixed number of LAN segments.

Modularity initially enabled manufacturers to offer equipment with higher port density

thereby enabling users to deal with the expansion of their LANs. However, it soon

became part of the hub manufacturers’ strategy to manage incremental changes and

transform them into market opportunities.

From the viewpoint of buyers, modularity allowed existing investments to be enhanced

by new technical features. First, when buying modular hubs users could mix and match

modules of different densities and standards thereby increasing the variety of the

technology supported. Second, modular hubs increased buyers’ flexibility to cope with

small changes in LAN architectures and continue to benefit from previous investments

in management software as well as training. Finally, when coupled with adequate

changes in the bus design and the deployment of high speed standards, modularity

could increase equipment performance measured in terms of backplane capacity.1 To

1Backplane capacity is defined here as the maximum speed (in Mbps) at which data transmission may occur
between the equipment input and output controller. The speed depends on the type of bus, maximum
number of ports (i.e. maximum port density) and type of standard supported. Higher backplane capacity
generally meant higher data transmission speed.

13
enjoy these benefits buyers seemed ready to pay a relatively high price of purchasing

modular hubs.2

On the supply side, modularity enabled manufacturers to master technical change while

at the same time, keeping control of their existing customer base. In the LAN

environment, standards were ‘open’ and users could freely mix and match equipment

manufactured by different firms, but supporting the same standards. Modules, however,

would only interoperate with chassis from the same manufacturer. By commercializing

modular hubs, firms could better co-ordinate the migration of their installed base of

users from one generation of hubs to the next. Modularity responded also to an explicit

strategy of ‘invasion’ of the product design space. This strategy had two aims. The first

was to target new categories of customers. Modular products generally offered users

higher capacity and port density than fixed ones. These features were requested by

customers with large LANs – not the usual target of hub producers. Modularity

therefore allowed manufacturers to extend their customer base. The second aim was to

restrict competition. Designing modules was relatively easy for manufacturers and

could enable them to quickly add new features and/or improve upon existing design.

Thus, a modular design was adopted to explore new areas of the design space, either in

response to previous moves by competitors, or with the intention of crowding them out.

2Per port prices of modular hubs were initially between 3 and 4 times higher than those for fixed hubs, this
premium being justified by the higher flexibility that these devices entailed. After a rapid decrease (30%)
between 1991 and 1993 however, the decline in the price of modular hubs slowed while prices for fixed hubs
continued to decrease at the same rate. As a result, in 1996 the per port price of modular hubs was 128 USD
which was six times higher than the price of a fixed hub of 21 USD (Source: Dell’ Oro Group Market
Research, 2000).

14
Finally, modularity played a central role with respect to the introduction of competing

standards. Indeed, modular hubs appeared in the first half of the decade at a time when

many sta ndards were competing in the market place to be adopted as high speed

upgrades to Ethernet. Modularity enabled manufactures to commit on multiple

standards thereby confronting existing uncertainty on which standard would finally

prevail. Quite simply, given an installed base of hubs, it was much easier to adopt a new

standard if the hub were characterized by a modular configuration. The new standard

could be implemented simply by sliding the module (or blade) supporting the standard

into the slot provided on the product chassis. Such ease of upgrade was beneficial to

both users and manufacturers, who were not required to commit to any one of the

standards that were competing for supremacy until 1995 (when Fast Ethernet finally

prevailed).

Figure 1 summariz es the above discussion. It represents the design space that was

available to LAN equipment manufacturers for exploration in the 1990s. Its two

dimensions are those identified above, namely the innovative trajectories of equipment

(the horizontal trajectory in Figure 1) and standards (the vertical trajectory in Figure 1).

The hardware trajectory is identified by four macro-categories: single bus hubs,

segmentable hubs, port reconfiguration hubs and switches. The standards trajectory

considers the five main standards: Ethernet, Token Ring, FDDI, ATM and Fast Ethernet.

Modularity is represented here on the vertical axis to capture the last point discussed

above. Each product could be marketed adopting either a modular or a fixed

configuration. The former offered the capability of adopting a new standard simply by

changing, or adding, the blade supporting the standard. So, for example, in considering

15
a fixed Ethernet single bus hub, and a modular Ethernet single bus hub, the latter had

the advantage that it could be more easily upgraded to, say, Fast Ethernet. However, the

manufacturer would have lost the option to lock the customer into the standard of its

choice.

{Figure 1 approximately here}

4. Data

4.1. Sample and Research Method

To analyse how and when firms in the LAN equipment industry invaded the hubs and

switches design space described in Figure 1, we used data about new hubs and switches

marketed between 1990 and 1999. Information on these products was collected from

Network World a specialized publication targeted at network professionals. Trade

journals, and Network World in particular, give extensive coverage to the introduction of

new products by reporting product characteristics, prices, manufacturers and dates of

introduction. Dates were double checked wherever possible, against press

communications and manufacturers’ product announcements. The choice of the 1990-

1999 time span was based on considerations concerning the evolution of the market for

both hub and switch equipment discussed in the previous section. Between 1990 and

1993 and again between 1995 and 1996 hubs experienced their fastest rates of technical

change and new product introduction. By the end of the decade sales of hubs had been

overtaken by sales of switches. In the case of switch equipment, the decision to end the

period of analysis in 1999 was a consequence of a concern with the introduction in the

market of LAN standards. In 1997 a new high speed standard, Gigabit Ethernet was

16
marketed. After that time, sales of new switches supporting other high speed standards,

such as FDDI and ATM, started declining. Thus, 1999 is a good ‘cut-off point’ because in

this year a reasonable mix of models supporting all the different standards was still

present in the sample.

