Modularity-in-Design: An Analysis Based on the Theory of Real Options

Posted: 25 Aug 1998

See all articles by Kim B. Clark

Kim B. Clark

Harvard Business School; National Bureau of Economic Research (NBER); Brigham Young University Idaho

Carliss Y. Baldwin

Harvard Business School

Abstract

This paper investigates the economic role of modularity in the design of new products and processes. We construct a formal model of the design process based on the financial theory of options, and analyze the benefits and costs of breaking apart a complex design into independent modules linked by pre-established interfaces. The model provides a rigorous framework for dealing with the effects of uncertainty, and shows how modular designs, independent experiments and testing technologies interact to create economic value. The model also shows how modularity rests on and contributes to the knowledge and organizational structure of a company.

JEL Classification: G31, M10, O32

Suggested Citation

Clark, Kim and Baldwin, Carliss Y., Modularity-in-Design: An Analysis Based on the Theory of Real Options. Available at SSRN: https://ssrn.com/abstract=6508

Kim Clark

Harvard Business School ( email )

Soldiers Field
Morgan Hall 125
Boston, MA 02163
United States
617-495-6550 (Phone)
617-495-0316 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Brigham Young University Idaho

525 S Center St
Rexburg, ID 83440
United States

Carliss Y. Baldwin (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
2,207
PlumX Metrics