Strategic Management Journal

Strat. Mgmt. J., 27: 799–823 (2006)

Published online in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/smj.547
Received 20 April 2005; Final revision received 8 February 2006

MODULARITY IN ORGANIZATIONAL STRUCTURE:

THE RECONFIGURATION OF INTERNALLY
DEVELOPED AND ACQUIRED BUSINESS UNITS
SAMINA KARIM*
Boston University School of Management, Boston, Massachusetts, U.S.A.

This paper explores changes in organizational structure and distinguishes between units’ origins.
Unit reconfiguration is the addition of units to, deletion of units from, and recombination of units
within the firm. This study compares the reconfiguration of internally developed vs. acquired
units, explores what forms of unit recombination are common, and observes whether firms pursue
recombination before divestiture. Theoretical support is drawn from the dynamic capabilities
perspective, research on modular organizational systems, and strategy–structure literature. The
findings are that acquired and internally developed units serve different roles in the process of
change, and that firms perceive reconfiguration to be beneficial. Copyright  2006 John Wiley
& Sons, Ltd.

INTRODUCTION for firms to use resources in new combinations,

This paper explores modular business unit change
within organizational structure, and specifically
focuses on the reconfiguration of internally devel-
oped and acquired units. Reconfiguration, broadly
speaking, refers to the redesign of certain elements
or components of a system. The system studied
here is the organization. Because this paper focuses
on structural change of organizations, the compo-
nents are business units. ‘Business unit reconfigu-
ration’ is the addition of units to the firm, deletion
of units from the firm, and recombination of units
within the firm such that resources and activities
are still retained by the organization. This phe-
nomenon is important to study because reconfigur-
ing structures and their resources makes it possible
Keywords: reconfiguration; recombination; restructure;
organizational structure; modularity; dynamic capabili-
ties; mergers and acquisitions
*Correspondence to: Samina Karim, Boston University School
of Management, 595 Commonwealth Ave., Boston, MA 02215,
U.S.A. E-mail: samina@bu.edu
improving the effectiveness of resources and fur-
thering innovation (Schumpeter, 1934; Kogut and
Zander, 1992). In this regard, one contribution of
this study is to provide a view into the recombinant
motor of innovation within organizations. Further,
the modularity of business units is explored with
particular focus on unit origin. The central research
question is: What roles do internally developed and
acquired business units play in the reconfiguration
of structure?
This central question is explored with three
specific questions regarding how firms change
their organizational structure and ultimately the
resources residing within structure. First, this study
distinguishes between the origin of units and com-
pares the reconfiguration of internally developed
units to that of acquired units. Given the differ-
ent characteristics of these components, namely
the familiarity with embedded routines and pur-
poseful development of resources within inter-
nally developed units, which units are reconfig-
ured sooner? Second, this paper investigates what

Copyright  2006 John Wiley & Sons, Ltd.

