Design Rules: How Modularity Affects the Value of Complex Engineering Systems Carliss Y. Baldwin...
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Transcript of Design Rules: How Modularity Affects the Value of Complex Engineering Systems Carliss Y. Baldwin...
Design Rules:How Modularity Affects the Value of Complex Engineering Systems
Carliss Y. BaldwinHarvard Business School
International Conference on Complex Systems (ICCS 2004)Quincy, MassachusettsMay 20, 2004
Slide 2 © Carliss Y. Baldwin and Kim B. Clark, 2004
Three Points
Modularity in Design is a financial force– that can change the structure of an industry.
Value and Cost of Modularity– it can increase financial value, – but it is NOT free.
Implications for Organizations and Firms Open Questions/Applications
Slide 3 © Carliss Y. Baldwin and Kim B. Clark, 2004
This is an emergent modular cluster
5054
5862
6670
7478
8286
9094
9802
737773747373
7372 ex Microsoft
Microsoft
737173703678
3674 ex Intel
Intel3672367035773576357535723571
3570 ex IBM
IBM
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$ billion
Slide 4 © Carliss Y. Baldwin and Kim B. Clark, 2004
SIC Codes in the DatabaseSICCode Category Definition Start Date (1)
3570 Computer and Office Equipment 19603670 Electronic Components and Accessories 19603674 Semiconductors and Related Devices 19603577 Computer Peripheral Devices, n.e.c. 19623678 Electronic Connectors 19657374 Computer Processing, Data Preparation and Processing 19683571 Electronic Computers 19703575 Computer Terminals 19707373 Computer Integrated Systems Design 19703572 Computer Storage Devices 19717372 Prepackaged Software (2) 19733576 Computer Communication Equipment 19743672 Printed Circuit Boards 19747370 Computer Programming, Data Processing, and Other
Services1974
7371 Computer Programming Services 19747377 Computer Leasing 1974
(1) Start date is the first year in which six or more are present in the category.(2) This category had six firms in 1971, dipped to five in 1972, and back to
six in 1973.
Slide 5 © Carliss Y. Baldwin and Kim B. Clark, 2004
Virtues of Modularity 1st Virtue: decentralizes knowledge and
distributes action– Makes more complexity manageable– Enables parallel work
2nd Virtue: tolerates uncertainty – “Welcomes experimentation”– —> Creates Options– Property of “evolvability”
Slide 6 © Carliss Y. Baldwin and Kim B. Clark, 2004
The Bright Side of Modularity
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Slide 7 © Carliss Y. Baldwin and Kim B. Clark, 2004
The Dark Side …
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$ billion
Slide 8 © Carliss Y. Baldwin and Kim B. Clark, 2004
Types of Modularity
Modular in Design– Modern computers– Eclectic Furniture (not “modular” furniture)– Recipes in a cookbook
Modular in Production– Engines and Chassis– Hardware and software– NOT chips, NOT a cookbook
Modular in Use– “Modular” furniture, bedding– Suits and ties – Recipes in a cookbook
Slide 9 © Carliss Y. Baldwin and Kim B. Clark, 2004
Designs are Options
Option = “right but not the obligation” A new design confers
– “the ability but not the necessity” to use it– Hence it is an “real” option
Slide 10 © Carliss Y. Baldwin and Kim B. Clark, 2004
Three Consequences
More risk is valuable Seemingly redundant efforts are value-
increasing (up to a point) Modularity creates more options
Slide 11 © Carliss Y. Baldwin and Kim B. Clark, 2004
Modularity Creates Design Options
System Before Modularization System after Modularization
System DesignOption Rules
Option Option
Option Option
Option Option
OptionSplit options, decentralize decisions,fragment control Evolution
Slide 13 © Carliss Y. Baldwin and Kim B. Clark, 2004
What is the value of…
Splitting a design into J modular building blocks…and
Running multiple experiments (K of them) on each of the modules… and
Choosing the “best of breed” of each module… and
Combining the best modules to arrive at the system?
Slide 14 © Carliss Y. Baldwin and Kim B. Clark, 2004
Robert C. Merton
“Theory of Rational Option Pricing”, – Written for— MIT PhD thesis, 1971; – Published in— Bell Journal of Economics and
Management Science, 1973; – Awarded— Nobel Prize in Economics, 1997
“A portfolio of options is worth more than the option on a portfolio.”
