The conditions in which modularity truly bears fruit: moderation and mediation analyses

Abstract

Despite modularity's prominence in contemporary innovation strategies, empirical evidence on its effectiveness remains mixed. This study addresses the inconsistent evidence on modularity's performance impact by examining its moderation and mediation effects. We argue that modularity's impact on firm performance is indirect and shaped by organizational and environmental contingencies, highlighting a critical tension between its theoretical promise and its practical outcomes. Drawing on the mirroring hypothesis and the resource‐based view, we examine how modularity affects firm performance via product innovation, speed to market, and cost efficiency and how these effects are moderated by technological turbulence, innovative culture, and market dependence. Using survey data from 249 Chinese firms in technology‐intensive industries, we find that modularity enhances innovation, speed to market, and cost efficiency, each serving as a mediator in the model, but its ultimate contribution to sales depends on contextual fit. Technological turbulence dampens modularity's cost advantages, while innovative culture and market dependence amplify innovation benefits but may hinder speed to market. These findings position modularity not as a universal solution but as a strategic capability whose value depends on careful alignment with internal and external conditions. The study offers a framework for managers to optimize modularity's trade‐offs in today's markets.