800 S. Karim
forms of modular recombination are common. Is it
more common to bring together two or more inter-
nally developed units, bring together two or more
acquired units, or combine acquired and internal
units? Firms often reconfigure to achieve greater
efficiency or to pursue new opportunities. Observ-
ing the forms of recombination that take place
will provide a better understanding of the roles
played by internal and acquired units as firms
attempt to reap these benefits. Third, this study
questions whether firms perceive reconfiguration
as beneficial by studying the relationship between
unit recombination and divestiture. Are most units
recombined before being divested? Does recom-
bination increase a unit’s longevity (survival of
its resources and activities in the firm)? Affirm-
ing both questions will provide some evidence that
reconfiguration is an attempt by the firm to create
value from recombining units and resources. The
premise of this study is that (1) firms are proac-
tive organizations that are motivated to learn, find
new opportunities, and be profitable, and (2) that
managers are rational and strive towards aforemen-
tioned goals when making decisions about struc-
tural change.
This research draws on dynamic capabilities lit-
erature on corporate divisional structure, modular-
ity literature on organizational forms, and strat-
egy literature on restructuring of businesses and
resources. Firms in dynamic markets are often
realigning their businesses and transferring resour-
ces between divisions. This paper builds upon
recent studies on patching (Eisenhardt and Brown,
1999), divisional charter changes (Galunic and
Eisenhardt, 1996, 2001), and organizational mod-
ularity (Helfat and Eisenhardt, 2004); works that
focus on corporations and changes at the divi-
sional (product market) level. This paper takes a
more granular view of structure and observes busi-
ness unit reconfiguration. The current literature is
also extended by observing whether origin plays
a role in the structural change process. Further-
more, this study includes not only multi-business
firms in turbulent markets, but also single-business
firms. Single and multiple business firms both
face issues regarding unit and resource coordina-
tion.
This study also contributes to our understand-
ing of modular systems theory (Schilling, 2000)
and the process by which firms change their inter-
nal organizational form. This paper builds upon
Copyright  2006 John Wiley & Sons, Ltd.
Ciborra’s (1996) concept of a platform organiza-
tion and observes the evolution of units as man-
agers experiment with reconfiguration. The study
investigates how acquired and internally devel-
oped units differ in their modularity and ability
to recombine with other components in an orga-
nizational system. Whereas most modularity work
refers to organizational form and design as tasks
that are partitioned inside and outside the organi-
zation, this study focuses within the firm on how
firms structurally organize what is internally man-
aged.
The empirical setting for this paper is the med-
ical sector and its three industries: healthcare ser-
vices, pharmaceuticals, and medical devices. The
sample observed is of 250 firms and their units
from 1978 to 1997. This study is a detailed study
of firm-level resource and business unit change.
Throughout the study period, several unit char-
acteristics are observed, including resource pro-
file, origin (how the unit came to enter the firm),
whether and how the unit had been recombined,
whether and when a unit was divested, and the
nature of the unit (whether it had been recombined)
at the time of divestiture. Each unit is, in essence,
tracked through the study period as it structurally
evolves.
The main findings of the paper are twofold.
First, differentiating by unit origin reveals that
internally developed units and acquired units serve
different roles within the organization. The study
finds that more acquired units than internal units
are reconfigured; acquired units are reconfigured
sooner than internally developed units, are mostly
reconfigured with each other or into internally
developed units, and are often reconfigured sev-
eral times. Acquisitions are malleable components
that provide key resources to internal units, and
provide organizations with opportunities to exper-
iment with structure as they strive to create value
by reconfiguring targets together. Internally devel-
oped units, even when integrated with other units,
usually retain their modular identity and serve as
the foundation of the firm. Second, tracing the evo-
lution of units reveals that firms perceive some
benefit from recombination. The study finds that
it is most common for units to be recombined
before being divested, and recombination length-
ens the longevity of units’ resources and activities
within the firm. Recombination attempts prior to
divestiture indicate that firms are trying to find
value by combining resources of different units
Strat. Mgmt. J., 27: 799–823 (2006)
DOI: 10.1002/smj
 Modularity in Organizational Structure by Reconfiguration
vs. discarding them right away. In general, the
study highlights structure as dynamic and con-
stantly evolving either through purposeful adap-
tation or experimentation.
The paper is organized as follows. It begins
with a review of relevant perspectives on struc-
tural change, clarifies terminology, and presents
hypotheses. This is followed by methods and mea-
sures, which outline the data and sample, opera-
tionalization of variables, and the methodology of
this study. Finally, the paper concludes with results
and discussion.
THEORY
Understanding how firms reconfigure components
within the organization builds upon dynamic
capabilities, modularity, and strategy–structure
research. These areas have each focused on some
element of structural change—namely divisional
changes, task changes, and resource changes—and
used various terminology in reference to change.
The dynamic capabilities perspective stresses the
frequency and agility with which firms in turbulent
markets need to be able to adapt (Amit and Schoe-
maker, 1993; Conner and Prahalad, 1996; Galu-
nic and Eisenhardt, 1996, 2001; Teece, Pisano,
and Shuen 1997; Eisenhardt and Brown, 1999;
Eisenhardt and Martin, 2000; Helfat and Eisen-
hardt, 2004). Several studies present a ‘recombi-
nant view of organizations’ and observe how firms
manage resources between businesses by altering
divisional responsibilities (Galunic and Eisenhardt,
1996, 2001) and by reusing resources—referred to
as ‘organizational modularity’ (Helfat and Eisen-
hardt, 2004). This paper refers to the manage-
ment of resources and structure as ‘reconfigura-
tion’ (Karim and Mitchell, 2004); this concept is
most closely aligned to Eisenhardt and Brown’s
(1999) concept of ‘patching’. Patching is a process
by which corporations frequently remap their divi-
sional structure in turbulent markets, realign their
businesses, and transfer some resources from one
business to another by ‘adding, splitting, transfer-
ring, exiting or combining chunks of businesses’
(Eisenhardt and Brown, 1999: 73). Whereas patch-
ing involves the realignment of structure to match
changing business/market opportunities, the con-
cept of reconfiguration also explicitly stresses a
purposeful experimentation and search for new
opportunities (Karim and Mitchell, 2004).
Copyright  2006 John Wiley & Sons, Ltd.
801
This study contributes to the dynamic capabili-
ties literature in several ways. As dynamic capa-
bilities involve the manipulation of resources into
new assets, one method of achieving this is to
manipulate the business units within which these
resources reside. Galunic and Eisenhardt mention
that studies assume the existence of these capa-
bilities and ‘do not focus on the specific micro-
processes and roles that form these capabilities’
(Galunic and Eisenhardt, 2001: 1229). By examin-
ing the reconfiguration of modular units, this study
unveils the dynamics within organizations at a
more granular level of analysis. Also, given the dif-
ferent characteristics of internally developed units
and acquisitions, this study explores their different
roles in the process of recombination. Galunic and
Eisenhardt further note that ‘little attention is paid
to how dynamic capabilities and organizational
structures can combine to constitute new orga-
nizational forms’ (Galunic and Eisenhardt, 2001:
1229). By observing what types of units are com-
bined together and tracking their longevity, this
study will explore which new organizational forms
are likely and their survival outcome.
Modularity literature complements the dynamic
capabilities perspective with studies that focus on
organizational form. Though much of the litera-
ture has focused on product architecture, studies
have also shown how modular product systems
can lead to modular organizational systems (Hen-
derson and Clark, 1990; Langlois and Robertson,
1992; Garud and Kumaraswamy, 1995; Sanchez,
1995; Ciborra, 1996; Sanchez and Mahoney, 1996;
Lei, Hitt, and Goldhar, 1996; Baldwin and Clark,
2000; Schilling and Steensma, 2001). Schilling
(2000) developed a general modular systems the-
ory and examined what drives a system to be
more or less modular (vs. integrated). She proposes
that a system’s degree of modularity decreases
as the components gain ‘synergistic specificity’
(low separability or high potential synergies from
integration). The study of integrating components
is grounded in the concepts of decomposability
and loose coupling: that every system is com-
prised of elements that are to some extent inter-
dependent and independent (Simon, 1916; Alexan-
der, 1964; Weick, 1976). Researchers have taken
these concepts and applied them to the organiza-
tion, highlighting the importance of flexible and
adaptive organizations and portraying structure as
malleable (Orton and Weick, 1990). Orton and
Weick challenge researchers ‘to study structure
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802 S. Karim
as something that organizations do, rather than
merely as something they have’ (Orton and Weick,
1990: 218, italics added by author). In a study that
nicely bridges both perspectives, Ciborra studied
the structural evolution of a high-tech firm and
found the organization to be actively experiment-
ing with structure through the ‘artful recombina-
tion of what is at hand’ (Ciborra, 1996: 111).
This study builds on our understanding of mod-
ular organizational systems by focusing on unan-
swered questions about structural reconfiguration.
By tracking how firms recombine units, this study
observes when firms choose integration over inde-
pendence, or in other words, when some value
that is associated with dependence or synergis-
tic specificity between units outweighs the value
of keeping these units separate. Thus, whereas
Schilling (2000) develops a causal model predict-
ing modularity, this study observes the structural
process and outcomes of modular unit recombina-
tion. Further, this paper examines the addition and
divestiture of units as organizations evolve through
a sequence of structural changes. Firms not only
choose how to recombine, but they also choose
what and when to remove elements completely
from the organization. Firms also choose what and
when to add components to the organization. As
acquisitions are a useful mechanism for obtaining
resources (Capron, Dussauge, and Mitchell, 1998;
Karim and Mitchell, 2000), firms may add modular
targets to their organizational structure. In practice,
firms not only experiment with ‘what is at hand’
but often purchase what they think will be of value
and increase the resources they have to work with.
Acquisitions, in this manner, can be thought of
as additional ingredients or components to exper-
iment with as organizations strive towards their
goals. Owing to the prevalence of acquisitions and
the differing characteristics of what is made inter-
nally vs. bought, this paper observes unit origin as
a key differentiator in the study of modular unit
reconfiguration.
Highlighting the importance of unit origin adds
to the stream of strategy–structure research. Fol-
lowing Chandler’s (1962) seminal work on orga-
nizational forms, strategy research shifted towards
what made firms more or less divisionalized
and how divisional reorganization affected perfor-
mance (Hoskisson and Galbraith, 1985; Hoskisson,
1987; Keats and Hitt, 1988; Brickley and Van
Drunen, 1990). A related stream of literature
focused on the restructuring and refocusing of
Copyright  2006 John Wiley & Sons, Ltd.
diversified and multidivisional firms (Porter, 1987;
Bowman and Singh, 1990; Hoskisson and John-
son, 1992; Johnson, 1996). Whereas these early
studies addressed the interaction between struc-
ture and changing business scope, recent research
has focused on the interaction between struc-
ture and resources. These include studies about
the redeployment of resources between organiza-
tions (namely targets and acquirers), and resource
reconfiguration (addition, deletion, or movement
of resources) within firms (Capron et al., 1998;
Karim and Mitchell, 2004).
This study adds to our understanding of how
resources are reconfigured within structure by
observing the evolution of units within which these
resources reside. As structure is the container for
resources (Barney, 1991), recombination of units
implies the reconfiguration of resources within
the organization. In essence, firms are adapting
and experimenting with structure for the purpose
of realigning their resources. By distinguishing
between the origin of units and their resources, this
study will inform us about how acquired resources
vs. those that are innovated within the firm are
reconfigured, and the different roles that each
play within the organization. Further, in examin-
ing recombination of business units, this study will
add more insight to the strategy–structure studies
on divisional reorganizations.
There are many terms that have been used
throughout literature in the study of structural
change. Most concepts overlap or are nested in
some regard, but others are distinct at the level
of analysis that they pertain to. The most gen-
eral phrase, ‘reorganizing,’ has been widely used
to address various elements including physical
assets, authoritative structures (centralization, hier-
archy), internal forms (U-form, M-form), and end-
less other scenarios. This phrase can be used in
reference to any system and encompasses all of the
following phrases. At the divisional level within
the firm, there are terms such as ‘restructuring’
from the strategy–structure literature and ‘patch-
ing’ from the dynamic capabilities literature. These
phrases are similar in that they refer to firms
changing their businesses and associated divisions.
This paper uses the terms ‘business’ and ‘divi-
sion’ interchangeably in reference to a product
market. Restructuring, in the strategy–structure lit-
erature, refers to what businesses a firm should
be involved in and the subsequent addition or
deletion of divisions from an organization. In the
Strat. Mgmt. J., 27: 799–823 (2006)
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 Modularity in Organizational Structure by Reconfiguration
dynamic capabilities literature, the discussion on
patching refers to the remapping of businesses
to align them to changing market opportunities,
where remapping includes addition or deletion of
businesses but also includes ‘splitting, transferring
. . . or combining chunks of businesses’ (Eisenhardt
and Brown 1999: 73).1 At the unit and resource
levels of the firm, the terminology most frequently
used to address either unit or resource change is
‘recombining’ and ‘reconfiguring’. These phrases
are similar in that they refer to firms changing
some components in some manner, but the term
‘recombining’ is more specific in that it involves
the interaction of more than one component. In
addition to recombining components, reconfigura-
tion may also involve components being added
to, deleted from, or moved within the firm. In
the modularity literature components usually refer
to either resource components within a product
system or task components within an organiza-
tional system. In the strategy–structure literature
the components being analyzed are business units
and/or resources. Finally, the term ‘redeploying’
usually refers only to the resource level of the
firm. This phrase has been used in the strat-
egy–structure literature and related literature on
acquisitions, diversification, and growth in refer-
ence to the use of resources in new ways or
towards new goals.
HYPOTHESES
Reconfiguration of acquired vs. internally
developed units
Acquired and internally developed units have dif-
ferent characteristics. Acquired units come to the
firm with an existing set of products and business
systems. Based on this, one might expect inter-
nally developed units that are newly created with-
out any previous infrastructure to require greater
ongoing reconfiguration than acquired units. Com-
pared to acquired units, a firm must develop the
products and systems of internally developed units
from scratch, requiring ongoing refinements. These
1
Eisenhardt and Brown (1999) make a comparison between
‘reorganizing’ and ‘patching.’ Given the common use of the
term ‘restructuring’ in the strategy–structure literature, this paper
would advocate relabeling ‘reorganizing’ more specifically to
‘restructuring.’ Terminology aside, their paper further clarifies
the differing characteristics under which firms reorganize their
businesses vs. patch their businesses.
Copyright  2006 John Wiley & Sons, Ltd.
803
refinements to internally developed units, however,
tend to involve incremental changes to existing
products and systems, rather than extensive recon-
figuration (Nagarajan and Mitchell, 1998). The
incremental changes build cumulatively, rather
than via large, discrete changes. Thus, this study
expects that internally developed units are likely
to require less reconfiguration over time than
acquired units.
Acquired units, when first obtained, will typi-
cally contain some products and systems that the
firm either does not want or needs to change exten-
sively in order to create value. A firm may pursue
an acquisition for many reasons: to acquire co-
specialized assets, to avoid barriers to entry, to
quickly diversify, to achieve economies of scope
or scale (Bain, 1956; Rumelt, 1974; Caves, 1981;
Panzar and Willig, 1981; Teece, 1986). A common
element of all these cases is that extensive changes
are often necessary to achieve full potential value
(Capron and Mitchell, 1999). Changes aside, a
restructuring strategy also often involves follow-
up acquisitions (Porter, 1987). Further, value may
come from making units more effective and/or
efficient. Firms may reconfigure units to improve
information and work flows (Chandler, 1962). As
targets may have different routines and proce-
dures than their acquirers for how they man-
age information and tasks, they may be recon-
figured to improve productivity. Thus, firms will
often need to undertake extensive reconfigura-
tion of acquired units in order to divest resources
that are not needed and to recombine units in
ways that improve business activities. The first
baseline hypothesis proposed compares the recon-
figuration of internally developed and acquired
units:
Hypothesis 1: Firms are likely to reconfigure
acquired units sooner than internally developed
units.
In the hypothesis above, the term ‘sooner’ refers
to the amount of time since a unit became part
of the organization. Thus, for internally developed
units, the time until reconfiguration refers to the
period between founding and getting reconfigured.
For an acquired unit, the time until reconfiguration
refers to the period between acquisition (entry into
the firm) and getting reconfigured.
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804 S. Karim
Forms of business unit recombination
The different characteristics of units that are
acquired vs. internally developed may also
constrain the modular recombinations that are
feasible or useful for firms. This study does not
measure the outcome of different forms of business
unit recombination. The intent of this paper is to
observe what forms of recombination are more or
less common and then to develop some logic and
understanding for why this may be the case.
Recall that business unit reconfiguration includes
the addition of new units to the organization (via
internal development or acquisition), deletion of
units (or portions of units) from the organization
(via divestiture or dissolution), and recombination
of units within the organization (see Figure 1).
Unit recombination may involve (1) a unit los-
ing its identity and melting into an existing unit
(Figure 1, Case 3), or (2) several units losing
their identity and forming a new unit altogether
(Figure 1, Case 4). This latter creation of a new
unit is another form of ‘addition of new units to
the organization,’ via reconfiguration, since this
unit was neither an internally developed unit from
scratch nor an acquired unit. Because the focus
of this study is to differentiate the roles of inter-
nally developed and acquired units in the process
of structural change, this paper will only observe
the first (Figure 1, Case 3) of these two unit recom-
bination scenarios.
For internally developed and acquired units dis-
solving into existing units, there are four possi-
ble modular unit recombinations. Let us consider
each of the four cases, the goals that each may
serve, and their likelihood of occurrence. Figure 2
depicts the four possible recombinations and their
expectations. If the baseline Hypothesis 1 is to
hold, then this paper expects acquired units (right
two quadrants) to be reconfigured more than inter-
nally developed units (left two quadrants), in gen-
eral.
First, consider reconfiguration of acquired units
into internally developed units. This form of unit
recombination is expected to be common, and
more likely than internally developed units being
recombined together. The act of dissolving an
internally developed unit is more radical than the
act of adding elements of other units to an inter-
nally developed unit. Because internally developed
units undergo more incremental changes than the
Copyright  2006 John Wiley & Sons, Ltd.
extensive reconfigurations of acquisitions (Nagara-
jan and Mitchell, 1998), it is unlikely that internal
units will be dissolved and recombined together.
Acquisitions will often be recombined into inter-
nally developed units as resources are purchased,
providing firms with a speedy mechanism for
resource procurement (Karim and Mitchell, 2000).
Firms may acquire units because they need co-
specialized or complementary assets to innovate
(Teece, 1986). Even if the necessity for a resource
is not clear prior to the acquisition, firms may
believe that there are potential benefits from tar-
gets’ resources (Capron et al., 1998). In these
cases, recombination of acquired units with exist-
ing internally developed units may provide inter-
nally developed units with sought-after key ingre-
dients that serve as ‘stepping stones’ towards fur-
ther opportunities (Wernerfelt, 1984). It is also
worth noting that regardless of whether or not
resources are needed by internally developed units,
reconfiguration of targets may be the result of path
dependence. Some firms that are highly acquisition
active may habitually reconfigure their targets in an
unreflective nature if it is their tradition to do so
(Oliver, 1997).
Second, consider the combination of two or
more acquired units. The arguments above high-
light how internal units may need key ingre-
dients from targets; similarly, other acquisitions
may need additional ingredients as well. Realiz-
ing the potential of targets may require substan-
tial post-acquisition reconfiguration (Porter, 1987).
In this regard, recombining acquisitions together
may serve to create more value or opportunities
than keeping the acquisitions separate. As a unit
increasingly needs resources belonging to another
target, these units’ interdependence increases and
it is expected that in such cases they would be inte-
grated (Orton and Weick, 1990; Schilling, 2000).
Similar to Orton and Weick’s (1990) view of struc-
tures as malleable, this paper views acquisitions as
pieces of clay that firms attempt to mold in the
hope of creating more value. Thus, it is proposed
that acquired units are more likely to be recon-
figured in either manner than internally developed
units:
Hypothesis 2: Firms are more likely to recon-
figure acquired units into internally developed
units, than to reconfigure internally developed
units with each other.
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 Modularity in Organizational Structure by Reconfiguration 805

