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Slide 1 © Carliss Y. Baldwin 2007
Architecture, Innovation and Industry Structure
Carliss Y. Baldwin
Washington UniversitySt. LouisApril 9, 2007
Slide 2 © Carliss Y. Baldwin 2007
We need new ways to envision the structure of systems industries
Andy Grove’s vision of a systems industry changing structure
1995-“Modular Cluster”
1980-“Vertical Silos”
Slide 3 © Carliss Y. Baldwin 2007
The Computer Industry in1985
Slide 4 © Carliss Y. Baldwin 2007
It changed—
1985 1995
Verticals are giving up ground…
Slide 5 © Carliss Y. Baldwin 2007
And then some more!
1985 2004
Slide 6 © Carliss Y. Baldwin 2007
Same time period… the auto industry stayed very vertical
Why the difference? We don’t know!
1984 2003
Slide 7 © Carliss Y. Baldwin 2007
The PUZZLE Firms can innovate by changing their product
architecture and vertical scope in tandem– Result is changing industry structure and
industry boundaries But “trends” can go in different directions
– ==> more horizontal industry structure (computers)
– stay the same (autos)– ==> more vertical industry structure (bike drive
trains)
Needed: a contingent theory
Slide 8 © Carliss Y. Baldwin 2007
Outline of talk Architectural Knowledge and how it changes Architectural Innovation based on Architectural
Knowledge Scope, outsourcing, footprints Competitive dynamics Evidence from two cases
– Sun-Apollo 1986-1989
– Dell-Compaq 1996-2001
Counter-example– Bike Drive Trains 1980-1990 (Fixson and Park)
Slide 9 © Carliss Y. Baldwin 2007
Architectural Knowledge Architecture = entities and relationships
– Function-to-component mapping– Interfaces between components – Linkages and interactions (“dependencies”)
Architectural knowledge means knowledge about all these things– The “Ibibidui” paradox – “I built it but I don’t understand it”– Henderson and Clark (1990): architectural knowledge
gets embedded in organizational structures – Complexity catastrophes
Mozilla Before Redesign Mozilla After Redesign
Ibibidui in software
© Alan MacCormack, Johh Rusnak and Carliss Baldwin, 2006
Slide 11 © Carliss Y. Baldwin 2007
Evolution of Architectural Knowledge about Computers
Generation 0—ENIAC– Von Neumann memo (function-to-component mapping)
Generation 1—Integral systems Generation 2 —Modular systems
– System/360, “the first modular computer system”– Bell and Newell text explained how to create modular
systems Generation 3 —Quantitatively measured and
optimized designs– RISC, Memory management (cache memory),
optimizing compilers, parallel threading– Hennessy and Patterson text explained how it’s done
Slide 12 © Carliss Y. Baldwin 2007
2 Questions
Is this progression of architectural knowledge consistent across domains?– Probably– Parts and functions to interfaces to quantitative
dependencies Can we measure it?
– “Domain X is in state Y of architectural knowledge?”
