slide 1 © carliss y. baldwin 2007 architecture, innovation and industry structure carliss y....

© Carliss Y. Baldwin 2007

Architecture, Innovation and Industry Structure

Carliss Y. Baldwin

Washington UniversitySt. LouisApril 9, 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”


The Computer Industry in1985


It changed—

1985 1995

Verticals are giving up ground…


And then some more!

1985 2004


Same time period… the auto industry stayed very vertical

Why the difference? We don’t know!

1984 2003


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


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)


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


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


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)


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


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


From 1962-1974 and 1980-1990 architectural knowledge was asymmetrically distributed

Some have it, many don’t


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)


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


Example—Sun 2

Product = engineering workstation Bottleneck = memory management


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


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


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


Example—Sun 219"

DisplayMonochrome


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


Controller

RS-170DisplayColor

Multibus (IEEE-796) (PI Bus)

DVMA

SCSI Bus

1-4 MBHigh-Speed

RAM

130 MBDisk

Contrast to 2nd generation architecture


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


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)


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)


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)


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!)


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!)


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!)


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


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


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


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


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


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


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!


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


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


The smallest possible footprint

Creates a negative cash cycle ROIC may be negative (!) and not

meaningful Still a good incentive measure


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


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)


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!)


The Dark Side of the “Smaller Footprint” Strategy

What happened to Sun What is happening to Dell The Shimano bicycle drive train story


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


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


Comparative judgment of history (to date)

QuickTime™ and aTIFF (Uncompressed) decompressor

are needed to see this picture.


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)


In the beginning (1980)


Introduction of Index Shifting (1985)


In 1990, only Vertical Silos left


In Mountain Bikes… Only Shimano


Summarizing the message of this talk…

Architectural Strategy is not a simple game!

Thank You!

We have lots more to learn

… but not today!


Thus industries evolve into new—and different— structures

Autos Computers

Something we can’t predict and don’t really understand!

slide 1 © carliss y. baldwin 2007 architecture, innovation and industry structure carliss y....

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