The dataset contains 199 different manufacturers and 1,071 pieces of equipment. Fifty-

four firms introduced five or more new products between 1990 ad 1999. We restrict the

analysis of product location in the design space to these firms, which reduces the

number of pieces of equipment considered to 810. Table 1 reports the total number of

products introduced by the selected manufacturers in the period under consideration

broken down by product market. Most firms (47) were active in both markets (hubs and

switches); only seven introduced hubs only and only three produced switches only.

{Table 1 approximately here}

Table 2 below reports for each standard and product type (hubs and switches) the

number of times and the frequency with which manufacturers first introduced a new

standard embodied in a modular product configuration. The decision to give support to

a new standard for hub equipment generally coincided with implementation of a

modular strategy. In the case of switches, new standards were first implemented in fixed

architectures and it was only some time after products became modular. This seems to

confirm that the switch represented a radical departure from the trajectory of hub

equipment. The fact that switches were first introduced in fixed configuration is

consistent with the existing research on modularity (e.g. Ulrich, 1995). Since a modular

17
architecture depends upon a very precise understanding of how the product works,

radically different products are likely to be introduced initially relying on a non-

modular architecture.

{Table 2 approximately here}

4.2. The empirical model

To investigate the two hypotheses introduced in Section 2 we employ ‘hazard’ models.

In particular we follow Klepper and Simons (2000) and use the Cox proportional hazard

model, a semi-parametric form compatible with different shapes of the hazard function

f(t,) that allows for time varying covariates. Given that we have information on whether

entry occurred in the first or the second semester of each year we divided each year into

two sub-periods. The regression results allow us to give a quantitative account of the

design trends and strategic constraints underpinning the qualitative analysis.

We estimated the Cox model as follows:

hit = f (t ) exp(β ' x it ) (1)

where f(t) is the base line hazard function, x is the vector of covariates and ß the vector

of the coefficients to be estimated.

18
When testing Hypothesis 1, according to which firms adopting a modular strategy were

swifter to enter new hub niches, hit is the probability that firm i would ‘complete the

transition’ (i.e. it enters the Port-Reconfiguration niche given that it has previously

entered the Shared and Multi-Segment niche). When we test Hypothesis 2, which

maintains that manufacturers that adopted modular design strategies were slower to

enter the switch market, hit is the probability that firm i would enter the switch market in

period t given that it has not yet entered before. We call the former the ‘transition

completion model’, and the latter the ‘switch entry model’.

Between 1990 and 1999, 25 out of the 54 firms in our sample completed the transition.

Eighteen firms did so before entering the switch market. Of the 29 companies that did

not complete the transition only three did not enter the switch market. None of these

three companies survived beyond 1999. (This rules out that they might have completed

the transition at a later stage not included in our sample period.) Forty-eight out of 54

companies entered the switch market. Twenty-six of these companies had not completed

the transition first. Twenty-two companies both completed the transition and entered

the switch market. Thirty-seven of the 48 companies that entered the switch market were

already active either in the hub or in the router market in 1990 when the switch was

invented. Eleven companies were founded after 1990. Again, the companies that did not

enter the switch market had ceased to exist before the end of 1999.

4.3. Exogenous variables

For each model we have one main independent variable that accounts for the role of

firms’ modular strategy on entry and a set of controls. Table 3 below contains the names

19
of the variables and their descriptive statistics. The correlation matrix is reported in the

Appendix.

{Table 3 approximately here}

Firm’s modular strategy

Our main independent variables capture the firms’ modular strategy. In the case of entry

into hub niches, Experience in Modular Hubs is the number of modular hubs introduced

by each company in each time period preceding transition completion. In the ‘transition

completion’ model, this variable is our proxy for the influence of modular product

strategy on entry into contiguous hub niches. It focuses on the relationship highlighted

in Hypothesis 1 (i.e. modularity enables rapid upgradability). When looking at the

‘switch entry‘ model, we use the variable Modular Hub Strategy. This is a dummy that

takes the value 1 if the company introduced modular hubs before entering the switch

market and 0 if not. This variable is time-invariant and is designed to capture the

specific role played by modularity in explaining entry into the switch market. It focuses

on the relationship highlighted in Hypothesis 2 (i.e. manufacturers who market modular

products are slower than manufacturers who market non-modular products to explore

the design space towards different technological solutions).

Beside firms’ modular strategy, we argue that both the exploration of the hub design

space and entry into the switch market may be influenced by four types of control

variables: firms’ characteristics, firms’ innovative experience in related markets,

innovation strategy, and the nature of competition.

20
Firms’ characteristics

To control for the effect of firms’ specific characteristics on entry, we use two variables.

First Age which is the number of periods since the company was founded. This variable

is used in both models to capture some sort of experience effect although such

experience cannot of course be related to either hubs or switches (Sorensen and Stuart,

2000).3 Since the invention of the switch provided the opportunity for many start-ups to

enter the market, when analysing entry in the switch market we consider an additional

variable (Entrant) which is a dummy taking the value 0 if the firm pre-dated the

invention of the switch and 1 if it was founded after 1990 (i.e. after the switch was first

introduced). This variable is time-invariant and aims at capturing the ‘opportunity’

effect that might have been induced by the first introduction of the switch (i.e. a radical,

although not disruptive, new technology might have generated a swarm of entries to

challenge the incumbents).