– The problem of subdomains (modules) and superdomains (compositions)
Slide 13 © Carliss Y. Baldwin 2007
3 Conjectures As knowledge builds in a domain, designers move both
search and complexity (hence uncertainty) to subdomains (modules) and superdomains (compositions)– Law of the conservation of architectural ignorance (Ibibidui)
Domains with higher levels of architectural knowledge have lower levels of uncertainty– Predictable trajectories and roadmaps
Domains in which user functions are still being discovered have low levels of architectural knowledge (High Ibibidui)– Functions and component-to-function causal mapping are the first
step in design, and the most primitive type of architectural knowledge
Mozilla Before Redesign Mozilla After Redesign
Ibibidui in software
© Alan MacCormack, Johh Rusnak and Carliss Baldwin, 2006
Slide 15 © Carliss Y. Baldwin 2007
Dynamics —Textbook lags 1962—IBM task group figures out how to
build a modular computer system 1974—Bell and Newell publish textbook 1980—Hennessy and Patterson begin to
teach graduate students about quantitative approaches to computer architecture
1990 H&P publish first text 1994 H&P publish second text
Slide 16 © Carliss Y. Baldwin 2007
From 1962-1974 and 1980-1990 architectural knowledge was asymmetrically distributed
Some have it, many don’t
Slide 17 © Carliss Y. Baldwin 2007
Architectural Innovation Generation 1—Integral systems
– Build a whole new system Generation 2—Modular systems
– Modular operators: split, substitute, augment, exclude, invert, port
– Recombine, link, compose Generation 3—Quantitatively measured
systems– Find a bottleneck and remedy it– “Make the common case fast” (Amdahl’s Law)
Slide 18 © Carliss Y. Baldwin 2007
Third-generation architectural knowledge tells you
Where bottlenecks are How to remedy a bottleneck How much the remedy is worth in terms of system
performance – “Speedup formula”
How to change modular structure – 2nd generation knowledge
Can have multiple objectives (cost and speed)– Multiple bottlenecks
Slide 19 © Carliss Y. Baldwin 2007
Example—Sun 2
Product = engineering workstation Bottleneck = memory management
Slide 20 © Carliss Y. Baldwin 2007
Example—Sun 219"
DisplayMonochrome
1152 x 900 x 2Display
Controller VirtualMemory Management
68010CPU
(2) RS-423Serial Ports Ethernet Coax
10 MbpsEthernet
Memory Map
FloatingPoint
Accelerator
Sun Private Fast Memory Bus (P2 Bus)
42 MBDisk
1/4" Tape
QIC-2Adapter
ST506Adapter
SCSIHost
Adapter
(4) RS-423Serial Ports SMD
DiskController
9-trackTape
Controller
1/2" Tape
640 x 480 x 8Display
Controller
RS-170DisplayColor
Multibus (IEEE-796) (PI Bus)
DVMA
SCSI Bus
1-4 MBHigh-Speed
RAM
130 MBDisk
Bottleneck remedies
• Patented MMU chip
• Fast bus
Slide 21 © Carliss Y. Baldwin 2007
Scope/Outsourcing Where product/process design meets strategy To have a superior product, you only need to
control the bottleneck(s) and make them better All other parts of the system architecture
– Have slack; or
– Don’t affect performance or cost very much (speedup formula; 80/20 rule)
Strategy: Keep control of bottlenecks and let go (outsource) the rest
Slide 22 © Carliss Y. Baldwin 2007
Example—Sun 219"
DisplayMonochrome
1152 x 900 x 2Display
Controller VirtualMemory Management
68010CPU
(2) RS-423Serial Ports Ethernet Coax
10 MbpsEthernet
Memory Map
FloatingPoint
Accelerator
Sun Private Fast Memory Bus (P2 Bus)
42 MBDisk
1/4" Tape
QIC-2Adapter
ST506Adapter
SCSIHost
Adapter
(4) RS-423Serial Ports SMD
DiskController
9-trackTape
Controller
1/2" Tape
640 x 480 x 8Display
Controller
RS-170DisplayColor
Multibus (IEEE-796) (PI Bus)
DVMA
SCSI Bus
1-4 MBHigh-Speed
RAM
130 MBDisk
Contrast to 2nd generation architecture
Slide 23 © Carliss Y. Baldwin 2007
Result => Smaller “Footprint”
Fewer inhouse activities – Relative to competitors that don’t have same
architectural knowledge… – Remember textbook lags!
Less invested capital, with no penalty in performance and cost– No penalty because of the optionality of modular
designs
– Architects can select the best treatment for each module
Slide 24 © Carliss Y. Baldwin 2007
Competitive Dynamics Now we are fully in the world of strategy Use a simple model of dynamic competition
– 2 firms, A and B – Make goods of equal quality, same variable cost– Firm A has architectural knowledge, hence a smaller
footprint, hence an IC advantage over B» Less invested capital per unit of capacity
– Both set prices to utilize all capacity*– Customers buy first from cheapest supplier*– No dividends, no debt, no external equity
*Non-strategic behavior … avoids strange mixed strategy equilibrium (Kreps and Scheinkman, 1983)
Slide 25 © Carliss Y. Baldwin 2007
Cases to be considered
Base case: myopic value maximization– Firm managers are perfect agents of
shareholders Other cases:
– Agency conflicts (empire-building managers)– Foresighted investors (w/ and w/out agency)– External financing (w/ and w/out agency)
Slide 26 © Carliss Y. Baldwin 2007
Results
In each period, both firms will charge the same price
Firm A has IC advantage, thus
ROICA(t) > ROICB(t) Growth rate gj(t) = ROICj(t) In each period, Firm A will grow faster than
Firm B:
gA(t) > gB(t)
Slide 27 © Carliss Y. Baldwin 2007
Dynamic Pattern Epoch 1: Both firms profitable for a while
– Prices fall as firms add capacity
– Industry growth = weighted average of firms’ ROICs
Epochs 2 & 3: ROICB < Cost of capital– If B is a value maximizer => withdraws
– If B is an empire builder => stays in
Epoch 4: Somebody exits– If B is a value maximizer => A dominates
– If B is an empire builder => it depends (read the paper!)