Time "t" Time "t + 1"

Case 1: Unit addition to the firm (via internal FIRM FIRM

development, acquisition, recombination). without with
Example 1: The Firm adds Unit A at time “t+1”. Unit A Unit A

Case 2: Unit deletion from the firm (via FIRM FIRM

divestiture or dissolution). with without
Example 2: The Firm deletes Unit B at time “t+1”. Unit B Unit B

Case 3: Recombination of a unit dissolving into

another existing unit(s). Unit C
Example 3: Both Unit C & D exist at time “t” with Unit D
within the firm. At time “t+1” Unit D dissolves Unit C mixed in
into Unit C. Unit D no longer maintains an
identity, but its resources and activities are still Unit D
considered to be retained within the firm.

Case 4: Recombination of units dissolving to

form a new unit(s).
Example 4: Both Unit E & F exist at time “t”
within the firm. At time “t+1” both units dissolve Unit E Unit G
to form a new Unit G. Unit G is a new addition to new to the
the firm via recombination. Units E & F no longer FIRM
Unit F
maintain their identities, but their resources and
activities are still considered to be retained within
the firm.

Case 5: Resource addition to a unit (where

resources - but not an entire unit - come from (liquidate or go to Unit H)
elsewhere, either internal or external to the firm;
and are dissolved into the unit). Unit H
Example 5: Unit H exists in the firm at time “t”, with added
and gets an addition of resources at time “t+1”. some resources
The resources are coming from Unit I. If Unit I Unit H from Unit I
resources
is also within the firm, then this is a transfer of
resources from one unit to another (i.e. resource Unit I
reconfiguration independent of unit Unit I
reconfiguration). If Unit I is outside the firm, with less
then this is the purchase of resources by Unit H. resources

Case 6: Resource deletion from a unit (where resources - but not the entire unit - go elsewhere,
either internal or external to the firm; and are dissolved into a unit)
Example 6: Unit I exists in the firm at time “t”, and removes resources at time “t+1”. The
resources are either being dissolved or going to Unit H. If Unit H is also within the firm, then
this is a transfer of resources from one unit to another (i.e. resource reconfiguration independent
of unit reconfiguration). If Unit H is outside the firm, then this is the sale of resources by Unit I.