Innovation strategy

Innovation strategy can influence entry too. In particular, firms’ entry strategies might

vary according to their positioning within the product design space. In fast-changing,

highly-segmented product spaces, firms that are far behind the frontier might try to leap

frog to access niches closer to the frontier. Alternatively, they might decide to pursue a

step-by-step strategy. Both paths have been discussed in the literature (Swann, 1985;

Greenstein and Wade, 1998). To account for innovation strategy, we use two sets of

variables.

3 In particular, Age can be considered a proxy for firm size (REF HERE)

21
First, we present ‘product specific’ variables. When analysing Model (1) we consider two

transition-specific variables to capture the influence of niche-specific differences in

transition completion (King and Tucci, 2002). Transition into Multi-Segment is a dummy

variable that takes the values of 1 if a firms is at risk of entry into this niche (i.e. it

marketed the Shared architecture prior to marketing the Multi-Segment one) and 0 if

not. Analogously, Transition into Port-Reconfiguration takes the values of 1 if a firms is at

risk of entry into this niche (i.e. it marketed a Multi-Segment architecture before Port-

Reconfiguration) and 0 if not. The aim of these two variables is to understand whether

firms tend to move in a stepwise manner within the design space, or jump a niche to

directly enter more technically sophisticated segments of the hub market.

Second, we develop a ‘technology specific’ variable: Least Distance from the Technological

Frontier which we control for in both models. With this variable, we aim to capture the

role of firms’ capabilities in explaining their entry strategy. The underlying assumption

is that firms that lag far behind the tech nological frontier are less ‘capable’ than those

firms that are closer to it. We construct this variable in several steps (Khessina, 2004;

Fontana and Nesta, 2004). First, we identify a product characteristic that could be

considered a good proxy for equipment performance. Backplane capacity is the obvious

candidate. As argued in Section 3 backplane capacity is a good performance indicator

because it takes into account equipment density, type of standard supported, product

configuration and type of architec ture implemented. Second, for each year, we

standardise the backplane measure by dividing the backplane capacity of each product

by the mean backplane capacity for the industry. Third, we compute a distance measure

as follows:

22
 f
d mit = max (Bcp t ) − Bcp mit
s
(2)

Bcpmit
where Bcpmit
s
= is the standardised backplane capacity of model m by company i
Bcp t

in period t. The higherd mit

f
, the farther the product is from the frontier. Since a company

can introduce several products in a specific year we consider for each firm the least

distance from the frontier:

( )
d itf = min d mit
f
it (3)

Firms’ innovative experience in related markets

We then account for the influence on entry of previous experience companies may have

gained in related markets of different technological complexity. In particular, we

measure innovative experience by looking at the company’s pattern of product

innovation in the same and/or related markets before the events being measured (i.e.

transition completion or entry into the switch market) occurred. Experience in routers is

the first variable capturing firm’s experience. It is present in both models and is

calculated as the number of routers introduced by each company before completing

transition or entering the switch market. This variable captures the influence of

experience acquired in a market of higher technical complexity. In the ‘switch entry’

model Experience in hubs is the number of hubs introduced by each company in each

time period before entry. Both variables are updated for successive years.

23
Nature of competition

Finally, we control for the influence on entry of the nature of competition. In fast

changing industries, companies typically follow product introduction strategies aimed

at filling empty niches in the product space. The presence of many products in the

market can be both a signal of increasing competition, deterring entry on the one hand,

and a signal of market expansion leading to increasing opportunities on the other hand

(Stavins, 1995). In the ‘transition completion’ model the effect of the nature of

competition is accounted for by the variable Niche Competition which is the total number

of Multi-Segment and Port-Reconfiguration hubs brought to market. In the ‘switch entry

model’ Switch Competition, is the total number of switches brought to market. We take

the natural logarithm of these variables and lag them one period to account for the fact

that entry decision are taken with reference to market condition before entry occurs.

5. Results

Results of our Cox regressions are presented in Table 4 and 5. To control for the

robustness of the results, in each model we use several specifications.

Table 4 reports the results for ‘transition completion’.

{Table 4 approximately here}

Model (1) takes into account the effect of our main variable Experience in Modular Hubs

only. The coefficient of the variable Experience in Modular Hubs is positive and significant

suggesting that more experience with modular products increased the hazard of

entering new hub niches. This finding supports Hypothesis 1 that firms adopting a

24
modular strategy were indeed faster to enter new hub niches. Both the sign and the

significance level of this coefficient continue to hold when adding the control variables.

In model (2) we control for firms’ characteristics. Tenure has a positive and significant

effect on the probability of firms completing the transition, as suggested by the positive

and significant coefficient of Age. When we look at the influence of innovation strategy

in model (3), we obtain the following results. On the one hand, the signs of the two

transition dummies are negative although only one (Transition into Multi-Segment) is

significant. This indicates that the risk of entering the next niche tended to decrease the

probability of transition completion. This result seems to suggest that innovative

companies introducing shared hubs would generally choose to enter a contiguous niche

rather than ‘leap-frog’ through the introduction of port-reconfiguration a rchitecture. On

the other hand, Least distance from Frontier has a positive and significant coefficient

suggesting that the farther a company is from the technological frontier the higher the

probability of completing the transition. In other words, for firms that are lagging,

expending effort to enter a new niche is perceived as one strategy for competing with

the market leaders. Besides being consistent with other findings on the dynamics of

niche entry in fast growing industries (King and Tucci, 2002), both results seem to be

consistent with our description of innovation strategy in the hub market, according to

which companies incrementally explore the hub design space. In model (4) we consider

the effect of companies’ innovative experience on the probability of completing the

transition. Experience gained in the router market is associated with earlier transition

completion. However, the coefficient of the variable Experience in Router is not

significant. Finally, in model (5) the sign of Niche Competitio n is positive suggesting that

increasing availability of a product with new features may have triggered entry from

25
companies attracted by new opportunities. This in turn would accelerate transition

completion. Again, the sign of this coefficient is not significant.

