How design rules emerge and evolve: a coevolutionary architectural perspective on firm and industry organization

This paper elaborates on how design rules emerge and evolve as firms' micro-level choices of product and organization architectures coevolve with changes in product markets and an industry's competitive and cooperative dynamics. We suggest that the design rules a firm adopts will vary according to firms' strategic choices of product and organization architectures that they believe are or may become feasible in a given industry. Building on the mirroring hypothesis that product designs a firm adopts will influence the organization designs it uses, we develop a model that identifies key relationships that influence firms' strategic choices of product and organization architectures and associated design rules. We then elaborate on key interactions between firm-level architectural choices and the architecture-enabled competitive and cooperative dynamics that obtain in an industry. Our model identifies strategically important aspects of open- and closed-system architectures and modular and nonmodular architectures that impact industry structures, interfirm interactions, and resulting industry dynamics. Drawing on these analyses, we suggest how firms' strategic choices of architectures are influenced by their assessments of (i) the potential for capturing value through both gains from specialization and gains from trade that firms believe will be enabled by their architectural choices and (ii) both ex ante and ex post transaction costs implied by their architecture decisions. We conclude by suggesting how the perspective on firm's strategic architectural decisions we develop here enables new approaches to understanding evolutions of both product markets and industry structures for serving product markets.