Figure 1. Reconfiguration cases

Hypothesis 3: Firms are more likely to recon-
figure acquired units with each other, than to
reconfigure internally developed units with each
other.
Third, consider the combination of two or more
internally developed units. This may be observed
Copyright  2006 John Wiley & Sons, Ltd.
when a firm is consolidating and focusing its
businesses (i.e., ‘downscoping’) (Johnson, 1996).
Assuming that firms create internally developed
units for some distinct purpose, this paper expects
that it is rare for firms to dissolve the infras-
tructures of internally developed units that were
created from scratch with much effort and time.
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DOI: 10.1002/smj
806 S. Karim
Int.dev. unit dissolves into →
LOW
→ an likelihood
existing (Consolidating)
int.dev.
unit
Hyp 4
VERY LOW
→ an likelihood
existing (Replacing I’s
acq. routines with A’s)
unit
Figure 2. Forms of unit recombination and expectations
Also, given the nature of incremental changes to
the products and systems of internally developed
units (Nagarajan and Mitchell, 1998), merging of
internally developed units together is not expected
to be as common as the reconfiguration of acquired
units.
Fourth, consider the absorption of internally
developed units into acquired units. Not only is
this expected to be rare due to the arguments men-
tioned above about dissolving internally developed
units, but also due to the potential loss of famil-
iar routines being overwritten by unfamiliar ones.
As an internally developed unit is dissolved into
an acquired unit, there may be exaggerated inte-
gration problems due to the lack of familiarity
that the organization has with the target’s routines.
There are often problems integrating acquisitions
into organizations; the alternative bodes to be even
more problematic. The internal routines that once
existed are disrupted and the new foundation (of
the acquired unit) and its resources may be poorly
understood and difficult to leverage. As it is, firms
face impediments to internal knowledge transfer
that include strained absorptive capacity and rela-
tionships amongst participants (Szulanski, 1996).
It is expected that these impediments are ampli-
fied when trying to create value between units,
one of which the organization is less familiar with.
Thus, it is proposed that the absorption of inter-
nally developed units into acquired units is not
common:
Hypothesis 4: Firms are more likely to reconfig-
ure internally developed units with each other,
than to reconfigure internally developed units
into acquired units.
Copyright  2006 John Wiley & Sons, Ltd.
Acq. unit dissolves into →
Hyp 2 HIGH
likelihood
(Buying
resources)
Hyp 3 HIGH
likelihood
(Molding
acquisitions)
Benefits of reconfiguration
Although this study does not measure financial
performance of modular units, it does observe the
retention and divestiture of units and their activ-
ities. This paper’s interest is in how unit recon-
figuration may indicate that firms are attempting
to recombine resources to create some benefit
for the firm. Because performance measures are
not available for the business units being stud-
ied, two other sources of ‘evidence’ are used as
proxies that reconfiguration is an attempt to cre-
ate value. First, for units that are divested, this
paper studies how many undergo some sort of
recombination before their ultimate divestiture vs.
how many are divested without any recombination
attempts. Second, for all units, this paper exam-
ines their longevity and observes whether those
that are reconfigured are retained longer than those
that are not reconfigured in any way. Both sources
of evidence would indicate that reconfiguration is
an attempt by the firm to create some positive out-
come by recombining the modular units and their
resources. There are a variety of purposes that
reconfiguration may fulfill to create benefits for
organizations, and they can be categorized under
two main goals: the realignment of structure for
better effectiveness and/or efficiency, or the pur-
suit of new opportunities as resources are used in
new ways.
‘Organizational restructuring is intended to
increase the efficiency and effectiveness of
management teams through significant changes
in organizational structure’ (Bowman and Singh,
1993: 6). Effectiveness and efficiency may
improve as firms realign their units to establish
Strat. Mgmt. J., 27: 799–823 (2006)
DOI: 10.1002/smj
 Modularity in Organizational Structure by Reconfiguration
proper fit between their strategy and structure.
Managers who pursue a patching strategy
constantly update unit size such that a unit is
‘small enough for agility and large enough for
efficiency’ (Eisenhardt and Brown, 1999: 74).
Further, effectiveness and efficiency are outcomes
of how information is accessed and transferred
within structure (Chandler, 1962). A frequent
challenge of managing information within the firm
is the sharing of knowledge between business
units. Garud and Karaswamy warn that traditional
hierarchical structures may ‘result in “knowledge
hoarding” by independently functioning units’
(Garud and Karaswamy, 1995: 98). Ranft (1997)
also found that post-acquisition knowledge transfer
is affected by the level of autonomy of the
acquired unit. The level of independence of units
(whether acquired or internally developed) affects
not only knowledge and information transfer but
also coordination amongst units. If units are
highly interdependent of one another then it may
be optimal to integrate these units and ‘forfeit
a degree of [future modular] recombinability’
(Schilling, 2000: 316). Alternatively, realigning
units such that they are more autonomous can
lead to reduced coordination and greater efficiency,
especially in dynamic markets (Eisenhardt and
Brown, 1999, Helfat and Eisenhardt, 2004).
This is what von Krogh and Cusumano (2001)
refer to as a ‘strategy of granulation’: exploring
new territory with autonomous business units.
Independence (or lack of interdependence) can
also affect management of risk and expected
outcomes. In simulations on knowledge attained
by an organization, March (1991) found that
coordination leads to doing better on average but
independent projects are more likely to lead to
abnormal returns.
Whereas above, the act of realigning units for
effectiveness and efficiency seems planned and
deliberate, organizations may also reconfigure in
ways that are more exploratory: reconfiguring to
find opportunities and new uses for resources.
Penrose (1959) described resources as providing
many services to an organization depending on
how they were used. By reconfiguring units and
their resources, organizations have the ability to
use resources in new combinations, learn new
skills, and find new opportunities (Schumpeter,
1934; Kogut and Zander, 1992). Managers are con-
sciously searching for new business opportunities.
Helfat and Eisenhardt found that managers used
Copyright  2006 John Wiley & Sons, Ltd.
807
their ‘knowledge of the firm as a whole to actively
search for and evaluate new related diversification
opportunities,’ and when they found promising
ones they reconfigured the organization to reallo-
cate resources (Helfat and Eisenhardt, 2004: 1226).
This search for opportunities and experimentation
with structure is common and continuous. Ciborra
portrays managers as ‘improvising and tinkering’
and ‘muddling through,’ often finding opportu-
nities that were not planned but were the result
of engaging in reconfiguration attempts (Ciborra,
1996: 103, 116). Further, experimental reconfig-
uration may be thought of as beneficial by pro-
moting strategic health; it may help established
companies who are comfortably successful to over-
come the inertia of success (Markides, 1998).
The expected benefit of reconfiguration likely
depends on the original intent behind it. Man-
agers may be focused on a one-time value creation
proposition through reconfiguration or be pursuing
long-term, ongoing value creation. Because effec-
tiveness and efficiency are incrementally improved
within organizations, those managers with an ongo-
ing commitment to value creation will likely have
such goals. Managers whose goals are to innovate
as a result of reconfiguration may intend for a one-
time value creation. In either case, the economic
value of these benefits may be substantial.
Because there are many potential benefits of
reconfiguration, this paper expects that firms will
first attempt to harness some/any of these benefits
before divesting a unit, and further, that it may
be common for firms to reconfigure units several
times in order to try to reap benefits. Regardless of
whether benefits are accrued, the act of reconfigu-
ration should add to the longevity of units within
the organization. Stated differently, units that are
recombined are expected to have their activities
retained in some form within the firm vs. being
divested or dissolved and no longer part of the
firm. Thus, if firms view reconfiguration as bene-
ficial, this paper proposes:
Hypothesis 5: Firms are more likely to reconfig-
ure units at least once rather than dissolve or
divest them without attempting reconfiguration.
Hypothesis 6: Reconfiguration will increase the
longevity of business units within the firm.
In summary, this paper expects that firms are
more likely to reconfigure acquired units than
Strat. Mgmt. J., 27: 799–823 (2006)
DOI: 10.1002/smj
808 S. Karim
internally developed units. Further, the recombina-
tion of acquired units and absorption of acquired
units into internally developed units is expected
to be more common than the recombination of
internal units or absorption of internal units into
acquired units. Finally, this study expects that
reconfiguration will be pursued before divestiture
and add to the longevity of units within the firm.
METHODS AND MEASURES
Data and sample
The study uses data from several editions of the
Medical and Healthcare Marketplace Guide, pub-
lished in 1975, 1978, 1983, 1986, 1989, and each
year thereafter.2 The guides include information
concerning U.S. and non-U.S. firms operating in
the U.S. medical industry. The industry can be
divided into three main categories: healthcare ser-
vices, medical devices (which can be further spec-
ified as ophthalmic, dental, or other), and phar-
maceutical drugs (both prescription and over-the-
counter). Between 1978 and 1997, the industry
grew enormously from $122 billion to $745 billion
in revenues. Though all categories grew in abso-
lute revenue, growth in medical devices lagged
compared to the others. Each sector’s share of
the industry from 1975 to 1997 were: healthcare
services 68 to 77 percent, medical devices 22 to
8 percent, and pharmaceuticals 10 to 15 percent.
For each firm in the guide, there is informa-
tion regarding its product markets and the business
units possessed each year. A business unit is a
structural component whose identity is recognized
by the firm with a unique address and some respon-
sibility for a product market. Several units of a
firm may be involved with the same product mar-
ket. The guide includes descriptions and histories
of firms and their units. The unit-level descrip-
tion includes information concerning what product
or services a unit offers, how the unit came to
be in the firm (whether it was internally devel-
oped, acquired, or a new unit that resulted from
the recombination of several other units), whether
2
The Medical and Healthcare Marketplace Guide was published
by International Bio-Medical Information Services, Inc. (Acton,
MA, and Miami, FL; Adeline B. Hale and Arthur B. Hale (eds))
in 1975, 1978, 1983, 1986, and 1989. Subsequent editions have
been published by MLR Publishing Company (Philadelphia, PA)
and by Dorland’s Biomedical Publications (Philadelphia, PA).
Copyright  2006 John Wiley & Sons, Ltd.
the unit had a name change, key product trade-
marks, whether particular product lines of the unit
were divested, top personnel, number of employ-
ees in the unit, and more. For an acquired unit, the
guide notes when it was originally founded, when
it was acquired into the organization, and from
whom it was acquired. For a newly recombined
unit, the guide notes which units were recombined
and dissolved to create the new unit. Information
regarding the divestiture or dissolution of a unit is
available at the firm-level description which also
states general information for the entire organi-
zation such as nationality, date of incorporation,
public or private status, level of revenue, key offi-
cials, and more.
This paper examines the origin and evolution
of all units within firms. For each unit, this study
observes whether the company created it inter-
nally, obtained it through acquisition, or derived
it by recombining several existing units. It is also
noted which units the firm reconfigured, divested,
or shut down. Finally, unit evolution is tracked
during the 1978–97 period in order to observe
recombinations and to determine the outcome of
each unit.
The study sample consists of 250 firms which
exist in the 1978 panel. These 250 firms were
chosen from the beginning of the alphabet and
range from letters starting with A, B, or C.3 The
study did not begin with the 1975 panel because it
was the first year of the guide and many firms and
units had missing data. Though the study begins
with firms in 1978, the 1978 guide mentions units
that were still in existence in some form within the
organization in 1978. Thus, pre-study period units
that had already exited the firm (either through
divestiture or liquidation) by 1978 were not in
the 1978 guide, but units that still existed in the
firm or had been recombined into other units were
mentioned in the 1978 guide.
Of the 250 firms, only 34 percent (85 firms)
were still alive in 1997 (Figure 3). Of the 165
firms that fail to survive to 1997, 68 were shut
down and 97 were acquired or spun off. The 250
firms in the sample have a total of 866 units
3
The only noticeable yet negligible bias of sampling from the
beginning of the alphabet is that there are a greater number of
domestic firms (27 firms starting with the term ‘American’) and
firms practicing in the medical device category (23 firms starting
with the term ‘Bio’ of which 19 were medical device firms, and
10 firms starting with the term ‘Cardiac’ of which 9 were medical
device firms).
Strat. Mgmt. J., 27: 799–823 (2006)
DOI: 10.1002/smj
 Modularity in Organizational Structure by Reconfiguration 809
Table 1. Sample firms’ descriptive statistics

Total # firms in sample = 250

Total # units in sample = 866
Total # product lines in sample = 1274

Summary of 250 firms

Survive to 1997? 85 survive 165 don’t survive (68 shut, 97 acquired)

Foreign? 24 foreign parents 226 U.S. parent/firm
Subcategory? 181 medical devices 38 healthcare services 31 pharmaceuticals
Multi-unit? 109 multi-unit firms 141 single-unit firm
Acquisition-active? 84 acquisition-active 166 no acquisition activity
Diversified? 64 diversified 186 only medical

Min/Max statistics for 250 firms over study period, 1975–1997

Min Max Mean

# of employees 3 230,293 6,503

Total sales $159 thousand $11 billion $386 million
% medical sales 1% 100% 81%
% profit margin −102% 258% 6%
Age in 1978 1 (founded 1978) 311 (founded 1668) 24
# of competitorsa 1 2258 143
# of unit reconfigurations 0 55 2
# of unique units 1 48 3.5
# of acquired units 0 33 1.7

a
# of competitors = sum of # competitors in medical industry offering each of a firm’s product line as reported by Medical Guides
source.