Results for switch entry are reported in Table 5. As in the hub case, we analyse the

contribution of each set of variables in turn. Model (6) considers the influence of Modular

Hub Strategy, our proxy for modularity. The coefficient is negative and significant,

suggesting that having pursued a modular strategy in the hub market reduced the

hazard of entering the switch market. This result supports Hypothesis 2 according to

which companies that adopted modular design strategies were slower to enter the

switch market. In model (7) we control for firms’ characteristics. The coefficient of Age is

positive although not significant while the coefficient of the Entrant dummy, our proxy

for firm status, is both positive and significant. Not being an incumbent in the LAN

industry increased the probability of entering the switch market. This finding suggests

that new technological solutions were more likely to be introduced by new comers to the

LAN equipment industry, and is consistent with our account of the evolution of the

industry in which both the growth of the switch market and the endorsement of new

communication standards opened up opportunities for new firms to enter. Concerning

the impact of technology strategy on entry into the switch market (model 8), as in the

case of hubs, Least distance from the frontier has a positive and significant coefficient

suggesting that the farther a firm is from the technological frontier the greater is the

hazard of entry, and confirming that firms may choose entry to a new niche as a way of

competing with rivals. Previous experience in related markets increases the hazard of

entry in the switch market as suggested by the positive and significant coefficient of the

variables Experience in Hub and Experience in Router in model (9). Experience in the router

26
market in particular is shown to definitely foster entry into the switch market. Both

results are consistent with other findings on the role of previous experience in related

markets in influencing entry in new markets (Klepper and Simons, 2000) and with

accounts as well as analyses of the dynamics of the LAN equipment industry, according

to which some of the most successful companies in the switch market exploited

experience gained with more technologically sophisticated equipment, such as routers,

and complementary assets in commercialising hubs (Fontana and Nesta, 2004).4 Finally,

in model (10) we control for the effect of market competition on the hazard of entry. The

coefficient of Switch Competition our proxy for competition in the switch market is

positive and significant suggesting that increasing competition in the switch market

seemed to foster rather than deter entry. This result is consistent with a situation in

which the growth of the switch market represented an opportunity to firms that seemed

to compensate for the progressive decline of the hub market especially during the

second half of the 1990s.

6. Discussion

The results presented in Section 5 are consistent with the discussion of modularity as a

design strategy, which facilitates the introduction of incremental innovation given

design rules, but might slow down the introduction of products that rely on different

design rules. Indeed, what the data show is that being an incumbent in the hub market

did not prevent entry into the switch market. Also, being an incumbent in the router

4
It can be argued that rather than capturing the effect of previous experience in the related market,
Experience in Hub and Experience in Router actually account for the influence on entry of the existing installed
base of equipment. If this was the case, firms could decide to delay entry into the switch market to avoid
cannibalizing their installed base of hub and router equipment. However, in this case, both coefficients
would have been negative.

27
market (i.e. a more sophisticated segment) also encouraged entry. In other words, firms

could enter the switch segment irrespective of their segment of origin (i.e. hubs or

routers). However, incumbents in the hub market, which relied on a modular

architecture, were seen to be at a disadvantage. These ‘modular’ incumbents were

slower than ‘fixed’ incumbents to follow the leading firms into the switch market. In

other words, they were disadvantaged not by their previous experience per se, but by

their strategic choices in terms of product architecture.

This interpretation of the quantitative results is consistent with the analysis of the

industry’s evolution based on qualitative research from secondary sources. Cisco

became the established leader of the switch market without having previously been

involved in the production of hubs. Entry occurred through its 1994 acquisition of

Kalpana, the start up originally responsible for the development of the switch. Among

the incumbents, those that followed Cisco moved into the switch market through

mergers and acquisitions of pioneering switching firms or router manufacturers. They

followed, rather than led, the move toward the adoption of switches. 3Com entered the

switch market in 1995 as a result of an agreement with the switch pioneer Synernetics.

Cabletron acquired Standard Microsystems Corporation in 1995. Bay Networks resulted

from the merger between SynOptics (a hub maker) and WeelFleet (a router maker).

More generally, it is worth noting that while the first switch was invented in 1990, and

the market took off in 1993, the four leading companies – Cisco, 3Com, Cabletron and

Bay Networks – only entered the switch market after 1994. None of the pioneers

managed to acquire a leading position. This happened for several firm-specific reasons.

28
First, companies such as DEC and Hewlett Packard developed the switch technology,

but implemented it relying on a standard that failed to achieve market dominance (i.e.

100VG-AnyLAN). While both DEC and Hewlett Packard subsequently entered the

switch market adopting Fast Ethernet, their early efforts to acquire dominance using

their own standard meant that their entry into the ‘right’ niche was very late. Their

initial gamble was bad. Second, Grand Junction Networks, a start-up that did develop

the right standard, i.e. Fast Ethernet, was acquired by Cisco in 1994 as a means of

allowing the latter to enter the Fast Ethernet segment, which further contributed to

Cisco’s successful entry. Third, UB Networks, a hub manufacturer, developed an

experimental switching module which was meant to be an upgrade to its existing family

of hub equipment. However, this solution which was a compromise between a hub and

a switch, did not have a long-lasting impact and one year after its introduction UB

Networks launched a new family of switching products that represented a complete

departure from previous technology. This case demonstrates how the fears of

cannibalising its own customer base may prevent a company from fully exploiting

technological opportunities.

