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 emergence of the MP3 file-based music format not only disrupted the market for portable audio players, it also had a huge impact on the business models of major record labels. Modularity, and the commoditization spill-over enabled by modularity in the personal computer industry, was a major force in the development of the market. While Apple's iPod held a dominant market position, new forces of commoditization continued to drive shifts in the value chain. The case examines the commoditization cycle and contrasts integrated solutions such as the iPod-iTunes software-iTunes Music Store with emerging competition from other MP3 players and the ultimate shift towards streaming.

Working Paper | HBS Working Paper Series | 2019

Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 13 Platform Systems vs. Step Processes—The Value of Options and the Power of Modularity

Carliss Y. Baldwin

This is the first chapter in Part 3. Its purpose is to contrast the value structure of platform systems with step processes from a technological perspective. I first review the basic technical architecture of computers and argue that every computer is inherently a platform for performing computations as dictated by their programs. I state and prove five propositions about platform systems, which stand in contrast to the propositions derived for step processes in Chapter 8. The propositions suggest that platform systems and step processes call for different forms of organization. Specifically, step processes reward technical integration, unified governance, risk aversion, and the use of direct authority, while platform systems reward modularity, distributed governance, risk taking, and autonomous decision-making. Despite these differences, treating platform systems and step processes as mutually exclusive architectures sets up a false dichotomy. Creating any good requires carrying out a technical recipe, i.e., performing a series of steps. Step processes in turn can be modularized (at the cost of lower efficiency) by creating buffers between steps. I show that the optimal number of modules (and buffers) increases as the underlying rate of technical change goes up. When the underlying technologies are changing rapidly, it makes sense to sacrifice some degree of flow efficiency for options to mix-and-match modular components.

Keywords: platform systems; step processes; computer architecture; modularity; Technology;

Citation:

Baldwin, Carliss Y. "Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 13 Platform Systems vs. Step Processes—The Value of Options and the Power of Modularity." Harvard Business School Working Paper, No. 19-073, January 2019. View Details

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The IBM PC was the first digital computer platform that was open by as a matter of strategy, not necessity. The purpose of this chapter is to understand the IBM PC as a technical system and set of organization choices in light of the theory of how technology shapes organizations. In Chapter 7, I argued that sponsors of large technical systems (including platform systems) must manage the modular structure of the system and property rights in a way that solves four inter-related problems: provide all essential functional components, solve system-wide technical bottlenecks wherever they emerge, control and protect one or more strategic bottleneck, and prevent others from gaining control of any system-wide strategic bottleneck. I use this framework to understand how IBM initially succeeded with the PC platform and then lost its position as platform sponsor in the industry it had created.

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

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