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.

This case describes the efforts of the Bill & Melinda Gates Foundation to lower the cost of producing vaccines to prevent polio infections. It is an abridged version of HBS Case No. 620-021 with less emphasis on comparison between traditional and the new compact modular process developed with the Foundation's funding. It focuses more on the lowering of entry barriers to vaccine manufacture and some of the perceived risks associated with that.

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The purpose of this chapter is to investigate the means by which firms capture value in open platform systems. I begin by arguing that the surplus value created by complementarities within a technical system will be split among the owners of the unique and essential components—the strategic bottlenecks in the system. However, most platforms must also execute a series of steps that are subject to “flow production” bottlenecks. Finding and fixing these flow bottlenecks is another way to capture value. In addition, two types of platform improvements provide further opportunities for value capture. “Accelerators” speed up the processing of options, while “subsidiary” platforms increase the range of options available to users. Finally, members of a platform system or new entrants may seek to supplant the owner of a strategic bottleneck by “disintermediating” platform components. I describe four generic methods of disintermediation: substitution, reverse engineering, platform independent complements, and platform envelopment.

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

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