Architectural vs component innovation
Most innovation involves small, incremental improvements to the parts of a system. A better spark plug, a better kind of tire, a better bar of soap, and so on. This is because these kinds of innovations are easier to inject into an existing system.
But some kinds of innovations – often called disruptive innovations – involve changes to the system itself. The PC revolution is an example of disruptive innovation, because the entire system of work computing had to change to accommodate it. This required a whole host of component innovations beyond the PC itself, such as the office scanner, printer, networking, and so on. System innovation like this requires changes to the fundamental architecture – known as architectural innovation.
Component innovation swaps out one node for another, which usually results in an incremental improvement. Architectural innovation changes the links. Changing the relationships between nodes is a sweeping change that usually transforms the way that the entire system works. Apple's iTunes/iPhone ecosystem was an architectural innovation that changed the music industry forever.
Perhaps one of the reasons more companies haven’t organized around small, empowered teams is that their business architectures don’t allow it. It’s not easy to plug modules into a platform that isn’t designed for it.