Slide 15 © Carliss Y. Baldwin and Kim B. Clark, 2004
What is the value of… Splitting a design into J
modular building blocks…and
Running multiple experiments (K of them) on each of the modules… and
Choosing the “best of breed” of each module… and
Combining the best modules to arrive at the system?
Going from one big indivisible block to many smaller building blocks
And trying out a number of designs on each small block
Where each design is a
(little) option
That gets recombined with others in a (large) portfolio
The Basic Framework of our Model of Modular Design Process
Stages Stage 1 Stage 2 Stage 3
TimeLine
Create Implement Test,
Task Task Integrate,
Structure & Structure Evaluate
Design Rules for Modules System
What Actually Happens
Actions Choose Carry out Test results &
operators tasks Exercise options
Events Splitting "The Wheel Spins" Economic
Substituting value is revealed;
Augmenting Best outcomes
Excluding are selected
Inverting
Porting
Mathematical Representation
Benefits A payoff in An outcome is drawn The value corresponding
the form of from the distribution to the outcome of the
a random of the random variable. random variable
variable is is revealed; where
chosen. options exist, the best
outcomes are selected.
X X → X ( , 0)max X
Costs Cost of Cost of Cost of
designing implementing testing and
task task integration
structure structure
Basis of Highest Highest Highest
Choice Net Option Net Option Value Value given
Value given task structure outcomes and tests
Slide 11 © Carliss Y. Baldwin and Kim B. Clark, 2001
Slide 17 © Carliss Y. Baldwin and Kim B. Clark, 2004
The Value of Splitting and Substitution
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17
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13
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25
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15
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25
30
Value
No. of ModulesNo. of Experiments
Slide 18 © Carliss Y. Baldwin and Kim B. Clark, 2004
When and if it arrives…
Modularity in design is
compelling, surprising and dangerous…
Slide 19 © Carliss Y. Baldwin and Kim B. Clark, 2004
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YearSIC Code or Company
Dangerous for whom?
Slide 20 © Carliss Y. Baldwin and Kim B. Clark, 2004
IBM System/360 The first modular computer design IBM did not understand the option value it
had created Did not increase its inhouse product R&D Result: Many engineers left
– to join “plug-compatible peripheral” companies San Jose labs —> Silicon Valley
“Compelling, surprising, dangerous”
Slide 21 © Carliss Y. Baldwin and Kim B. Clark, 2004
Entry into Computer Industry1960, 1970, 1980
Code Category Definition 1960 1970 1980
3570 Computer and Office Equipment 5 2 93571 Electronic Computers 1 8 293572 Computer Storage Devices 1 6 36 *3575 Computer Terminals 2 5 23 *3576 Computer Communication Equipment 1 1 10 *3577 Computer Peripheral Devices, n.e.c. 3 5 12 *3670 Electronic Components and Accessories 11 7 11 *3672 Printed Circuit Boards 2 19 39 *3674 Semiconductors and Related Devices 8 4 10 *3678 Electronic Connectors 5 15 16 *7370 Computer Programming, Data Processing,
and Other Services 1 9 26 *7371 Computer Programming Services 0 2 12 *7372 Prepackaged Software 0 7 13 *7373 Computer Integrated Systems Design 1 3 167374 Computer Processing, Data Preparation
and Processing 0 5 29 *7377 Computer Leasing 0 10 7 *
41 108 298
* Firms in these subindustries make modules of larger computer systems. Firms making modules = 34 95 244Percent of total = 83% 88% 82%
Mapping the Modular Structure of a Complex Engineering System
We can “see” a system’s modular structure via a Design Structure Matrix (DSM) Map
Slide 23 © Carliss Y. Baldwin and Kim B. Clark, 2004
. x x x x xx . x x x x x x x x x
Drive x x . x x xSystem x x x . x x x x x x x x
x x . xx x x x . x x x
x x x . x xx x x . x x x x
x x x . x x x x xMain x x x . x x xBoard x x x x x x x x . x x x x x
x x x x x . x xx x x x x x . x x x
x x x . x
x x x . x x xx x x x . x x x x
LCD x x x . x xScreen x x x x . x x x
x x x x x x x . x x xx x x . x
x x x x . x x x xx x x . x x x x
x x x x x . x x xPackaging x x x x . x x
x x x x x . x xx x x x . x x
x x x x x .x x x x x .
