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Modularity in Design: How the Building Blocks of Design Influence the Structure of Industries Carliss Y. Baldwin Harvard Business School Presented at MIT Media Lab “Building Blocks” Symposium October 21, 2003 Three Points Modularity in Design is a financial force

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modularity in design how the building blocks of design influence the structure of industries

Modularity in Design: How the Building Blocks of Design Influence the Structure of Industries

Carliss Y. Baldwin

Harvard Business School

Presented at MIT Media Lab

“Building Blocks” Symposium

October 21, 2003

three points
Three Points
  • Modularity in Design is a financial force
    • that can change the structure of an industry.
  • Value and Cost of Modularity
    • it can increase financial value,
    • but it is NOT free.
  • What is Modularity in Design?
    • How to map it, measure it.

Slide 2 © Carliss Y. Baldwin and Kim B. Clark, 2003

the market value of the computer industry by sector 1950 1996 in constant 1996 us dollars
The Market Value of the Computer IndustryBy sector, 1950-1996 in constant 1996 US dollars

Slide 3 © Carliss Y. Baldwin and Kim B. Clark, 2003

the market value of the computer industry by sector 1950 1996 in constant 1996 us dollars4
The Market Value of the Computer IndustryBy sector, 1950-1996 in constant 1996 US dollars

Slide 4 © Carliss Y. Baldwin and Kim B. Clark, 2003

modularity is powerful but
Modularity is powerful, but…
  • NOT always a good thing.
  • I advocate—
    • rigorous mapping, measurement, and analysis of modularity
    • Not blind adoption
  • Its virtues:
    • Makes complexity managable
    • Enables parallel work
    • “Welcomes experimentation”
    • —> Creates Options

Slide 5 © Carliss Y. Baldwin and Kim B. Clark, 2003

types of modularity
Types of Modularity
  • Modular in Design
    • Modern computers
    • Eclectic Furniture (not “modular” furniture)
    • Recipes in a cookbook
  • Modular in Production
    • Engines and Chassis
    • Hardware and software
    • NOT chips, NOT a cookbook
  • Modular in Use
    • “Modular” furniture, bedding
    • Suits and ties
    • Recipes in a cookbook

Slide 6 © Carliss Y. Baldwin and Kim B. Clark, 2003

modularity in design creates design options
Modularity-in-Design Creates Design Options

Split options, decentralize decisions,fragment control Evolution

Slide 7 © Carliss Y. Baldwin and Kim B. Clark, 2003

design options are valuable

Design Options are Valuable

How Valuable?

Ask a financial economist…

what is the value of
What is the value of…
  • Splitting a design into J modular building blocks…and
  • Running multiple experiments (K of them) on each of the modules… and
  • Choosing the “best of breed” of each module… and
  • Combining the best modular building blocks to arrive at the system?

Slide 9 © Carliss Y. Baldwin and Kim B. Clark, 2003

robert c merton
Robert C. Merton
  • “Theory of Rational Option Pricing”,
    • Written for— MIT PhD thesis, 1971;
    • Published in— Bell Journal of Economics and Management Science, 1973;
    • Awarded— Nobel Prize in Economics, 1997
  • “A portfolio of options is worth more than the option on a portfolio.”

Slide 10 © Carliss Y. Baldwin and Kim B. Clark, 2003

what is the value of11
Splitting a design into J modular building blocks…and

Running multiple experiments (K of them) on each of the modules… and

Choosing the “best of breed” of each module… and

Combining the best modules to arrive at the system?

Going from one big indivisible block….

To many smaller building blocks

Where each building block is a (little) option

That gets recombined with others in a (large) portfolio

What is the value of…

Slide 11 © Carliss Y. Baldwin and Kim B. Clark, 2003

slide12

Slide 11

© Carliss Y. Baldwin and Kim B. Clark, 2001

the value of splitting and substitution
The Value of Splitting and Substitution

Slide 13 © Carliss Y. Baldwin and Kim B. Clark, 2003

when and if it arrives
When and if it arrives…

Modularity in design is

compelling, surprising and dangerous…

Slide 14 © Carliss Y. Baldwin and Kim B. Clark, 2003

the market value of the computer industry by sector 1950 1996 in constant 1996 us dollars15
The Market Value of the Computer IndustryBy sector, 1950-1996 in constant 1996 US dollars

Slide 15 © Carliss Y. Baldwin and Kim B. Clark, 2003

ibm system 360
IBM System/360
  • The first modular computer design
  • IBM did not understand the option value it had created
  • Did not increase its inhouse product R&D
  • Result: Many engineers left
    • to join “plug-compatible peripheral” companies
  • San Jose labs —> Silicon Valley

“Compelling, surprising, dangerous”

Slide 16 © Carliss Y. Baldwin and Kim B. Clark, 2003

what is modularity

What is Modularity?

We can “see it” via a

Design Structure Matrix (DSM) Map

slide18

Design Structure Matrix Map of a Laptop Computer

Slide 18 © Carliss Y. Baldwin and Kim B. Clark, 2003

slide19

Design Structure Matrix Map of a Modular System

Slide 19 © Carliss Y. Baldwin and Kim B. Clark, 2003

a modularization splitting of a complex design goes from map a to map b

A “modularization” (splitting) of a complex design goes from Map A to Map B

Via Design Rules, which specify

Architecture, Interfaces and Module Tests, that provide

Encapsulation and Information Hiding.

slide22

Every important cross-module interdependency must be addressed via a design rule.

This is costly

Costs eat up the option value

Modularization may not pay

Slide 22 © Carliss Y. Baldwin and Kim B. Clark, 2003

experiments are also costly thus each module has a unique value profile
Experiments are also costly, thus each module has a unique “value profile”.

Value Profile of a Sun Microsystems Workstation circa 1992

Slide 23 © Carliss Y. Baldwin and Kim B. Clark, 2003

ibm personal computer
IBM Personal Computer
  • Highly modular architecture
  • IBM outsourced hardware and software
  • Controlled one high-level chip (BIOS) and the manufacturing process

Then

  • Compaq reverse-engineered the BIOS chip
  • Taiwanese lowered manufacturing costs

By 1990 IBM was seeking to exit the unprofitable PC marketplace!

Slide 25 © Carliss Y. Baldwin and Kim B. Clark, 2003

compaq vs dell
Compaq vs. Dell
  • Dell did to Compaq what Compaq did to IBM…
  • Dell created an equally good machine, and
  • Used process modularity to reduce its production, logistics and distribution costs and increase ROIC
    • Negative Net Working Capital
    • Direct sales, no dealers

By 1990 Compaq was seeking to exit the unprofitable PC marketplace!

Slide 26 © Carliss Y. Baldwin and Kim B. Clark, 2003

modularity in design is not good or bad it is important and it is costly and dangerous to ignore

“Modularity-in-design is not good or bad. It is important and it is costly. And dangerous to ignore.”