Cannibalisation of the installed base was not the only factor that slowed hub

incumbents’ efforts. There are grounds to argue that at least some hub ma nufacturers,

were slow to adopt switch technologies for cognitive reasons that prevented them from

exploring new product configurations. First, there were concerns that implementing a

switched bus in equipment such as hubs, which had always been technologically quite

simple, might encounter resistance from users. Some manufacturers were concerned that

the performance improvements offered by switches might be too radical and

29
represented ‘too much too early’ for the needs of existing LANs (McClellan, 1996: p. 51).

As a result of these concerns, many manufacturers failed to foresee the changes in the

relative benefits of hubs and switches that were to materialise. For example, in 1991,

Robert Held, CEO of Chipcom, predicted that it would be another ten years before hubs

would be transformed into a commodity (Molloy, 1991: 16). Cabletron, rather than

moving away from hubs, tried to embody switch functionalities into its hubs to satisfy

the perceived preferences of users (Cummings, 1992: 18). In addition, there were

concerns about the sheer technical difficulty encompassed by the new technology. As

late as 1993, UB Networks’ President and CEO Roel Pieper declared that ‘It’s easier to

spec products down than to create newer and more complex products that you’ve done

before’ (quoted in MacAskill, 1993: 19). 3Com and SynOptics also did not encourage the

diffusion of new switching technologies and, in 1994, were still launching new stackable

(modular) products that meant that users did not have to replace their installed base of

hubs with the new technology (Petrosky, 1994; MacAskill, 1994). This ‘tunnel effect’

introduced by modular design strategies might have speeded up and increased the

efficiency of firms’ search efforts, but at the expense of greater breadth in their search

paths.

The shift from hubs to switches finally gained momentum as a result of progressive

reconfiguration of existing LANs, culminating in the widespread adoption of the client-

server (C/S) architecture. C/S was described as a new and emerging model of a data

processing paradigm because it triggered changes that were more radical than those

previously experienced along the hub trajectory, and the strategies being pursued by

manufacturers ceased to provide advantages. At the end of the 1980s, most of the traffic

30
in exiting LANs occurred locally within the portion of network defined by the TCP/IP

address. In this context, the main concern of both users and manufacturers was to

reduce congestion while preserving the existing structure of the LAN. Innovations in

hub equipment had generally responded well to this priority by coupling the

introduction of high speed standards with incremental changes in the product

architecture. In the first half of the 1990s, C/S computing allowed applications to be

broken down into a server program and a front end (client) which could request

information and rely on the server to perform the task and execute functions. One of the

main consequences of C/S was that applications over the LAN tended to generate much

more data traffic, which extended beyond the ‘local’ portion of the network. Hubs were

good at processing ‘local’ data, but became increasingly inadequate in this new LAN

environment whereas switches could deal easily with both local data and data spanning

across segments.

Figure 2 below summarises the qualitative and quantitative analysis presented in this

paper. Concerns related to cannibalisation and problem-solving strategies initially

slowed hub manufacturers and led them to continue to follow the pattern of innovation

currently being pursued. The reliance on (and efficiency of) the ‘modular upgradability’

strategy (typical of the hubs trajectory) generated a ‘tunnel effect’ that constrained firms

from identifying or actively pursuing radically different product configurations. Thus,

hub manufacturers quickly moved along the downward trajectory in Figure 2 (left of the

curved boundary), first adopting faster standards and then moving to the right,

exploiting the flexibility built into modular configurations. However, the adoption of the

switch required totally different strategies, and ‘vision’. A barrier existed (represented in

31
Figure 2 by the curved line) that prevented them from developing switches as the end

point of a process of modular upgrades. As a result, manufacturers who at an early stage

joined the switch trajectory mainly came from other sectors of the LAN equipment

industry and/or joined forces (through M&As) with other firms from different

backgrounds (the left-pointing arrows to the right of the ‘boundary’ drawn in figure 2).

Most hub manufacturers, initially at least, persisted in an incremental approach to the

modification of the hub revolving around tightly defined modular design rules.

{Figure 2 approximately here}

As a consequence, the switch market did not follow the same pattern of niche entry

experienced in the hub segment. Exploration of the design space occurred in a different

way. Entry in niches typically occurred with the commercialization of fixed

configuration equipment. Moreover, the ineffectiveness of the modular strategy also

meant that incumbent firms were more susceptible to competition than they had been in

the hub market. Competition came mainly from firms operating outside the segment,

but within the LAN industry. The major pioneers in the switch market were

manufacturers of routers who adapted their competence with a more sophisticated

technology to compete in the new segment. Although many hub manufacturers

eventually entered the switch market, it took them relatively much longer and quite

often entry was through the acquisition of switch start-up companies.

32
7. Conclusions

We have argued that modularity does support firms’ efforts to quickly move across

adjacent niches within a given design space. Manufacturers in the LAN equipment

industry used modularity to avoid early commitment to any given standard. Moreover,

modularity did enable manufacturers to exploit economies of substitution through

modular upgradability (Garud and Kamuraswamy, 1995). Products based upon non-

modular configurations did not show a similar pattern of continuous improvement

through the addition of new characteristics and functionalities. Empirical analysis of

entry into the switch market confirms our expectations about the type of innovation that

modularity most facilitates. Modularity is particularly useful when incremental

innovations are sought. The entry patterns clearly show that modular hubs, unlike fixed

configuration hubs, were characterised by very dynamic innovative trajectories.

