Architectural Innovation Theory of Entrepreneurship

The architectural innovation theory of entrepreneurship focuses on changes in product architecture and their advantages/disadvantages for incumbents and new entrants (Henderson and Clark, 1990). The bottom line of the theory for entrepreneurs is that a type of innovation called "architectural innovation", is a promising avenue for new entrant to pursue because it is difficult for incumbent to pursue.

The theory starts with the basic idea that a product or service is made up of components that fit together according to some type of design called "product architecture" (Ulrich, 1995). For instance, a bus architecture uses a single point of contact for all the components to connect to. A slot architecture has a unique connector for each type of component. In a sectional architecture, components can be physically arranged in a number of different ways. Modular architectures are those which make it possible to isolate the development of components by standardizing their interfaces. Modular architectures make it possible to swap components later on or to add product variety. 

Architectural innovations are those which involve combinations of the same components, only they are organized in a new way, according to a new product architecture. For instance, a change from a slot architecture to a bus architecture. Specifically, there is a contrast with integrated or integral architectures, where the linkages between components are not one to one. For example, a ceiling fan maker might find it difficult to start making standing fans. Even though standing fans are similar to ceiling fans, standing fans represent a change in product architecture that necessitates what is potentially a whole new value chain, or set of stakeholder relationships. 

Firms develop competences with the organizational structures that develop around product architecture. For example, a firm with a modular product architecture is more likely to outsource most of the components. The firm develops competences around managing relationships with component suppliers through the structured interfaces afforded by the product architecture. Firms then become weary about changing to a new product architecture because they don't want to destroy their existing competences (Tushman & Anderson, 1986).

The authors generalize away from components to concepts, so one could also say that Netflix is serving up the same components as cable and Blockbuster did, but using a new product architecture. Whereas the Blockbuster experience was in person, the Netflix experience is online. The content, however, is the same.