Graphics controller on Main Board or not?If yes, screen specifications change;If no, CPU must process more; adopt different interrupt protocols
Design Structure Matrix Map of a Laptop Computer
Slide 24 © Carliss Y. Baldwin and Kim B. Clark, 2004
Design Structure Matrix Map of a Modular System
. x x x xx . x x
Design x . x x Design Rules Task GroupRules x x . x
x x x .x . x x x
x x . x x xDrive x x x x . xSystem x x x x x . x x Hidden Modules
x x x . x many Task groupsx x x x .
x . x xx x x x x . x x
x x . x x x xMain x x x x x . x xBoard x x x x x x x . x x
x x x x x . xx x x x x x . x
x x x x x .x x . x x x
x x x . x x xLCD x x x . xScreen x x x x x . x x
x x x x x . xx x x x x x .
x x . x x x xx x x . x x x x
x x x . x x xPack- x x x x x x . x xaging x x x . x x
x x x x x . x xx x x x x .
x x x x x x .x x x x x x . x x x x
System x x x x x x x x . x x System Testing x x x x x x x x x . x x x Integration& Integ- x x x x x x x x x x x x and Testingration x x x x x x x x . x Task Group
x x x x x x x x x x x .
A “modularization” (splitting) of a complex design goes from Map A to Map B
Via Design Rules, which specify Architecture, Interfaces and Module
Tests, that provide Encapsulation and Information Hiding.
Slide 27 © Carliss Y. Baldwin and Kim B. Clark, 2004
Design Hierarchy ViewGlobal Design Rules
Module A Module B Module C Module D System
Integration
& Testing
The system comprises four "hidden" modules and a "System Integration and Testing"
stage. From the standpoint of the designers of A B, C, and D (the hidden modules),
system integration and testing is simply another module: they do not need to know the
details of what goes on in that phase as long as they adhere to the global design rules.
Obviously, the converse is not true: the integrators and testers have to know something
about the hidden modules in order to do their work. How much they need to know depends
on the completeness of the design rules. Over time, as knowledge accumulates, more
testing will occur within the modules, and the amount of information passed to the
integrators will decrease. The special, time-dependent role of integration and testing
is noted by the heavy black border around and gray shading within the "module."
Slide 28 © Carliss Y. Baldwin and Kim B. Clark, 2004
Six Modular Operators
System I Global Design Rules Module F System II Design RulesDesign Rules
System Module C System I F-1 System IIIntegration Module F Module F& Testing D-E Design Rules Translator F-2 Translator System II Modules ...
Module GModule A F-3Design Rules Module D Module E Architectural
Module
A-1 A-2 A-3
Splitting Substitution Exclusion Augmenting Inversion Porting
We started with a generic two-level modular design structure, as shown in Figure 5-3, but with six modules (A, B, C, D, E, F) instead of four. (To displaythe porting operator, we moved the "System Integration & Testing Module" to the left-hand side of the figure.) We then applied each operator to a different set of modules.
Module A was Split into three sub-modules.Three different Substitutes were developed for Module B.Module C was Excluded.A new Module G was created to Augment the system.Common elements of Modules D and E wereInverted. Subsystem design rules and an architectural module were developed to allow the inversion.Module F was Ported.First it was split; then its "interior" modules were grouped within a shell; then translator modules were developed.
The ending system is a three-level system, with two modular subsystems performing the functions of Modules A, D and E in the old system.In addition to the standard hidden modules, there are three kinds of special modules, which are indicated by heavy black borders and shaded interiors:
System Integration & Testing ModuleArchitectural ModuleTranslator Module(s)
Module BModule B
Slide 30 © Carliss Y. Baldwin and Kim B. Clark, 2004
. x x x x xx . x x x x x x x x x
Drive x x . x x xSystem x x x . x x x x x x x x
x x . xx x x x . x x x
x x x . x xx x x . x x x x
x x x . x x x x xMain x x x . x x xBoard x x x x x x x x . x x x x x
x x x x x . x xx x x x x x . x x x
x x x . x
x x x . x x xx x x x . x x x x
LCD x x x . x xScreen x x x x . x x x
x x x x x x x . x x xx x x . x
x x x x . x x x xx x x . x x x x
x x x x x . x x xPackaging x x x x . x x
x x x x x . x xx x x x . x x
x x x x x .x x x x x .
