In the last decade, the concept of modularity has caught the attention of engineers, management researchers and corporate strategists in a number of industries. When a product or process is "modularized," the elements of its design are split up and assigned to modules according to a formal architecture or plan. From an engineering perspective, a modularization generally has three purposes:
- To make complexity manageable;
- To enable parallel work; and
- To accommodate future uncertainty.
Modularity accommodates uncertainty because the particular elements of a modular design may be changed after the fact and in unforeseen ways as long as the design rules are obeyed. Thus, within a modular architecture, new module designs may be substituted for older ones easily and at low cost.
This paper summarizes and extends the arguments set forth in our book, Design Rules, Volume 1, The Power of Modularity. We first present evidence to show that modularity is a financial force, which can change the structure of an industry. The economic power of modularity lies in two fundamental properties: first, modularity creates options; and second, modular designs can evolve at low cost and without central control. We explore the value and costs that are associated with constructing and exploiting a modular design, and then examine the risks that modularity poses for individual firms.
