From the March 1998 issue of Entrepreneur

When the founders of Palm Computing set out to create what would become history's hottest computer gadget, they didn't go it alone. Instead, they wrote detailed specifications for a hand-held electronic organizer called the Pilot--then they invited other companies to create parts of the product that eventually sold more than 1 million units in its first 18 months.

One company that contributed to the project was The Windward Group, a 75-person software developer in Los Gatos, California, that created desktop applications with a link to the Pilot. "We decomposed the system into chunks which we developed on their behalf," president Doug Engfer explains.

The system benefits both Palm and those who build the pieces and, in many cases, sell them independently, says Donna Dubinsky, president of Palm Computing, now a subsidiary of networking giant 3Com Corp. "The metaphor that springs to mind is the Russian Matreshka dolls, where each layer takes from the layer above and gives to it as well," she says.

The strategy is called modularity, and it's the up-and-coming thing in business, according to Carliss Baldwin, a Harvard Business School professor and co-author of the forthcoming book Design Rules: The Power of Modularity (MIT Press). The message of modularity, says Baldwin, is that "you don't have to do everything to be important."


Mark Henricks is an Austin, Texas, writer specializing in business topics.

Breaking It Down

Modularity is defined as building a complex product, service or process from many smaller pieces that can be created independently and then combined to make a whole. It's what allows computer hard-drive makers to build drives they know will work in any PC. At the same time, it enables PC makers to build their boxes, confident that hard-drive companies will supply the needed accessories.

Low-tech industries can also be modular; bedsheet makers cut cloth they're confident will fit standard mattresses. Even services can be modular, such as when an investment advisor farms out the mutual fund management portion of his or her services to a fund company.

Modern modularity started with innovations in project management in the 1960s, enabling IBM to design many versions of its System 360 mainframe computer, all using the same basic software and add-ons, such as printers. Previously, all computers needed their own special programs and peripherals, says Baldwin. The modularity of IBM's design allowed it to virtually take over the mainframe computer industry and made the 360 one of the most successful products ever, she says.

Many products are manufactured in modular fashion, of course. Car makers give parts specifications to suppliers, who come back with modules that can be assembled into an automobile. Modern modularity goes beyond manufacturing, however, and encompasses design as well. That means that parts suppliers not only produce pieces according to the manufacturers' specifications, but they also design new parts that will fit into and add to the overall design.

Strength In Numbers

Modularity helps firms deal more easily with rapid change, reduce the cost of innovation and cut the time it takes to improve designs, says Baldwin. Its strength lies in numbers.

For instance, there are more than 3,500 registered developers of Palm Pilot products and services. "It ranges from things like a chart of chords for the guitar to the Singapore subway map to real estate and medical market add-ons," Dubinsky says.

Many of these products would never have been developed if left to Palm Pilot's in-house team. "We couldn't possibly recreate the investment people are making in our product," says Dubinsky. "We couldn't create an organization fast enough, and we couldn't be creative enough."

To create a modular product, you must first thoroughly define it by developing a detailed architecture or interface specification, says Baldwin. One example is the specification Microsoft lays down for creating Windows software. Boundaries must be specific so you know what you are doing and what your module maker's terrain is, adds Baldwin.

Modular companies themselves, however, must be agile and adaptable, says Baldwin. That's because modularity calls for all kinds of joint ventures: outsourcing, flexible hiring, and other complex relationships between the architecture owners and the module creators.

And business owners adopting a modular strategy have to be ready to relinquish control when it comes to exactly what their module-makers create, adds Dubinsky. "I try to take the philosophy of letting a thousand flowers blossom," she explains, "because we don't know what the next big thing is going to be."

Modularity works in two directions, of course. Small companies can prosper greatly by creating a complex new architecture as Palm did. "You can wind up like Microsoft, sitting on top," says Baldwin.

Companies without such a big vision can still profit by becoming module makers. That's what hard-drive makers have done since the 1960s, and what Windward and many other firms are doing with the Palm Pilot.

If you want to be a module maker, your strategy should be to look at a large system and try to find a piece you can do better, Baldwin says. You have to be fast (to beat the competition) and precise (to ensure a good fit with the system) if you want to succeed.

Calculating Risks

Neither architects nor module makers are guaranteed an easy ride. IBM's modular System 360 let third-party makers of plug-compatible equipment flourish at its expense. The PC that IBM went on to create was later almost completely taken away from them by cheaper competitors who plugged into its highly modular design.

Module makers face the problem of rivals being better at their game than they are. "If you can be a substitute," warns Baldwin, "then somebody can be a substitute for you. So you should always be looking over your shoulder."

Modular strategies can go wrong from the beginning if the architect doesn't know enough about the details of the overall product, adds Baldwin. The flaw commonly shows up only at the end, when the pieces of the puzzle don't fit. "That's when you have cost overruns, time overruns and systems that don't work," she says.

The major cost of a modular strategy, accordingly, is in developing the knowledge about your product or service. You have to know not only how to make it work but how to tell other people how to build a wide variety of add-ons that will function together seamlessly. This can be costly, Baldwin warns. IBM's original 360 development effort ran far over budget, for example, and Palm had to be acquired by modem maker US Robotics, which was later bought by 3Com, in order to fund the manufacturing and marketing of the Pilot.

The Modular Era

Despite its risks and limitations, modularity may be the dominant strategy of the future simply because it's easier to do today. Joint ventures and outsourcing, both key to modularity, are widely accepted now, notes Baldwin. And modern information-processing technology simplifies the creation and management of the knowledge needed to specify and control modular architectures.

Most important, modularity will catch on because it must. The rapid pace of change long familiar in the computer industry is making itself felt in other industries as well. Since modularity is one of the best ways of coping with rapid change, says Baldwin, it may soon be that you're either modular or you're marginal.

Contact Sources

3Com Corp., Palm Computing, (888) 619-7488, http://www.3com.com/palm

The Windward Group, (888) 395-9442, http://www.wwg.com