Graphics controller on Main Board or not?If yes, screen specifications change;If no, CPU must process more; adopt different interrupt protocols
Every important cross-module interdependency must be addressed via a design rule.
This is costly
Costs eat up the option value
Modularization may not pay
Slide 31 © Carliss Y. Baldwin and Kim B. Clark, 2004
Costs of Experiments vary by module
Size Visibility Examples
large hidden disk drive; large application program
large visible microprocessor; operating system
small hidden cache memory; small application program
small visible instruction set; internal bus
Slide 32 © Carliss Y. Baldwin and Kim B. Clark, 2004
Thus each module has its own “value profile”
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
0 5 10 15 20 25
No. of Experiments
Net Option Value as a percentage of the
Benchmark Process
Small;Hidden
Large;Hidden
Small;VisibleLarge;
Visible
Slide 33 © Carliss Y. Baldwin and Kim B. Clark, 2004
Value Profiles for a Workstation System
1
5
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21
25
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0.02
0.04
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0.08
0.1
0.12
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0.18
No. of Experiments
Sun Microsystems Workstation circa 1992
Slide 35 © Carliss Y. Baldwin and Kim B. Clark, 2004
IBM Personal Computer Highly modular architecture IBM outsourced hardware and software Controlled one high-level chip (BIOS) and the
manufacturing process
Then Compaq reverse-engineered the BIOS chip Taiwanese lowered manufacturing costs
By 1990 IBM was seeking to exit the unprofitable PC marketplace!
Slide 36 © Carliss Y. Baldwin and Kim B. Clark, 2004
Compaq vs. Dell Dell did to Compaq what Compaq did to IBM…
Dell created an equally good machine, and Used process modularity to reduce its production,
logistics and distribution costs and increase ROIC– Negative Net Working Capital
– Direct sales, no dealers
By 1990 Compaq was seeking to exit the unprofitable PC marketplace!
Slide 37 © Carliss Y. Baldwin and Kim B. Clark, 2004
Applications/Extensions
Science of Design– Mapping DSMs of Large Systems
» Calculating Coordination Cost and Change Cost
– Formalizing Design Structure using Predicate Logic
– Valuing Functions and Functionalities; – Mapping to Functions to Designs Structures– Estimating the Technical Potential of Modules
and tracking the evolution of versions and functionalities in large systems
Slide 38 © Carliss Y. Baldwin and Kim B. Clark, 2004
Applications/Extensions
Empirical Studies of Modular Clusters– Pricing and profitability of large clusters– Tracking Evolution, Design Dependencies, and
Economic Value in Supply Networks—Video games and Software
– Modular Operators as Correlates of Mergers & Acquisitions
– Mortgage Banking– Electronics
Slide 39 © Carliss Y. Baldwin and Kim B. Clark, 2004
Applications/Extensions
Computational Experiments– Impact of local, voluntary mechanisms, eg,
bargaining on network formation and efficiency– Innovation and imitation in modular vs. “near-
modular” design and task structures– Pricing and profitability of firms in “symmetric”
and “asymmetric” modular clusters
Slide 40 © Carliss Y. Baldwin and Kim B. Clark, 2004
Applications/Extensions
Management studies/Strategy– Comparing Knowledge Spans to Task Structures– The architecture of self-organizing projects
» Game theoretic structures of open source projects» Tools and methods of coordination in open source
projects
– Competitive strategies for firms in clusters» Managing footprints for maximum ROIC» Design of a design monopoly
Slide 41 © Carliss Y. Baldwin and Kim B. Clark, 2004
Applications/Extensions
Public policy/Design of institutions– Impact of intellectual property rights and M&A on
entry into design competitions– Impact of tournaments on design effort– Epistemic problems in estimating value
» What are sufficient beliefs and how are they supported?
» Where do we get valid estimates of “technical potential”?
» Bubbles and crashes
“Modularity-in-design is not good or bad. It is important and it is costly. And dangerous to ignore.”