1. 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

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

3. The Market Value of the Computer Industry By sector, 1950-1996 in constant 1996 US dollars
Slide © Carliss Y. Baldwin and Kim B. Clark, 2003

4. The Market Value of the Computer Industry By sector, 1950-1996 in constant 1996 US dollars
Slide © Carliss Y. Baldwin and Kim B. Clark, 2003

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

6. Types of Modularity Modular in Design Modular in Production
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
Slide © Carliss Y. Baldwin and Kim B. Clark, 2003

7. Modularity-in-Design Creates Design Options
Split options, decentralize decisions, fragment control Evolution
Slide © Carliss Y. Baldwin and Kim B. Clark, 2003

8. Design Options are Valuable
How Valuable?
Ask a financial economist…

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

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

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

12. Slide 11
© Carliss Y. Baldwin and Kim B. Clark, 2001

13. The Value of Splitting and Substitution
Slide © Carliss Y. Baldwin and Kim B. Clark, 2003

14. Modularity in design is compelling, surprising and dangerous…
When and if it arrives…
Modularity in design is
compelling, surprising and dangerous…
Slide © Carliss Y. Baldwin and Kim B. Clark, 2003

15. The Market Value of the Computer Industry By sector, 1950-1996 in constant 1996 US dollars
Slide © Carliss Y. Baldwin and Kim B. Clark, 2003

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

17. We can “see it” via a Design Structure Matrix (DSM) Map
What is Modularity?
We can “see it” via a
Design Structure Matrix (DSM) Map

18. Design Structure Matrix Map of a Laptop Computer
Slide © Carliss Y. Baldwin and Kim B. Clark, 2003

19. Design Structure Matrix Map of a Modular System
Slide © Carliss Y. Baldwin and Kim B. Clark, 2003

20. 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.

21. The Costs of Modularity

22. Costs eat up the option value
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 © Carliss Y. Baldwin and Kim B. Clark, 2003

23. Experiments are also costly, thus each module has a unique “value profile”.
Value Profile of a Sun Microsystems Workstation circa 1992
Slide © Carliss Y. Baldwin and Kim B. Clark, 2003

24. The Perils of Modularity

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

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

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

28. Just remember— “Compelling, surprising, dangerous…”

29. Thank you!