Slide 28 © Carliss Y. Baldwin 2007
Empirical PredictionsIf A pursues a smaller footprint strategy
against B —1. ROICA> ROICB
2. gA > gB
3. Eventually ROICB< Cost of Capital
4. Possibly ROICB < 05. A can drive B out of the market
“B” can be a set of firms, not just one (remember textbook lag!)
Slide 29 © Carliss Y. Baldwin 2007
Strategic Implications If you are a “B” type firm, don’t go to war
against an “A” If you are an “A” type firm
– Track bottlenecks» Must know more than you make (Brusoni and
Prencipe)» Be prepared to change architecture and shift
footprint as bottlenecks move around
– Pay attention to strategy details (read the paper!)
– Make sure your “B” type competitors know that you are an “A” (publish your ROICs!)
Slide 30 © Carliss Y. Baldwin 2007
Evidence—Case Studies
Sun vs. Apollo 1986-1989 Dell vs. Compaq (and others) 1993-2001
Architectural SmallerKnowledge 'Footprint' Invested Long-run(bottlenecks through Capital Market& potential selective Advantage Dominancemodules) outsourcing
Recap Causal Argument
Slide 31 © Carliss Y. Baldwin 2007
Comparative Footprints
Apollo Computer Sun Microsystems
Aegis proprietary O BSD UnixInhouse Operating System Operating SystemDesign O EthernetOS DOMAIN proprietary Network Architecture
Network Network Architecture O Standard IO and Display controllersO Power supply
Hardware Design x x x x x Customize UnixDN series = 3-4 boards incl. x x x x x Inhouse Proprietary MMU
Hardware IO and Display controllers, x x x x x Design Internal busPower supply x x Single Board Layout
x x x x Purchase Components T T T T x x x x Purchase ComponentsComponent Test x x x x x Component Test x x x x x O
Kits x x x x x x Inhouse Kits x x x x T Manu-Board stuff and Solder x x x x x x Manu- Board stuff and Solder x x x x x O facturing
Test Boards x x x x x x facturing Test Boards x x x x TBoard Assembly x x x x x x Board Assembly x x x x x
System Assembly x x x x x x System Assembly x x x xSystem Test x x x x x x System Test x x x x x
Quality Assurance x x x x x x Quality Assurance x x x x xConsolidate and Ship x x x x x x Consolidate and Ship x x x x x
Key:x= transfer of material or information from column
task to row task;T= transaction: sale of good by column owner to row
owner;O= outsourced task blocks;
highly interdependent task blocks
Footprint (tasks performed inhouse).
Apollo Sun
Opportunistic commoditization—
Notice selective use of open standards (Ethernet) and open source code (BSD Unix) to make non-bottleneck components into commodities
Slide 32 © Carliss Y. Baldwin 2007
ROIC
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
Q21985
Q31985
Q41985
Q11986
Q21986
Q31986
Q41986
Q11987
Q21987
Q31987
Q41987
Q11988
Q21988
Q31988
Q41988
Q11989
Sun
Apollo
Slide 33 © Carliss Y. Baldwin 2007
Financial Results—Sales Growth
0
100
200
300
400
500
Q21985
Q31985
Q41985
Q11986
Q21986
Q31986
Q41986
Q11987
Q21987
Q31987
Q41987
Q11988
Q21988
Q31988
Q41988
Q11989
Time
$ millions
Sun
Apollo
Slide 34 © Carliss Y. Baldwin 2007
Apollo was acquired by HP in May 1989
Justification— Economies of scale“the largest engineering workstation company in the world…”
HP was 2nd generation, too, clueless about bottlenecks, footprints and ROIC
Slide 35 © Carliss Y. Baldwin 2007
Dell vs. Compaq
This time we are looking at a manufacturing and logistics process architecture
Cannot point to any professor, but there was a crisis in 1993 and another in 1995
And a key person … – Thomas Meredith, former CFO, put “ROIC” on
his license plate
Slide 36 © Carliss Y. Baldwin 2007
Dell’s Architectural Knowledge about Process Bottlenecks
Inhouse build-to-order assembly based on proprietary software
Maniacal about metrics– Opposite of Ibibidui
Locate manufacturing close to point of sale “Cross-docking” of peripheral equipment 1100 Patents!