300 calculated as the period between when a unit enters

# of existing firms

250
250 a firm (either by internal development, acquisition,
200
158 132 or recombination) and when it is reconfigured
150 117 98 85 (recombined, divested, or dissolved). Because the
100
50 sample is right censored, for those firms that are
0 never reconfigured this calculation is the period
1975 1980 1985 1990 1995 2000
from their entry into the firm to 1997. Hypotheses
Year
2, 3, and 4 count the number of different types of
Figure 3. Sample firms’ survival in medical industry, recombinations that occur for internally developed
1978–1997 and acquired units, and later control for the number
of each type of unit that exists per firm. Hypothesis
over the time period of the study. (Table 1 lists 5 observes all units that are divested and notes how
descriptive statistics of the sample.) The majority many were reconfigured (at least once) vs. how
of the sample consists of firms that have domestic many were never reconfigured prior to divestiture.
parents (90%), produce medical devices (72%), The dependent variable for Hypothesis 6 is time
and are not diversified (74%). Just under half the (in years) until a unit is divested or shut down
sample are firms that have multiple units (44%) (exiting the firm). Similar to the dependent variable
and are acquisition active (34%). in Hypothesis 1, the period is calculated as the
time between entry into the firm and when a unit
Variables and operationalization and its activities are completely extracted from
the firm. It is important to note here that if a
Dependent and independent variables
unit is recombined with other units, then it is
For Hypothesis 1, the dependent variable is time not considered to be deleted from the firm; its
(in years) until a unit is reconfigured. This is resources and activities are still within the firm but
Copyright  2006 John Wiley & Sons, Ltd. Strat. Mgmt. J., 27: 799–823 (2006)
DOI: 10.1002/smj
810 S. Karim
perhaps under the jurisdiction of another unit. The
point of interest is to observe when a firm makes
the clear choice to discard (either by divesting
or liquidating) the activities and resources of a
unit.
Regarding independent variables, Hypothesis 1
makes the distinction between acquired and inter-
nally developed units. Thus, ‘unit entry type’ is 0
for internal units and 1 for acquired units. Note
that units entering as recombinations are not being
tested in this hypothesis. Hypothesis 6 makes a
distinction between units that are reconfigured (via
recombination) vs. those that are not. Thus, ‘unit
was previously recombined’ is 0 for units that kept
their original identity throughout their life at the
firm, and is 1 for units that were recombined with
other units.
Control variables
For testing Hypotheses 1 and 6, there are several
industry-, firm-, and unit-level controls included
in the study. At the industry level there is the cat-
egory that the unit operates in chiefly. This is a
dummy variable indicating category of pharma-
ceutical, healthcare services, ophthalmic devices,
or dental devices (with comparison being made to
the omitted category of medical devices). Due to
the intensity of R&D in pharmaceutical units and
the valuable tacit knowledge that may be difficult
to coordinate, both divestiture and reconfiguration
of these units are expected to occur later as com-
pared to medical device units. The expectation
for healthcare services is more ambiguous; though
these units involve less, if any, R&D there may
be intricacies in coordinating people and service
tasks. Ophthalmic and dental devices are expected
not to differ significantly from medical devices.
There are several firm-level characteristics includ-
ing parent nationality, medical sales, non-medical
sales (to evaluate diversified firms), age, and profit
margins. At the unit level, the birth year (i.e., year
of entry into the firm) of the unit is included. This
variable controls for the proclivity towards recon-
figuration or divestiture in different years (e.g.,
units created in the 1970s vs. units created in the
1990s).
Additional controls are added that may affect
how soon a unit is reconfigured or divested. First,
let us consider firms’ and units’ levels of activity.
As a firm or unit’s level of activity increases, it
may be considered that there are more units and
Copyright  2006 John Wiley & Sons, Ltd.
resources available for experimentation and, thus,
recombination may occur sooner. Also, increased
activities in units may indicate the importance
of these units if they bring in greater revenues,
in which case they would be divested later (i.e.,
retained longer). At the firm level, ‘firm level of
unit activity’ is the number of units the firm has
active at the time this unit is introduced into the
firm. Similarly, at the unit level, ‘unit level of PL
activity’ is the number of product lines this unit
has active at the time that it enters the firm. This
unit level variable may also, somewhat, represent
unit maturity. One could argue that acquired units
are more mature (in absolute time) upon entering
the firm than internally developed units, and that
this level of maturity may influence reconfigura-
tion and divestiture (i.e., less mature units may be
given an incubation or grace period before expe-
riencing either event). The absolute birth date of
an acquired unit was not used as a control owing
to inconsistencies in the data. For some acquired
units, the date provided was of incorporation; for
others it was of founding. As a potential proxy,
‘unit level of PL activity’ may indicate maturity.
Internally developed units enter the firm having
activity, usually, in only one or two product line
areas. On the other hand, many acquired units have
multiple product line areas within which they are
active. Having said this, one should be cautious not
to equate level of maturity with level of activity;
there are certainly cases of mature units that may
choose to remain active in only one product line
area. Thus, ‘unit level of PL activity’ measures the
number of product line areas a unit is involved in
and may represent maturity to some extent.
Next, consider a unit’s overlap in activities with
other units. The variable ‘PL overlap with other
units’ is the number of other units that are creat-
ing any of the product lines similar to this unit. As
there is increased overlap between the activities of
units, consolidation is expected and thus recombi-
nation may occur sooner. Further, as increase in
overlap may indicate a commitment by the firm
to a product market, divestiture is expected to be
postponed. Lastly, how soon a unit may be recon-
figured may also depend on the firm’s experience
with modular reconfiguration. The variable ‘degree
of unit reconfiguration’ is the number of reconfig-
urations that the firm experienced prior to the entry
of this new unit. This paper expects that firms
with greater experience with reconfiguration are
likely to reconfigure sooner than those with less
Strat. Mgmt. J., 27: 799–823 (2006)
DOI: 10.1002/smj
 Modularity in Organizational Structure by Reconfiguration
experience as they may have a proclivity towards
reconfiguration.
Methodology
Hypothesis 1 predicts that acquired units will
be reconfigured sooner than internally developed
units. Hypothesis 6 predicts that units that are
recombined with other units will be retained longer
than those that are not recombined. For both these
hypotheses, the dependent variable is a length of
time and requires the use of a duration model
(Kleinbaum, 1996; Klein and Moeschberger,
1997).4 Thus, for testing Hypotheses 1 and 6, an
accelerated event time model is used to estimate
regression coefficients.
Running an accelerated event time model
requires choosing an error distribution. A common
method used is the evaluation of the Akaike
Information Criterion (AIC) (Equation 1). The
AIC may only be used in maximum likelihood
estimations and is an indicator of the fit of a chosen
distribution. The optimal model is that which has
the lowest AIC value (Akaike, 1973).
Akaike Information Criterion:
AIC = (−2)(log-likelihood of model)
+ (2)(# of independent variables) (1)
Hypotheses 2–5 expect a certain event to occur
more often than another event (for each firm).
These predictions involving only two categories,
where it is expected that one category scores higher
than the other, can be tested using t-tests that com-
pare the difference between two groups of cases
for each subject (Pindyck and Rubinfeld, 1981;
Pedhazur and Schmelkin, 1991). A t-test is suit-
able since the events of Firm A do not affect
the events of Firm B. Because these hypotheses
explore whether certain types of recombination
occur more often than others, and are not predict-
ing a causal effect of what causes recombination
4
Studies with dependent variables that are lengths of time
require the use of duration models for two reasons. First, the
data are right-censored (in this case at the year 1997) and the
event being tracked may not occur by the time the study period
ends; however, there is always the likelihood that it will occur
later. Second, the normal error distribution assumption of linear
regression is often violated. The duration being modeled is often
not a normal bell-shaped distribution but rather some skewed
version where more events occur at a shorter or longer duration.
Copyright  2006 John Wiley & Sons, Ltd.
811
(as Hypothesis 1 does with unit origin), a regres-
sion test is not appropriate.
RESULTS AND DISCUSSION
Reconfiguration of acquired vs. internally
developed units
Let us begin by looking at business unit recon-
figuration based on origin type (Figure 4). Of the
sample’s 866 units, 43 percent (370) are inter-
nally developed, 48 percent (413) are acquired,
7 percent (63) came into being as recombinations
of existing units, and 2 percent (20) came into
being as joint ventures. These ratios lend support
to the idea of acquisitions serving as a favor-
able means of obtaining resources. More acquired
units are reconfigured than internally developed
units: 53 percent to 13 percent, respectively. These
descriptive statistics are consistent with support for
Hypothesis 1, which predicts that acquired units
are more likely to be reconfigured than internally
developed units.
For a more accurate test, an accelerated event
time model was run to analyze the effect of origin
type on duration until reconfiguration. A glance
at the correlation matrix (Table 2) shows no sig-
nificantly high correlations that could bias results.
The highest correlations of 0.5501 and 0.6133 sug-
gest that foreign firms in the sample are more
diversified and older than domestic firms. Table 4
reports the models’5 results of the unit reconfig-
uration analysis. The sample used in these mod-
els includes all acquired and internally developed
units of the 250 firms. This resulted in 783 units;
however, it was shrunk to 483 units because of
missing data regarding firms’ net incomes that
resulted in missing data for the variable ‘profit
5
To implement an accelerated event time model, first an error
distribution had to be chosen (Table 3). Running a generalized
gamma distribution could not reject the null hypothesis that the
shape parameter (kappa) equaled zero. This indicated that a
log-normal or log-logistic distribution could not be ruled out.
Further, testing the null hypothesis that the shape parameter
equaled one (by testing the statistic sqr[{B coefficient estimate
−1}/B std error] under a chi-squared distribution) also could
not be rejected. This indicated that a Weibull or Gompertz
distribution needed to be tested. Using the Akaike Information
Criterion (AIC), the log-normal distribution was selected because
it had the lowest AIC. Choosing the log-normal also made
sense from a graphical standpoint since the generalized gamma
distribution had shown a non-monotonic curve (intuitively ruling
out the Weibull and Gompertz distributions and leaving the log-
normal and log-logistic distributions).
Strat. Mgmt. J., 27: 799–823 (2006)
DOI: 10.1002/smj
 812

Table 2. Correlation matrix for testing Hypothesis 1a

S. Karim

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

1. Duration until unit

reconfigured
2. Unit entry type −0.3347

Copyright  2006 John Wiley & Sons, Ltd.

(acq = 1, int = 0)
3. Category dummy: 0.1430 0.0283
pharmaceutical
4. Category dummy: −0.0885 −0.1304 −0.3081
healthcare service
5. Category dummy: −0.0104 −0.0280 −0.0773 −0.0755
ophthalmic device
6. Category dummy: −0.0404 0.1056 −0.1038 −0.1015 −0.0255
dental device
7. Foreign parent 0.1664 0.0957 0.3211 −0.2790 −0.0812 −0.0299
8. Firm medical sales −0.1437 0.1693 0.1355 −0.0169 −0.0154 −0.0296 −0.1390
9. Firm non-medical −0.0467 0.1879 0.2221 −0.1881 −0.0588 0.0090 0.5501 0.1179
sales
10. Firm age 0.0596 0.1971 0.2615 −0.2871 −0.0415 0.0464 0.6133 0.1039 0.3179
11. Firm % profit 0.0157 −0.0798 0.0458 −0.0720 −0.0091 −0.0282 −0.1015 0.1287 −0.0503 −0.0353
margin
12. Unit birth −0.4131 0.3759 0.0242 0.0669 −0.0360 0.0382 0.1121 0.2301 0.2059 0.2868 0.0265
13. Firm level of unit −0.1888 0.2483 0.0337 −0.0807 0.0481 0.0779 0.1458 0.3515 0.2670 0.2783 −0.0120 0.3236
activity
14. Unit level of PL 0.0504 0.0114 0.0158 −0.1491 −0.0180 0.0002 0.1082 0.0264 0.1443 0.0518 0.0376 −0.0568 0.1019
activity
15. PL overlap with −0.1661 0.2386 0.2473 −0.1073 −0.0608 −0.0590 0.1549 0.1799 0.2093 0.1920 0.0196 0.2358 0.3504 0.2336
other units
16. Degree of unit −0.2649 0.2083 0.1959 −0.0889 −0.0367 −0.0346 0.1126 0.5118 0.4675 0.2169 0.0567 0.4132 0.3734 0.0062 0.3280
reconfiguration

a
Variables 8–11 and 13–16 are for the year in which the business unit was introduced to the firm.

