The power of modularity explains why platforms win, why ecosystems form, and why incumbents fall. In this Innovation Show exclusive, Aidan McCullen hosts both authors of the landmark book Design Rules, Volume 1: The Power of Modularity — Carliss Baldwin and Kim Clark. As Aidan frames it, the book is the Rosetta Stone that connects Christensen, Osterwalder, McGrath and von Hippel: “The act of modularizing your product is the very act of inviting your future competitors into existence.”
What Are Design Rules?
Carliss Baldwin defines a design rule as a formal, explicit constraint that lets people who were never involved in the original design create compatible, complementary designs. Design rules are, in fact, the platform. Kim Clark finds them everywhere: clothes from different firms that fit together, frying pans that match your burners, plugs that fit your sockets. Because independent firms can build to shared rules, extensible systems become possible — and modularity, the authors argue, is the underpinning of Moore’s Law itself.
The Power of Modularity: IBM System/360
Before the System/360, instructions were hard-coded into circuits. Every faster machine meant rewriting hard-won software by hand, so customers refused to upgrade. IBM locked a group of engineers in a Connecticut motel in late November and told them not to come out until they solved it. They emerged with design rules: follow these constraints and your software runs on the next machine, and the next. It was, Baldwin argues, the first conscious exercise of a modular platform strategy — an invention, not an evolution. Within a few years, people stopped calling IBM a competitor. As one observer put it, IBM was the environment, holding roughly 90% of the value in the computer industry.
Ecosystems, Real Options and Value Migration
However, the same rules that built the ecosystem armed its challengers. Engineers walked out of IBM’s San Jose plant and spawned the entire disk-drive industry. Later, IBM owned 30% of Intel and contracted a tiny Microsoft to build the PC operating system — yet never secured ownership of the processor or the operating system, the only two lasting sources of profit in that ecosystem. Clark recalls his mentor Bob Hayes’ lesson from the Swiss watch industry: the game is never incontestably won. Modularity creates real options, and someone will capture their value — whether or not it’s you.
Tacit Knowledge and the Chevy Vega
Architectural change is brutal because the crucial knowledge is often tacit. When American carmakers moved from big cars to small ones, engine compartments shrank and hoods literally rippled with vibration on the test track. The Chevy Vega shook itself apart — fasteners sheared off — because decades of unwritten packaging know-how no longer applied. Sears couldn’t become Walmart, and Walmart couldn’t become Amazon; Walmart survived only because customers who love stores gave it time to learn.
AI Agents, Workflows and Modular Organisations
Baldwin connects the book directly to AI: agents are modules, and to orchestrate them, companies must finally map the tasks and transfers inside their workflows — the design structure matrices she has championed for decades. Clark extends the idea to organisations. Haier replaced twelve layers of management with 4,000 entrepreneurial teams; one rural-China team noticed customers washing vegetables in their machines and built a business from it worth around $100 million. Leadership, Clark argues, is the operating system of the organisation — the theme of his book Leading Through and the Leading Through Institute.
[Internal link: related episode on Clayton Christensen’s Innovator’s Dilemma]
[Internal link: Leading Through episode with Jonathan and Erin Clark]
Outbound: Design Rules, Volume 2: How Technology Shapes Organizations (MIT Press)
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About the Guests
Carliss Y. Baldwin is the William L. White Professor of Business Administration, Emerita, at Harvard Business School and author of Design Rules, Volume 2: How Technology Shapes Organizations (MIT Press). Kim B. Clark is a former Dean of Harvard Business School, NAC Distinguished Professor of Management at the BYU Marriott School of Business, co-author of Leading Through: Activating the Soul, Heart, and Mind of Leadership, and co-founder of the Leading Through Institute. Together they wrote Design Rules, Volume 1: The Power of Modularity (MIT Press).
About the Host
Aidan McCullen is a 2025 Thinkers50 Innovation Award recipient, keynote speaker on AI, disruption, innovation and change, host of The Innovation Show, and author of Undisruptable: A Mindset of Permanent Reinvention (Wiley). Read more about Aidan McCullen.
Frequently Asked Questions: The Power of Modularity
What are design rules?
Design rules are formal, explicit constraints that allow people who were not involved in creating an original design to build compatible, complementary designs. According to Carliss Baldwin, design rules are effectively the platform itself: with them in place, independent firms can create modules that work together in one extensible system.
What is the power of modularity?
The power of modularity is the ability to break a complex product into independent modules governed by shared design rules. This creates real options — designers can replace inferior modules with better ones later — accelerates innovation, and enables ecosystems of specialist firms. Baldwin and Clark argue modularity underpins Moore’s Law and the entire digital economy.
How did IBM System/360 create the modern platform?
IBM’s engineers formalised the interfaces between hardware, software and peripherals so that software written for one machine would run on the next, larger machine without rewriting. This solved the upgrade problem that was stalling sales and became the first conscious modular platform strategy — turning IBM from a competitor into what industry observers called “the environment”.
Why do incumbent firms fail during architectural innovation?
Incumbents often see the threat and invest in the new technology, but they miss the nuances — the hidden interactions and tacit knowledge inside the new architecture. Clark’s example is the Chevy Vega, which vibrated apart on the test track because decades of unwritten big-car packaging knowledge no longer applied to small cars. When customers can switch quickly, that learning gap is fatal.
What does modularity mean for AI adoption?
Baldwin argues AI agents must be treated as modules hooked together in an architecture. To deploy them effectively, companies must map their workflows — the tasks and transfers inside teams and departments — which is what design structure matrices have always revealed. Most organisations have never mapped these workflows, and AI is now forcing them to.
What is Haier’s modular organisation?
Haier, the Chinese appliance company, replaced roughly twelve layers of management with about 4,000 entrepreneurial teams of 10–15 people, supported by staff who provide resources rather than commands. Senior executives act as investors and architects. One team, serving rural China, discovered customers washing vegetables in machines and turned that insight into a business worth around $100 million.