IP Modularity: Profiting from Innovation by Aligning Product Architecture with Intellectual Property

In this paper we explain how firms seeking to take advantage of distributed innovation and outsourcing can bridge the tension between value creation and value capture by modifying the modular structure of their technical systems. Specifically, we introduce the concept of "IP modularity," a special form of modularity that seeks to protect and capture value from intellectual property (IP). We define what it means for a system to be "IP-modular," and illustrate the application of this concept in a number of practical situations. From the examples, we derive a comprehensive framework that can be used to design and evaluate value capture strategies for modular systems.