DOI: 10.1002/smj
Strat. Mgmt. J., 27: 799–823 (2006)
 Modularity in Organizational Structure by Reconfiguration 813

Business Unit Origins & Change

450 70%
48%

400
43% 60%

350
50%
300

percentage of units
number of units 40%
250

200 30%

150
20%
100
7%
10%
50
2%

0 0%
Internally- Entry as Joint
Acquired
created Recom. Venture
Units by source 370 413 63 20
% Reconfigured 13% 53% 36% 59%
% Divest w/o reconf. 2% 16% 21% 12%
% Continue w/o reconf. 24% 9% 27% 14%

Units by source % Reconfigured

% Divest w/o reconf. % Continue w/o reconf.

Figure 4. Business unit origins and change

Table 3. Choosing a distribution for testing Hypothe- margin.’ This step controls for firm profitability
sis 1 as a factor that may affect how long until units
Unit reconfiguration: choose the distribution with the
lowest AICa are reconfigured.6 Model 1 includes only the con-
trol variables for industry-level category dummies,
Gamma Log-normalb Log-logistic firm-level attributes, and unit-level birth. Model 2
adds the independent variable, namely unit ori-
LR chi2 188.45 193.08 212.33 gin. Models 3, 4, 5, and 6 iteratively add the
Log-likelihood −562.24 −562.44 −565.03 controls for firm and unit activity, activity over-
# independent 15 15 15
variables lap, and experience with reconfiguration to test for
# parameters 2 1 1 their significance and the robustness of the ori-
AIC 1160.48 1158.88 1164.06 gin–reconfiguration relationship. All models were
found to be significant, had similar results for both
a
Weibull and Gompertz were excluded (Wald test rejected null
hypothesis that kappa coefficient from the generalized gamma
model is 1). 6
The coefficient estimates are robust in magnitude and direction
b
Bold type: Log-normal distribution chosen for accelerated for both samples of 783 and 483.
event time model.
Copyright  2006 John Wiley & Sons, Ltd. Strat. Mgmt. J., 27: 799–823 (2006)
DOI: 10.1002/smj
814 S. Karim

magnitude and significance of variables, and were
highly robust.
The results in Table 4 provide strong support for
the unit reconfiguration argument of Hypothesis 1.
Acquired units are reconfigured sooner than inter-
nally developed units. Whether firms are shedding
unwanted businesses, or recombining resources for
new opportunities or to increase effectiveness, this
finding implies that firms are trying to reap the ben-
efits of modular reconfiguration by experimenting
with acquired units sooner than internally devel-
oped units. Several of the control variables are also
significant. Units created later (in the 1990s com-
pared to the 1970s, for example) are more likely
to be reconfigured sooner than those born earlier.
Perhaps this is indicative of the trend that recon-
figuration is more common recently than in the
past. The more overlap between a unit’s activi-
ties (i.e., product lines) and other activities in the
firm, the sooner a unit is reconfigured. As product
market activities are spread amongst many units,
this paper expected that firms may reconfigure to
substitute or consolidate resources. Surprisingly,
increased product line activity in a unit increases
the time until the unit is reconfigured. Based on
former arguments, it was expected that such a unit
was more likely to be reconfigured sooner since
there were more resources that a firm could exper-
iment with. There are several counter-arguments
that may explain this finding. First, as the activities
of a unit increase, it may increase the coordination
cost of reconfiguring the unit. Second, in conjunc-
tion to the earlier finding that units with unique
product lines are reconfigured later, it may be the
case that unique units and active units have greater
power within the firm and can influence or delay
change and reconfiguration if it is unwanted (Hin-
ings et al., 1974). If unit activity is any indication
of maturity, the findings do not support the logic
that less mature units are given a longer grace
period before they are reconfigured. As expected,
firms that had a greater degree of reconfiguration
activity in the past are more likely to reconfig-
ure units sooner than firms with little reconfigu-
ration experience. Firms’ profitability did not sig-
nificantly affect reconfiguration. Figure 5 depicts

Table 4. Duration until unit reconfiguration (Hypothesis 1), log-normal AETM estimate

Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Unit entry type (acq. = 1, int. = 0) −1.009∗∗∗ −1.001∗∗∗ −0.991∗∗∗ −0.937∗∗∗ −0.955∗∗∗
Industry-level controls
Category: pharmaceutical 0.111 0.068 0.060 0.072 0.162 0.172
Category: healthcare services 0.172 0.025 0.024 0.047 0.047 0.025
Category: ophthalmic −0.019 −0.026 0.006 0.033 −0.054 −0.068
Category: dental −0.002 0.142 0.156 0.162 0.087 0.054
Firm-level controls
Foreign parent 0.332∗ 0.274∼ 0.276∼ 0.256 0.247 0.183
Firm medical sales 0.000 0.000 0.000 0.000 0.000 0.000
Firm non-medical sales −0.000 −0.000 −0.000 −0.000 −0.000 0.000
Firm age 0.001 0.001 0.002 0.002 0.002 0.002∼
Firm % profit margin 0.439 0.083 0.077 0.042 0.055 0.056
Unit-level control
Unit birth −0.047∗∗∗ −0.035∗∗∗ −0.034∗∗∗ −0.033∗∗∗ −0.031∗∗∗ −0.027∗∗∗
Level of activity
Firm level of unit activity −0.006 −0.008 −0.001 0.000
Unit level of PL activity 0.049∗ 0.066∗∗ 0.060∗∗
Overlap in activities
PL overlap with other units −0.082∗∗∗ −0.073∗∗
Experience
Degree of unit reconfiguration −0.021∗
LR chi2 109.06∗∗∗ 171.73 ∗∗∗
172.38 ∗∗∗
175.94 ∗∗∗
187.48 ∗∗∗
193.08∗∗∗
N 483 483 483 483 483 483

(Excluded medical device category dummy.)

Significant estimates: ∼p < 0.1; ∗ p < 0.05; ∗∗ p < 0.01; ∗∗∗
p < 0.001

Copyright  2006 John Wiley & Sons, Ltd. Strat. Mgmt. J., 27: 799–823 (2006)
DOI: 10.1002/smj
 Modularity in Organizational Structure by Reconfiguration
the hazard function of unit reconfiguration for both
acquired and internally developed units; acquired
units face a greater hazard of being reconfigured
than internally developed units. The hazard for
these acquired units increases sharply in their first
3 years of life before steadily falling. Internally
developed units also face an increase in hazard
during the first few years but much less than the
acquired units.
An important question to consider when
differentiating between internally developed and
acquired units is: When has an acquired unit
belonged to a firm long enough to be treated like
an internally developed unit? One expects that the
longer an acquired unit has been part of a firm,
the unit will assimilate its routines with those of
the firm such that the firm no longer differentiates
it when compared to an internally developed
unit. The hazard plot from testing Hypothesis 1
(Figure 5) sheds light on this question; it supports
our intuition since the hazard functions for the
different units are approaching one another. With
regard to reconfiguration, acquired units are treated
similarly (with negligible hazard difference of
0.05) to internal units after they have been in the
firm for 18 years.
Forms of business unit recombination
When observing recombination of units at the 84
acquisition-active firms (Figure 6), there were a
total of 71 acquired units dissolved into internally
developed units, 208 targets that were recombined
together, 16 internally developed units recombined
together, and 46 internally developed units dis-
solved into acquired units. Reconfiguring inter-
nally developed units with each other is rare, as
expected. There are far more cases of acquired
units being reconfigured, either into internally
0.25
reconfiguration
0.2
hazard of
0.15
0.1
0.05
0
0 5 10 15
time (years from entry into firm)
entry=acquired units
entry=internally developed units
Figure 5. Hazard function for unit reconfiguration
Copyright  2006 John Wiley & Sons, Ltd.
815
250
Total count of events
for all 84 acquisition
208
200
active firms
150
100 71
46
50 16
0
acq goes to acq units int-dev units int-dev goes
int-dev together together to acq
Figure 6. Forms of unit recombination
developed units or with other targets, than there
are of internally developed units being reconfig-
ured together. Surprisingly, there were a substan-
tial number of cases of internally developed units
being dissolved into targets.
To test the significance of the forms of recom-
bination, the study first controls for the number of
internally developed and acquired units available
to each firm for recombination, and then uses t-
tests to evaluate the significance in the difference
of occurrences. Table 5 lists the events tested in
the t-tests, along with the probability statistics and
significance.
A t-test comparing the occurrence of acquired
units dissolving into internally developed units vs.
the recombination of internally developed units
with each other, after controlling for both types
of units, finds the difference to be significant. This
supports Hypothesis 2 that predicts that internally
developed units obtain many key ingredients from
acquired units. This paper further proposed that
firms attempt to harness the benefits of recon-
figuration by recombining acquisitions together.
As expected, reconfiguring acquisitions together
is far more prevalent than the reconfiguration
of internally developed units with one another.
The difference is highly significant and supports
Hypothesis 3. Although more internally developed
units are dissolved into acquired units vs. inter-
nally developed units being recombined together,
the difference is not significant when perform-
ing a t-test. Nonetheless, there is no support for
Hypothesis 4.
The 46 cases of internally developed units dis-
20 solving into targets are intriguing. Since this form
of recombination may lead to the loss of organi-
zationally embedded routines, this study expected
to observe very few such cases. Recall that firms
could have recombined the units together such that
the acquired unit was dissolved into the internally
Strat. Mgmt. J., 27: 799–823 (2006)
DOI: 10.1002/smj
816 S. Karim

Table 5. Paired t-test outcomes (Hypotheses 2, 3, 4, 5)

Controlled event A Controlled event B Paired t-test

Event A > Event B

H2 Number of recombinations of Number of recombinations of Find Event A > Event B

acquired units dissolving into internally developed units
internally developed units (A → I) with each other (I → I)
divided by the ratio of A/(I + A) divided by the ratio of
units I/(I + A) units
H3 Number of recombinations of Number of recombinations of
acquired units dissolving into internally developed units
internally developed units with each other (I → I)
(A → A) divided by the ratio of divided by the ratio of
A/(I + A) units I/(I + A) units
H4 Number of recombinations of Number of recombinations of
internally developed units with internally developed units
each other (I → I) divided by the dissolving into acquired
ratio of I/(I + A) units units (I → A) divided by the
ratio of A/(I + A) units
H5 Number of divested units that were Number of divested units that
recombined prior divided by the were not recombined prior
total number of units divided by the total number
of units
p < 0.01 significant∗∗
Strong support for H2
Find Event A > Event B
p < 0.000 significant∗∗∗
Strong support for H3
Find Event B > Event A
p < 0.26 non-significant
No support for H4
Find Event A > Event B
p < 0.72 non-significant
Weak support for H5

