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. BaldwinHarvard Business School

Presented at MIT Media Lab “Building Blocks” SymposiumOctober 21, 2003

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

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.


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The Market Value of the Computer IndustryBy sector, 1950-1996 in constant 1996 US dollars



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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


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


Modularity-in-Design Creates Design Options

System Before Modularization System after Modularization

System DesignOption Rules

Option Option

Option Option

Option Option

OptionSplit options, decentralize decisions,fragment control Evolution

Design Options are ValuableHow Valuable?

Ask a financial economist…


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?


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.”


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

The Basic Framework of our Model of Modular Design Process

Stages Stage 1 Stage 2 Stage 3

TimeLine

Create Implement Test,

Task Task Integrate,

Structure & Structure Evaluate

Design Rules for Modules System

What Actually Happens

Actions Choose Carry out Test results &

operators tasks Exercise options

Events Splitting "The Wheel Spins" Economic

Substituting value is revealed;

Augmenting Best outcomes

Excluding are selected

Inverting

Porting

Mathematical Representation

Benefits A payoff in An outcome is drawn The value corresponding

the form of from the distribution to the outcome of the

a random of the random variable. random variable

variable is is revealed; where

chosen. options exist, the best

outcomes are selected.

X X → X ( , 0)max X

Costs Cost of Cost of Cost of

designing implementing testing and

task task integration

structure structure

Basis of Highest Highest Highest

Choice Net Option Net Option Value Value given

Value given task structure outcomes and tests

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


The Value of Splitting and Substitution

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No. of ModulesNo. of Experiments


When and if it arrives…

Modularity in design is

compelling, surprising and dangerous…


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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”

What is Modularity?

We can “see it” via a Design Structure Matrix (DSM) Map


. x x x x xx . x x x x x x x x x

Drive x x . x x xSystem x x x . x x x x x x x x

x x . xx x x x . x x x

x x x . x xx x x . x x x x

x x x . x x x x xMain x x x . x x xBoard x x x x x x x x . x x x x x

x x x x x . x xx x x x x x . x x x

x x x . x

x x x . x x xx x x x . x x x x

LCD x x x . x xScreen x x x x . x x x

x x x x x x x . x x xx x x . x

x x x x . x x x xx x x . x x x x

x x x x x . x x xPackaging x x x x . x x

x x x x x . x xx x x x . x x

x x x x x .x x x x x .

Graphics controller on Main Board or not?If yes, screen specifications change;If no, CPU must process more; adopt different interrupt protocols

Design Structure Matrix Map of a Laptop Computer


Design Structure Matrix Map of a Modular System

. x x x xx . x x

Design x . x x Design Rules Task GroupRules x x . x

x x x .x . x x x

x x . x x xDrive x x x x . xSystem x x x x x . x x Hidden Modules

x x x . x many Task groupsx x x x .

x . x xx x x x x . x x

x x . x x x xMain x x x x x . x xBoard x x x x x x x . x x

x x x x x . xx x x x x x . x

x x x x x .x x . x x x

x x x . x x xLCD x x x . xScreen x x x x x . x x

x x x x x . xx x x x x x .

x x . x x x xx x x . x x x x

x x x . x x xPack- x x x x x x . x xaging x x x . x x

x x x x x . x xx x x x x .

x x x x x x .x x x x x x . x x x x

System x x x x x x x x . x x System Testing x x x x x x x x x . x x x Integration& Integ- x x x x x x x x x x x x and Testingration x x x x x x x x . x Task Group

x x x x x x x x x x x .

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.

The Costs of Modularity


. x x x x xx . x x x x x x x x x

Drive x x . x x xSystem x x x . x x x x x x x x

x x . xx x x x . x x x

x x x . x xx x x . x x x x

x x x . x x x x xMain x x x . x x xBoard x x x x x x x x . x x x x x

x x x x x . x xx x x x x x . x x x

x x x . x

x x x . x x xx x x x . x x x x

LCD x x x . x xScreen x x x x . x x x

x x x x x x x . x x xx x x . x

x x x x . x x x xx x x . x x x x

x x x x x . x x xPackaging x x x x . x x

x x x x x . x xx x x x . x x

x x x x x .x x x x x .

Graphics controller on Main Board or not?If yes, screen specifications change;If no, CPU must process more; adopt different interrupt protocols

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


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

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Value Profile of a Sun Microsystems Workstation circa 1992

The Perils of Modularity


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!


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!

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

Just remember—

“Compelling, surprising, dangerous…”

Thank you!

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

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