The Modular Squad

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.

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This article was originally published in the March 1998 print edition of Entrepreneur with the headline: The Modular Squad.

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