Significant estimates: ∼p < 0.1; ∗ p < 0.05; ∗∗

p < 0.01; ∗∗∗
p < 0.001

developed unit, and still the two units’ resources
and activities would have merged. By not having
done this, and having purposefully dissolved the
internally developed unit into the acquired unit,
we are left with several explanations. First, it may
be that these cases are being driven by the matu-
rity of units, that less mature, internally devel-
oped, units are being dissolved into more mature,
acquired units. This scenario is not supported by
the study since there is no consistent evidence of
internally developed units being dissolved when
they are young (i.e., less mature), nor are the
acquired units necessarily older (i.e., more mature).
Second, focusing on the acquired unit, a firm may
want to retain the identity and independence of the
acquired unit but still infuse it with routines of the
broader organization. This infusion may be valu-
able to both parties (the acquiring firm and the tar-
get); however, it may be worrisome that the poten-
tial loss of routines of the internally developed unit
may be greater than the potential gains. Third, an
argument that is more likely and consistent with
evoking radical change is that a firm is purpose-
fully trying to change some of the practices of a
poor performing internally developed unit. This
assumes that the target possesses some routines
or intangible assets that the acquiring firm would
like to absorb and spread within its organization.
Copyright  2006 John Wiley & Sons, Ltd.
This scenario is not unlikely as acquisitions are
often pursued for their successful practices. The
preference for these practices, and in general, for
external knowledge, may be the result of man-
agers responding to status implications and valuing
targets’ unique contributions (Menon and Pfeffer,
2003).
Reconfiguration and divestiture
The purpose of studying whether firms attempt
to recombine their units before divestiture is to
capture some evidence that firms expect some ben-
efit from reconfiguration. For the 109 multi-unit
firms, 117 of the 530 acquired or internally devel-
oped units were ultimately divested. Of these 117
units, 62 were recombined in some way prior to
being divested, and the remaining 55 were divested
without any recombination attempts (Figure 7). As
expected, a greater number of units were recom-
bined before divestiture vs. those divested right
away. However, after controlling for the total num-
ber of units that were potential recombination part-
ners, the difference is not significant (see Table 5).
Thus, there is only weak support for Hypothesis 5.
Further study of the firms which divested with-
out any recombination attempts reveals that these
Strat. Mgmt. J., 27: 799–823 (2006)
DOI: 10.1002/smj
 Modularity in Organizational Structure by Reconfiguration
Total count of events
for all 109 multi unit
64 62
62
firms 60
58
55
56
54
52
50
Unit was recf. then Unit was divested
divested w/o recf.
Figure 7. Reconfiguration and divestiture
firms were mainly of two types: either they were
small firms with only a few units, or they were
large, acquisition-active firms with dozens of units.
The small firms generally did not have as much
reconfiguration experience as other firms and prob-
ably found the cost of reconfiguration to be too
expensive. For large, acquisition-active firms, an
opposite scenario may be at work. Though these
firms had substantial reconfiguration experience,
they may have been able to afford simply divest-
ing units and repurchasing the resources they were
looking for instead of spending the time reconfig-
uring or molding units.
Although the difference was not statistically sig-
nificant, the fact that there were more cases of
recombination prior to divestiture than not indi-
cates that there may be some perceived benefits
of reconfiguration. Further, upon observation, this
paper finds that it is common for reconfiguration to
occur several times. For example, of the 63 units
that originated as recombinations in the first place,
36 percent were reconfigured again, some more
than once (see Figure 4). Figure 4 indicates that
13 percent of the 370 internally developed units
were reconfigured, as were 53 percent of the 413
acquired units, and many of these were also recon-
figured several times.
To study the potential benefit of reconfiguration,
this study focuses on the performance variable of
retention (i.e., lack of divestiture or dissolution)
and makes comparisons between units that were
reconfigured at least once before divestiture and
those that were never reconfigured. An accelerated
event time model was run to analyze the effect of
prior reconfiguration on duration until divestiture
(i.e., duration retained). The correlation matrix
(Table 6) shows no significantly high correlations
that could bias results. Similar to the correlations
for testing Hypothesis 1, the highest correlations
of 0.5408 and 0.5956 again indicate that foreign
Copyright  2006 John Wiley & Sons, Ltd.
817
firms in the sample are more diversified and older
than domestic firms. Based on the AIC criterion,
the best choice of distribution for the model was a
log-logistic distribution (Table 7).
Table 8 reports the results of the unit divesti-
ture analysis. The sample used in these models
includes all acquired and internally developed units
of the 109 multi-unit firms. This resulted in 530
units; however, the sample was shrunk to 463
units because of missing data regarding firms’
net incomes (and thus profit margins). Model
1 includes only the control variables. Model 2
adds the independent variable, namely the dummy
that indicates whether the unit was ever recon-
figured. Because there was a relationship found
between unit origin and reconfiguration from test-
ing Hypothesis 1, unit origin is included as a
control in these models and is added in Model 3.
Models 4, 5, and 6 iteratively add the other con-
trols. All models were found to be significant, had
similar results in both magnitude and significance
of variables, and were highly robust.
The results in Table 8 provide strong support
for the unit retention argument of Hypothesis 6.
Units that are recombined at least once are divested
later than those units that are never recombined.
In other words, attempts at recombination increase
the longevity of a unit within the firm. The findings
were robust in every model and highly significant.
Although the logic supporting Hypothesis 6 argued
that retention may be due to a performance bene-
fit, it is important to acknowledge that it may also
be driven by other rationales. First, firms may be
retaining these recombined units longer because
they have already sunk some costs into the pro-
cess and are awaiting a return. This rationale for
retention would be to recoup sunk costs. Second,
longer retention of recombined units may be due
to firms resetting the ‘clock’ for the period they
are willing to wait for any returns before consid-
ering divestiture. This latter rationale for retention
would support the arguments for Hypothesis 5 that
argue that firms recombine with the belief that a
benefit will eventually emerge. These various pos-
sibilities are presented here to caution the reader
that we do not know exactly which of these factors
is driving retention, but one possibility is that of
performance benefits.
Model 3 indicates that acquired units are
divested sooner than internally developed units.
Due to the nature of investments and purpose of
Strat. Mgmt. J., 27: 799–823 (2006)
DOI: 10.1002/smj
 818

Table 6. Correlation matrix for testing Hypothesis 6a

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
S. Karim

1. Duration until
unit divested
2. Unit was 0.2078
previously
reconfigured

Copyright  2006 John Wiley & Sons, Ltd.

3. Unit entry type −0.1417 0.2140
(acq. = 1,
int. = 0)
4. Category dummy: 0.2320 0.1027 −0.0054
pharmaceutical
5. Category dummy: −0.1174 −0.1270 −0.0864 −0.3039
healthcare service
6. Category dummy: −0.0861 0.0634 0.0148 −0.0727 −0.0640
ophthalmic
device
7. Category dummy: −0.0757 −0.0082 0.0914 −0.1110 −0.0978 −0.0234
dental device
8. Foreign parent 0.2976 0.1717 0.0180 0.3185 −0.2740 −0.0768 −0.0382
9. Firm medical −0.2202 −0.0109 0.1003 0.1259 0.0063 −0.0005 −0.0371 −0.1641
sales
10. Firm non-medical 0.0493 0.1800 0.1380 0.2308 −0.1846 −0.0545 0.0009 0.5408 0.0980
sales
11. Firm age 0.1768 0.1554 0.0780 0.2529 −0.2736 −0.0208 0.0347 0.5956 0.0655 0.2968
12. Firm % profit −0.3463 0.2447 0.2853 −0.0280 0.0928 0.0116 0.0312 0.0796 0.1329 −0.0535 −0.0380
margin
13. Unit birth −0.4131 0.3759 0.0242 0.0669 −0.0360 0.0382 0.1121 0.2301 0.1978 0.1735 0.2414 0.0201
14. Firm level of unit −0.1943 0.1243 0.1348 −0.0033 −0.0376 0.0867 0.0701 0.1079 0.3235 0.2330 0.2217 −0.0120 0.2921
activity
15. Unit level of PL 0.1198 −0.0477 0.0087 0.0231 −0.1429 −0.0291 −0.0029 0.1108 0.0165 0.1409 0.0448 0.0425 −0.0502 0.0912
activity
16. PL overlap with −0.0018 0.1680 0.1685 0.2520 −0.0875 −0.0504 −0.0683 0.1380 0.1520 0.1886 0.1442 0.0202 0.1842 0.3090 0.2418
other units

a
Variables 9–12 and 14–16 are for the year in which the business unit was introduced to the firm.

DOI: 10.1002/smj
Strat. Mgmt. J., 27: 799–823 (2006)
 Modularity in Organizational Structure by Reconfiguration 819
Table 7. Choosing a distribution for testing Hypothesis logic that less mature units are given a longer grace
6 period before they are divested. Older firms also
Unit divestiture: choose the distribution with the
lowest AICa divest their units later but the coefficient magnitude
is very small. Pharmaceutical units are retained
Gamma Log- Log- longer than medical device units. This is aligned
normal logisticb with our expectation that due to high R&D invest-
ments in pharmaceutical units these units will be
LR chi2 123.61 129.72 141.41 retained longer. Figure 8 depicts the hazard func-
Log-likelihood −326.22 −326.33 −325.61
# independent variables 15 15 15
tion of unit divestiture for both units that are
# parameters 2 1 1 recombined and units that are not. Units that are
AIC 688.45 686.65 685.21 never recombined face a greater hazard of being
divested than those units that have been through
a
Weibull and Gompertz were excluded (Wald test rejected null recombination.
hypothesis that Kappa coefficient from the generalized Gamma
model is 1).
b
Bold type: Log-logistic distribution chosen for accelerated
event time model. CONCLUSION

Overall, many of the hypotheses of this study

internally developed units, this is expected. Units
with heavy product line activity are divested later
than less active units. Since increased activity may
indicate that a unit has greater value to the firm
or is responsible for a greater share of revenues,
this too is expected. If unit activity is any indi-
cation of maturity, the findings do not support the
are supported. Differentiating between internally
developed and acquired business units leads to dif-
ferent modular reconfiguration outcomes. Acquired
units are reconfigured sooner than internally devel-
oped units. This is attributed to the lack of famil-
iarity with targets’ routines and resources, and the
motivation of firms to generate greater benefits

