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

Joachim  Henkel; Carliss Y. Baldwin; Willy C.  Shih

Article | California Management Review | Summer 2013

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

by Joachim Henkel, Carliss Y. Baldwin and Willy C. Shih

Abstract

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, this article introduces the concept of "IP modularity," which seeks to protect and capture value from intellectual property. The article defines what it means for a system to be "IP-modular," illustrates the application of this concept in a number of practical situations, and presents a comprehensive framework that can be used to design and evaluate value capture strategies for modular systems.

Keywords: modularity; value appropriation; distributed innovation; open innovation; intellectual property; Innovation Strategy; Intellectual Property; Value;

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Henkel, Joachim, Carliss Y. Baldwin, and Willy C. Shih. "IP Modularity: Profiting from Innovation by Aligning Product Architecture with Intellectual Property." California Management Review 55, no. 4 (Summer 2013): 65–82.

The purpose of this chapter is to present analytic tools based on functional maps that can be used to identify investment opportunities and to formulate strategy in large, evolving technical systems. I argue that the points of value creation and value capture in a technical system are the system’s bottlenecks. Bottlenecks arise first as important technical problems to be solved. Once the problem is solved, the solution in combination module boundaries and property rights can be used to capture a stream of rents. In this chapter I extend the functional mapping techniques developed in the last chapter to locate technical and strategic bottlenecks, modules, and property rights. I then show how these analytic tools can be used to construct narratives explaining the dynamics of three nascent technical systems: early aircraft, high-speed steel in machine tools, and container shipping.

This note on supply chain management provides background for the seven class supply chain module in the Technology & Operations Management required curriculum course taught at the Harvard Business School. This module includes four broad topics: sourcing and supply chain structure, supply chain coordination, coping with uncertain demand, and supply chain visibility.

Working Paper | HBS Working Paper Series | 2018

Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 5 Complementarity

Carliss Y. Baldwin

The purpose of this chapter is to relate the theory of task networks and technology set forth in previous chapters to theories of firm boundaries from economics and management. Complementary goods have more value when used together than separately. Complementarity may be strong or weak. Strong complements are specific and unique goods that have no value (or greatly diminished value) unless all are present in use. In the task network, dense technical interdependencies create strong complementarity, but it can arise for other reasons as well.
Transaction cost economics and property rights theory advise that strong complements should be placed under unified governance, for example, through common ownership. Agency theory suggests that weak complementarity can be handled via arms-length transactions and contracts. Furthermore, strong or weak complementarity are not innate properties of tasks and assets, but can be the result of choices regarding task networks, incentives and job design.
Supermodular complementarity exists when more of one input makes more of another input more valuable. Distributed supermodular complementarity (DSMC) exists when two or more independent actors can create complementary value by pursuing their own interests, and will not find it advantageous to combine in order to coordinate their actions. I derive formal conditions under which DSMC holds as a consistent pattern in a dynamic equilibrium. Given DSMC, clusters of firms making different complementary goods, including open platforms with surrounding ecosystems, can survive and compete effectively against integrated firms that control all complementary inputs.

Keywords: Complementarity;

Citation:

Baldwin, Carliss Y. "Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 5 Complementarity." Harvard Business School Working Paper, No. 19-036, October 2018. View Details

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

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