However, switches did not emerge as the end point of a long process of fast, incremental

and modular innovation. Rather, they were introduced by firms that were previously

not involved in hub production (i.e. new firms or router makers), or by fixed hub

manufacturers that joined forces with firms from other segments. The distinction

between ‘modular’ and ‘fixed’ hub producers is fundamental here. Incumbents,

challenged by the emergence of a new product, were not necessarily damaged by their

previous experience and capabilities having focused on hubs, as the argument put

forward by Henderson and Clark (1990) would imply. They were hindered by their

focus on ‘modular’ hubs (i.e. by their strategic choice of product architecture).

33
We have argued that this was due to two factors. First, incumbents were concerned

about cannibalising their own customer base. Hence, even when they had the

capabilities to introduce a new product, their efforts were rather tentative and failed to

make an impact. This was less serious for fixed manufacturers, mainly because for them

cannibalisation had always been a problem because, unlike modular hubs, fixed hubs

had to be replaced every time a new standard was introduced. Second, the main

problem for modular hub producers was eliminating congestion through the

introduction of faster standards while minimising changes to the hardware. Thus, they

failed to identify – or were slow to exploit – opportunities linked to the introduction of

major hardware changes. Hence, a new entrant became the leader in the switch market,

and the faster followers were those fixed hub manufacturers that were accustomed to

making changes to both the standard and hardware, because they could not rely on a

modular architecture to easily introduce new standards.

These conclusions, although still preliminary and needing more robust empirical

analysis, confirm the results of prior research on modularity and its limits (Chesbrough

and Kusunoki, 2001; Fleming and Sorenson, 2001; Brusoni et al. 2001; Ethiraj and

Levinthal, 2003). In particular, our results provide preliminary empirical support to the

idea that there is a trade off between speed of search, and breadth. Modular strategies

are a very fast exploitation strategy, but because they explore only a relatively narrow

part of the whole design space, they risk missing radically different, yet value

generating, design alternatives. Non-modular search strategies explore a wider portion

of the design space, but are slower, and run the risk of alienating conservative users.

Indeed, the LAN equipment case shows that for a new product to become dominant, a

34
number of environmental changes (i.e. the adoption of the C/S configuration) had to

occur to push both users and producers towards the new technology.

35
 R EFERENCES

Baldwin, C. and K. Clark (2000), The Power of Modularity, Cambridge MA, MIT Press.

Baldwin, C and K. Clark (2001), The Value and Costs of Modularity, paper prepared for
the Opening Conference of the Research Institute of Economy, Trade and Industry
(RIETI), “Modularity—Impacts to Japan’s Industry,” Tokyo, Japan, July 12-13.

Brusoni, S. (2003) ‘Authority in the Age of Modularity’. SPRU Electronic Working Paper
no. 101. 2003 TIM Division nominated W. H. Newman Award (best paper based on PhD
project), University of Sussex at Brighton (UK).

Brusoni, S., Prencipe, A. and K. Pavitt (2001), Knowledge Specialisation, Organizational

Coupling and the Boundaries of the Firm: Why Firms Know More Than They Make?,
Administrative Science Quarterly , 46 (4): 597-621.

Chesbrough, H. and K. Kusunoki (2001), The Modularity Trap: Innovation, technology phase
shifts, and the resulting limits of virtual organizations. In Nonaka I. and D. Teece (Eds.)
Managing Industrial Knowledge: Creation, transfer and Utilization: 2002-230. Thousand
Oaks, CA: Sage.

Cox, B. (1996), Object Oriented Programming: An evolutionary approach, Addison-Wesley

Publishing Company, Reading, MA.

Ethiraj, S. K. and D. Levinthal (2003), Modularity and Innovation in Complex Systems,

forthcoming on Management Science.

Fleming, L. and O. Sorenson, (2001), The Dangers of modularity, Harvard Business

Review, September: 20-21.

Fontana, R. and L. Nesta (2004), Product Entry in a Fast Growing Industry: the LAN
Switch Market, forthcoming on Journal of Evolutionary Economics.

Galunic, D. C. and K. M. Eisenhardt (2001), Architectural Innovation and Modular

Corporate Forms, Academy of Management Journal, 44: 1229-1250.

Garud, R. and A. Kumaraswamy (1993), Changing Competitive Dynamics in Network

Industries: An exploration of Sun Microsystems open systems strategy, Strategic
Management Journal, 14: 351-369.

Garud, R. and A. Kumaraswamy (1995), Technological and Organizational Designs for

Realizing Economies of Substitution, Strategic Management Journal, 16: 93-110.

Gawer, A. and M. A. Cusumano (2002), Platform Leadership: How Intel, Microsoft, and Cisco
Drive Industry Innovation, Harvard Business School Press, Cambridge MA.

36
Greenstein, S. M. and J. B. Wade (1998), The product life cycle in the commercial
mainframe computer market 196-1982, RAND Journal of Economics, 29: pp. 772-789.

Henderson, R. and K. Clark (1990), Architectural Innovation: The reconfiguration of

existing capabilities and the failure of established firms, Administrative Science Quarterly,
35: 9-30.

Khessina, O.M. (2004), Direct and Indirect Effects of Product Portfolio on Firm Survival
in WW Optical Disk Drive Industry, Paper prepared for the Academy of Management
Annual Meeting, New Orleans – Louisiana, August 6-11, 2004.

King, A. A. and C. L. Tucci (2002), Incumbent entry into new market niches: the role of
experience and managerial choice in the creation of dynamic capabilities, Management
Science, 48: pp. 171-186.