Table 8. Duration until divestiture (Hypothesis 6), log-logistic AETM estimates

Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Unit was previously recombined 0.465∗∗∗ 0.548∗∗∗ 0.554∗∗∗ 0.605∗∗∗ 0.589∗∗∗

Unit entry type (acq. = 1, int. = 0) −0.739∗∗∗ −0.731∗∗∗ −0.690∗∗∗ −0.697∗∗∗
Industry-level controls
Category: pharmaceutical 0.987∗∗∗ 0.936∗∗∗ 0.934∗∗∗ 0.910∗∗∗ 0.979∗∗∗ 0.960∗∗∗
Category: healthcare services 0.145 0.214 0.115 0.118 0.206 0.210
Category: ophthalmic −0.669∼ −0.797∗ −0.770∗ −0.700∼ −0.626 −0.599
Category: dental −0.640∗ −0.497∼ −0.390 −0.352 −0.321 −0.304
Firm-level controls
Foreign parent 0.544∗ 0.511∗ 0.420∼ 0.411∼ 0.368 0.372
Firm medical sales −0.000 −0.000 −0.000 −0.000 −0.000 −0.000
Firm non-medical sales 0.000 0.000 0.000 0.000 0.000 0.000
Firm age 0.004∗ 0.004∗ 0.004∗ 0.004∗ 0.004∗ 0.004∗
Firm % profit margin 0.186 0.239 0.000 −0.010 −0.063 −0.059
Unit-level control
Unit birth −0.010 −0.015∗ −0.009 −0.009 −0.008 −0.008
Level of activity
Firm level of unit activity −0.010 −0.011 −0.012
Unit level of PL activity 0.169∗∗ 0.168∗∗
Overlap in activities
PL overlap with other units 0.016
LR chi2 98.02∗∗∗ 109.84∗∗∗ 125.80 ∗∗∗
126.73 ∗∗∗
141.13 ∗∗∗
141.41∗∗∗
N 463 463 463 463 463 463

(Excluded medical device category dummy.)

Significant estimates: ∼p < 0.1; ∗ p < 0.05; ∗∗ p < 0.01; ∗∗∗
p < 0.001

Copyright  2006 John Wiley & Sons, Ltd. Strat. Mgmt. J., 27: 799–823 (2006)
DOI: 10.1002/smj
820 S. Karim
hazard of divestiture
0.06
0.05
0.04
0.03
0.02
0.01
0
0 5 10 15
time (years from unit entry into firm)
reconfigured units non-reconfigured units
Figure 8. Hazard function for unit divestiture
from acquisitions via reconfiguration. These bene-
fits may come from shedding of unwanted parts of
a target, using targets’ resources as key ingredients
for internally developed units, or recombining tar-
gets together to generate greater value combined
than when separate. As units become more active
in managing more product lines, they are likely to
be reconfigured later, perhaps due to coordination
issues and costs. Duration until reconfiguration is
shortened for units that possessed product lines that
are also created elsewhere in the firm, that belong
to firms with greater experience with reconfigura-
tion, and that are formed recently. Firms that have
more overlapping resources distributed throughout
the firm in several units may reconfigure to consol-
idate their resources. The coefficient on experience
indicates that firms that previously had reconfig-
ured their units have a proclivity towards future
reconfiguration. Units created more recently are
getting reconfigured sooner, indicating that recon-
figuration is becoming more common.
The study of unit recombination further stresses
that not only are acquired units reconfigured sooner
than internally developed units, but there is also
a greater share of acquired units that are recon-
figured than internally developed units. Acquired
units are often dissolved into internally developed
units, perhaps serving to provide key ingredients
or some other value to the internal unit. Most
common is the recombination of several targets
together. This could be the case of building criti-
cal mass, or if the resources are different within the
units then perhaps it is the attempt to create new
opportunities by bringing together these resources.
As expected, it is rare to see internally developed
units being consolidated together. Though not sig-
nificant, there were more cases of internally devel-
oped units dissolving into targets than expected.
Copyright  2006 John Wiley & Sons, Ltd.
Firms may be trying to infuse internally developed
units with the best practices of particular targets.
So does reconfiguration benefit or add value to
firms? This study explores firms’ perceptions of
reconfiguration, and finds that firms do attempt
reconfiguration before divestiture more often than
20 not. This provides some indication that firms per-
ceive reconfiguration to have some potential ben-
efit. Further, units that are recombined, vs. those
that are not, are retained longer within the firm.
This also indicates that potentially there are some
perceived benefits expected from reconfiguration
attempts such that firms choose to still retain
units and recombine them somehow instead of
discarding them outright. As expected, acquired
units are divested sooner than internally developed
units, and pharmaceutical units are retained longer.
Increased activity within a unit also indicates some
value to the firm as these units are also retained
longer.
There are several managerial implications of this
study. First, managers should not be wary of recon-
figuration as it seems not only to be prevalent,
but also seems to have some accrued benefits.
As the majority of cases observed in this study
imply, managers do find it valuable to attempt
reconfiguration before divesting a unit. Second,
when considering how to reconfigure their mod-
ular units, managers should recognize that recon-
figuring acquisitions is very common, especially
together. In this regard, acquisitions are viewed
as malleable modules within the firm. Further,
managers should prepare themselves for the like-
lihood that units may need to be reconfigured
several times before the benefit they are striv-
ing for is achieved. Third, it should be appar-
ent that acquisitions vs. internally developed units
play different roles within the firm. The sta-
bility, familiarity, and investment involved with
internally developed units make them the build-
ing blocks of the organization, whereas acquired
units are more often molded as needed. These
distinctions will allow managers to make bet-
ter decisions as they allocate resources amongst
their different business units. Finally, managers
should recognize that the greater the number of
product lines within a unit may make it diffi-
cult or costly to coordinate its reconfiguration;
however, the overlap of these lines with others
in the firm make its potential for reconfiguration
greater.
Strat. Mgmt. J., 27: 799–823 (2006)
DOI: 10.1002/smj
 Modularity in Organizational Structure by Reconfiguration
This paper set out to explore how firms pursue
modular structural change through the reconfigura-
tion of acquired and internally developed business
units. This study had three goals: to explore the dif-
ferent roles played by acquired and internal units
with regard to reconfiguration, to observe what
forms of modular recombination were common,
and to explore the perceived benefit of reconfig-
uration by studying firms’ recombination attempts
(or lack of) before divestiture. This research builds
upon our understanding of dynamic capabilities,
modular systems, and the interaction of strategy
and structure in several ways. This study high-
lights that firms’ structures are dynamic and con-
stantly evolving. It stresses the experimental nature
of structural change and the fact that units may
be reconfigured many times. Firms with greater
reconfiguration experience built a capability with
this form of experimentation, and reconfigured
units sooner than firms with less experience. This
paper focuses on the business unit as the element or
component within the organizational system, and
depicts various forms of modular recombination
and tests our expectations of which are more preva-
lent. Finally, this research makes the distinction in
the origin of components and shows how acqui-
sitions serve to make organizations more flexible,
creative, and dynamic by providing more modular
pieces to experiment with. Although the value of
acquisitions and their role in providing ingredients
to the firm should not be diminished, this study
finds that internally developed units are recon-
figured later and retained longer than acquired
units. This study reminds us that even for highly
acquisition-active firms it is the internally devel-
oped units that are the foundation of the organiza-
tion.
As there are several limitations to this study,
there remains much room for future study. In this
paper, the focus is on first-order reconfiguration,
meaning what happened to the unit from its orig-
inal status with the firm (when it was internally
developed or acquired). However, it is observed
that many of these recombined units were recon-
figured further. A study tracing the evolution of
different reconfiguration paths and their conse-
quences could be insightful. A third form of unit
entry—units that are derived by recombination
(i.e., the dissolution of several units into a brand
new unit)—was not studied in this paper. A future
study could investigate when it makes sense to cre-
ate a new unit vs. dissolving one into another. This
Copyright  2006 John Wiley & Sons, Ltd.
821
study did not have accurate dates for acquisition
founding and, thus, could not properly control for
unit maturity. A new study with this control would
be beneficial. This paper also looks at units as
components within the system. Further granular-
ity and understanding of modular organizational
systems and how they change could come from
observing components at the resource level. Recall
that another form of reconfiguration is resource
reconfiguration, which may occur with or inde-
pendent of unit reconfiguration (Figure 1, Cases
5 and 6). ‘Real-time’ observations of firms under-
going reconfiguration will undoubtedly raise more
research questions and shed light on the observa-
tions that are made here. One key issue pertain-
ing to reconfiguration that is not addressed in this
study is that of intent. This study only presents
the logic for why certain recombinations may be
more or less likely than others, and observes the
occurrences of these different recombinations. A
focus on intent would add to our understanding of
why firms choose the recombinations that they do.
Further, it would be interesting to study a recom-
bination from start to finish, determine whether
the outcome is a success or failure, and propose
what made it succeed or fail. The only pseudo-
performance variable that is observable in this
paper at the unit level is the period of unit reten-
tion. However, retention could be driven by differ-
ent rationale and, thus, is not a clear indicator of
a performance benefit. If reconfiguration creates
benefits, we expect other performance measures
to be positive. Thus, a future study could observe
how reconfiguration affects units’ financial perfor-
mance, innovativeness, or operating efficiencies.
Yet another fruitful study would be to focus closely
on a single firm as it reconfigures to observe what
routines are used and created to carry out the
reconfiguration process.
This paper explores the intricate changes of
organizational structure over a long period. It is
the tracking of business unit evolution that allows
us to study what forms of modular reconfiguration
are common. The study of recombinative forms
based on unit origin, namely acquisitions or inter-
nal developments, is new to the field of strategy
and gives us insight into how firms manage their
units and resources as they pursue change. Hope-
fully this study contributes to practitioners’ and
researchers’ better understanding of the choices
made by firms through this process.
Strat. Mgmt. J., 27: 799–823 (2006)
DOI: 10.1002/smj
822 S. Karim
ACKNOWLEDGEMENTS
I would like to thank Nick Argyres, Laurence
Capron, Stephane Girod, Isin Guler, Ken Hat-
ten, Anita McGahan, Will Mitchell, and Charlie
Williams for their generous comments. Thanks are
also due to the participants of ACAC 2005, includ-
ing Kathy Eisenhardt, Pankaj Ghemawat, and Kyle
Mayer for their thoughtful comments.
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