Slide 37 © Carliss Y. Baldwin 2007
In 3rd generation process architectures
ArchitecturalKnowledge(bottlenecks& potentialmodules) Smaller
'Footprint' Invested Long-runthrough Capital Marketselective Advantage Dominance
Power outsourcingin theSupplyChain
Power in the Supply Chain is a strategic complement to Architectural Knowledge
Slide 38 © Carliss Y. Baldwin 2007
ROIC
-100%
-75%
-50%
-25%
0%
25%
50%
75%
100%
125%
150%
175%
200%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Dell
Compaq
Slide 39 © Carliss Y. Baldwin 2007
The smallest possible footprint
Creates a negative cash cycle ROIC may be negative (!) and not
meaningful Still a good incentive measure
Slide 40 © Carliss Y. Baldwin 2007
Growth Rates
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Dell
Compaq
Slide 41 © Carliss Y. Baldwin 2007
Compaq was acquired by HP in May 2002
Justification— Economies of scale“the largest personal computer company in the world…”
13 years after Apollo, HP was still clueless about bottlenecks, footprints and ROIC
(There was a proxy fight)
Slide 42 © Carliss Y. Baldwin 2007
Summary of evidence
Smaller footprint strategy exists Rests on “3rd generation” architectural
knowledge of bottlenecks, remedies, and potential new modules
Power in the supply chain is a complement (Sun used it too!)
Slide 43 © Carliss Y. Baldwin 2007
The Dark Side of the “Smaller Footprint” Strategy
What happened to Sun What is happening to Dell The Shimano bicycle drive train story
Slide 44 © Carliss Y. Baldwin 2007
What happened to Sun After besting Apollo, they adopted Apollo’s
integral product architecture Developed a proprietary Unix (Solaris) which ran
best on Sun workstations/servers Sold lots of servers as the Internet boom ramped
up Servers were not competitive with cheap PCs
made by Dell (smaller footprint), running Linux (open source software)
Sun refocused on very-high-end hardware (eg Blackbox datacenters) and open sourced Solaris
Slide 45 © Carliss Y. Baldwin 2007
What happened to Dell
Small footprint leads to quality problems in supply chain
ROIC focus puts lots of pressure on organization
“accounting errors, evidence of misconduct, and deficiencies in the financial control environment”
Has delayed filing its 10-K for 2006
Slide 46 © Carliss Y. Baldwin 2007
Comparative judgment of history (to date)
QuickTime™ and aTIFF (Uncompressed) decompressor
are needed to see this picture.
Slide 47 © Carliss Y. Baldwin 2007
When the largest footprint won
Fixson and Park (2007): “The Power of Integrality”
Bicycle drive trains– New functionality (index shifting)– Integral product architecture (combining
modules)
Slide 48 © Carliss Y. Baldwin 2007
In the beginning (1980)
Slide 49 © Carliss Y. Baldwin 2007
Introduction of Index Shifting (1985)
Slide 50 © Carliss Y. Baldwin 2007
In 1990, only Vertical Silos left
Slide 51 © Carliss Y. Baldwin 2007
In Mountain Bikes… Only Shimano
Slide 52 © Carliss Y. Baldwin 2007
Summarizing the message of this talk…
Architectural Strategy is not a simple game!
Thank You!
We have lots more to learn
… but not today!
Slide 53 © Carliss Y. Baldwin 2007
Thus industries evolve into new—and different— structures
Autos Computers
Something we can’t predict and don’t really understand!