Klepper, S. and K.L. Simons (2000), Dominance by birthright: entry of prior radio
producers and competitive ramifications in the U.S. television receiver industry, Strategic
Management Journal, 21: 997-1016

Kogut, B. and A. Metiu (2001). Open -source software development and distributed
innovation, Oxford Review of Economic Policy , 17: 248-264.

Langlois, R. N. (1997), Cognition and Capabilities: Opportunities missed and seized in the
history of the computer industry, in Garud, R., P. Nayyar and Z. Shapira (eds.),
Technological Innovation: Oversights and foresights, pp. 71-94, New York, Cambridge
University Press.

Langlois, R. N. (2002), Modularity in Technology and Organization, Journal of Economic

Behavior and Organization, 49: 19-37.

Levinthal, D. A. (1998), The Slow Pace of Rapid Technological Change: Gradualism and
punctuation in technological change, Industrial and Corporate Change, 7: 217-247.

Marengo, L., Pasquali, C. and Valente, M. (2004), Decomposability and Modularity of

Economic Interactions, in C. W. and D. Rasskin-Gutman (eds.), Modularity: Understanding
the Development and Evolution of Complex Natural Systems.

Prencipe, A. (1997), Technological Competencies and Product’s Evolutionary Dynamics,

Research Policy , 25, 1261-1276.

Sanchez, R. and Mahoney (1996), ‘Modularity, Flexibility, And Knowledge Management

In Product And Organisation Design’, Strategic Management Journal, 17, Winter Special
Issue: 63-76.

Schilling, M.A. (2000), Toward a General Modular Systems Theory and Its Application
to Interfirm Product Modularity, Academy of Management Review , 25: 312-334.

37
Sorensen, J.B. and Stuart, T.E. (2000), Aging, Obsolescence, and Organisational
Innovation, Administrative Science Quarterly, 1: 81 -112.

Stankiewicz, R. (2000), The Concept of ‘Design Space’. In John Ziman (ed.): Technological
Innovation as an Evolutionary Process. Cambridge, Cambridge University Press.

Stavins, J. (1995), Model entry and exit in a differentiated-product industry: the Personal
Computer market, The Review of Economics and Statistics, LXXVII(4): 571-584.

Swann, G. M. P. (1985), Product Competition in Microprocessors, Journal of Industrial

Economics, XXIV: 33-53.

Ulrich, K. T. (1995), The Role of Product Architecture in the Manufacturing Firm,

Research Policy , 24: 419-40.

Wheelwright, S. and K. Clark (1992), Revolutionizing Product Development: Quantum leaps

in speed, efficiency and quality, Free Press, New York.

Womack, J., D. Jones and D. Ross (1990), The Machine that Changed the World, Rawson
Associates, New York.

Worren, N., K. Moore and P. Cardona (2002), Modularity, Strategic Flexibility, and Firm
Performance: The case of the home appliance industry, Strategic Management Journal, 23:
1123 -1140.

A RTICLES FROM SPECIALISED TRADE PRESS AND DATA SOURCES

Bhardwaj, V. (1990), Can fast packet switching give Ethernet new life?, Data
Communications, (19): 67-71.

Ben-Yosef, G. (1996), Low end hubs look for R-E-S-P-E-C-T, Network World, (13): 69-75.

Breindenbach, S. (1998), Where we've come from, Network World , (15): 76.

Brown, B. and M. Molloy (1991), Next generation of local net hubs adds flexibility,
Network World . (8): 1.

Cummings, J. (1992), Hub Vendors Vary in Market Strategies, Network World, 19, (9): 17-
19.

Dell’Oro Group Market Research (2000), 5 Years Forecasts. Shared hubs and LAN
switches, for the years 1999-2004, 6, 1.

Greenfield, D. (1992), Switching hubs give Ethernet new life, Data Communications: 41-44.

Herman, J. (1991), Smart LAN hubs take control, Data Communications, (20): 62-73.

38
MacAskill, S. (1994), 3Com Readies New Stackable Product Strategy, Network World , 17,
(11): 8-9.

MacAskill, S. (1993), New Ungermann-Bass Chief Airs Company’s Networking

Strategies, Network World , 48, (10): 19-21.

McClellan, R. (1996), A switch for all reasons, Network World, (13): 51.

McConnell, J. (1994), Hubs, switches play key role in building the virtual network,
Network World , (11): L18-L19.

Molloy, M. (1991), Hub Exec Envisions Gear as Data Switch, Network World, (33): 15.

Petrosky, M. (1994), Switching Strategy will be Key as Internet Markets Collide, Network
World , 8, (11): 34-35.

39
TABLE 1
N UMBER OF N EW P RODUCTS BY MARKET BY YEAR
Y EAR H UB EQUIPMENT SWITCH EQUIPMENT TOTAL
1990 31 0 31
1991 32 0 32
1992 57 0 57
1993 52 5 57
1994 63 25 88
1995 69 78 147
1996 68 109 177
1997 26 63 89
1998 14 68 82
1999 5 45 50
TOTAL 417 393 810

40
TABLE 2
JOINT INTRODUCTION OF NEW STANDARD AND MODULAR CONFIGURATIONS BY LAN S TANDARD TYPE
STANDARDS H UB EQUIPMENT S WITCH EQUIPMENT
NUMBER OF FREQUENCY NUMBER OF FREQUENCY
ENTRY ENTRY
ETHERNET 24 48% 14 31%
TOKEN R ING 27 87% 11 69%
FDDI 27 96% 14 48%
ATM 17 94% 14 56%
FAST ETHERNET 13 42% 10 26%

41
TABLE 3
DESCRIPTION OF VARIABLES
VARIABLE MEAN S T . DEV . MIN MAX
EXPERIENCE IN MODULAR H UB 2.224 3.386 0 16
MODULAR H UB STRATEGY 0.637 0.481 0 1
AGE 26.224 29.702 0 151
ENTRANT 0.801 0.399 0 1
TRANSITION TO MULTI-S EGMENT 0.693 0.461 0 1
TRANSITION TO P ORT R ECONFIGURATION 0.236 0.425 0 1
LEAST DISTANCE FROM FRONTIER 13.000 8.209 0 30.671
EXPERIENCE IN H UB 4.407 5.147 0 29
EXPERIENCE IN R OUTER 2.903 6.638 0 45
N ICHE COMPETITION (LOG) 3.914 1.406 0.693 5.215
S WITCH COMPETITION (LOG) 3.093 2.554 0 6.284

42
TABLE 4
COX P ROPORTIONAL HAZARD MODEL FOR TRANSITION COMPLETION

(1) (2) (3) (4) (5)

0.399 0.428 0.568 0.590 0.586

EXPERIENCE IN MODULAR H UB
[0.074]*** [0.079]*** [0.085]*** [0.090]*** [0.094]***

0.012 0.013 0.011 0.011

AGE
[0.004]*** [0.004]*** [0.004]** [0.004]**

TRANSITION TO MULTI-S EGMENT -1.184 -1.187 -1.153

(DUMMY) [0.454]*** [0.445]*** [0.443]***

TRANSITION TO P ORT -0.503 -0.697 -0.709

R ECONFIGURATION (DUMMY ) [0.477] [0.470] [0.472]

0.124 0.129 0.125

LEAST DISTANCE FROM FRONTIER
[0.040]*** [0.040]*** [0.046]***

0.064 0.062
EXPERIENCE IN R OUTER
[0.040] [0.041]

0.102
N ICHE COMPETITION (LOG) (T - 1)
[0.260]

OBSERVATIONS 551 551 551 551 504

W ALD CHI-SQUARED 29.14*** 30.42*** 60.05*** 57.27*** 73.79***
LOG-L -53.8 -52.9 -47.5 -47.1 -47.1
Robust standard errors in brackets
* significant at 10%; ** significant at 5%; *** significant at 1%

43
TABLE 5
COX P ROPORTIONAL HAZARD MODEL FOR SWITCH ENTRY

(6) (7) (8) (9) (10)

-0.640 -0.925 -0.887 -1.272 -1.017

MODULAR H UB STRATEGY (DUMMY)
[0.277]** [0.285]*** [0.286]*** [0.270]*** [0.286]***

0.006 0.006 0.000 0.000

AGE
[0.004] [0.004] [0.005] [0.005]

1.901 1.687 1.549 0.577

ENTRANT (DUMMY)
[0.326]*** [0.277]*** [0.304]*** [0.407]

0.040 0.047 0.018

LEAST DISTANCE FROM FRONTIER
[0.023]* [0.029]* [0.031]

0.088 0.074
EXPERIENCE IN H UB
[0.032]*** [0.032]**

0.072 0.062
EXPERIENCE IN R OUTER
[0.017]*** [0.017]***

0.441
S WITCH COMPETITION (LOG) (T – 1)
[0.114]***

OBSERVATIONS 489 489 489 489 435

W ALD CHI-SQUARED 5.35** 43.04*** 49.53*** 78.51*** 105.33***
LOG-L -149.2 -138.4 -137.0 -132.3 -126.6
Robust standard errors in brackets
* significant at 10%; ** significant at 5%; *** significant at 1%

44
FIGURE 1: THE DESIGN S PACE OF THE LAN EQUIPMENT INDUSTRY (1990-1999)
S HARED BUS SEGMENTABLE BUS P ORT SWITCH
RECONFIGURATION
ET MODULAR
ET FIX
TR MODULAR
TR FIX
FDDI MODULAR
FDDI FIX
ATM MODULAR
ATM FIX
FET MODULAR
FET FIX

FIGURE 2: DESIGN S PACE AND PATTERNS OF ENTRY BEFORE AND AFTER THE SWITCH R EVOLUTION

Product configurations of increasing diversity

Standards of
increasing speed

45
 APPENDIX

TABLE A1
CORRELATION MATRIX
P REDICTING HUB NICHE ENTRY
VARIABLE NAME 1 2 3 4 5 6 7
1 EXPERIENCE IN MODULAR HUB 1.000
2 AGE 0.047 1.000
3 TRANSITION TO MULTI -S EGMENT 0.208 -0.076 1.000
4 TRANSITION TO P ORT R ECONFIGURATION -0.084 -0.113 0.090 1.000
5 LEAST DISTANCE FROM FRONTIER 0.019 0.058 -0.002 0.023 1.000
6 EXPERIENCE IN ROUTER 0.131 0.375 -0.120 -0.054 0.038 1.000
7 N ICHE COMPETITION 0.281 0.167 -0.047 -0.084 0.400 0.299 1.000
Predicting Switch Market Entry
VARIABLE NAME 1 2 3 4 5 6 7
1 MODULAR H UB STRATEGY 1.000
2 AGE 0.105 1.000
3 ENTRANT -0.007 -0.318 1.000
4 LEAST DISTANCE FROM FRONTIER -0.083 0.055 0.073 1.000
5 EXPERIENCE IN HUB 0.347 0.250 -0.098 0.126 1.000
6 EXPERIENCE IN ROUTER -0.007 0.414 -0.130 0.046 0.322 1.000
7 S WITCH COMPETITION -0.166 0.158 0.057 0.324 0.430 0.279 1.000

46