- 13 Jan 2012
- Working Paper Summaries
The Impact of Modularity on Intellectual Property and Value Appropriation
Distributed innovation in open systems is an important trend in the modern global economy. In general, distributed innovation in open systems is made possible by the modularity of the underlying product or process. Carliss Y. Baldwin and Joachim Henkel provide a systematic analysis of value appropriation in closed and open modular systems, with implications for managers. Modular systems are made up of components that are highly interdependent within sub-blocks, called modules, and largely independent across those sub-blocks. Despite the technical benefits of modularity, history shows that it is not always straightforward for firms to capture value in a modular system. The paper argues that strategies for capturing value in an open, modular system must be formulated at the module level. But modularity is not a single strategy: it is rather a large set of strategic options and related tactics that can be deployed in different ways depending on the interplay of countervailing forces. Key concepts include: Special attention should always be paid to essential modules, which have the capacity to capture a portion of total system value. The IP related to some modules can and should be given away, although care must be taken not to let essential modules fall into the wrong hands. Other modules can be protected via state-sanctioned IP rights and/or agent payments under a relational contract. The modular architecture of the system should not be cast in stone until its IP dimensions are understood. After IP issues have been analyzed, some modules may need to be split further to concentrate agents' knowledge or reduce payments to outside owners of knowledge. Others may need to be made larger to make imitation and substitution more difficult. Closed for comment; 0 Comments.
- 29 Sep 2011
- Sharpening Your Skills
Sharpening Your Skills: Leveraging Intellectual Property
Many companies lack a coherent policy for maximizing the value of their intellectual property. In this collection from our archives, Harvard Business School faculty offer insights on the importance of IP and how best to protect and use it. Closed for comment; 0 Comments.
- 22 Aug 2011
- Research & Ideas
Getting to Eureka!: How Companies Can Promote Creativity
As global competition intensifies, it's more important than ever that companies figure out how to innovate if they are going to maintain their edge, or maintain their existence at all. Six Harvard Business School faculty share insights on the best ways to develop creative workers. Closed for comment; 0 Comments.
- 03 Mar 2011
- Working Paper Summaries
How Firm Strategies Influence the Architecture of Transaction Networks
In business, an "ecosystem" refers to a group of firms that work together through a series of shared transactions to provide a complex product or service. Using data from the disparate Japanese electronics and automotive sectors, this paper tackles the following questions: Do hierarchies of interfirm transaction networks vary across different ecosystems? What practices explain the difference in hierarchy across these two ecosystems? How do firms' strategies influence hierarchy? And what environmental factors explain the differences in the largest firm's strategies in each ecosystem? Research was conducted by Carliss Y. Baldwin of Harvard Business School and Jianxi Luo, Daniel E. Whitney, and Christopher L. Magee of the Massachusetts Institute of Technology. Key concepts include: There is a much lower degree of hierarchy in the electronics sector than in the automotive sector, due to the numerous interfirm transaction cycles in the former. Many electronics firms have adopted the strategy of "vertically permeable boundaries," meaning that they allow goods to flow from division to division within the firm, but at the same time, internal divisions can buy from and sell to external suppliers and customers. This strategy, which apparently leads to an increase in transaction cycles and innovation, is virtually nonexistent in the automotive sector. Several environmental factors explain the difference in strategy at these firms. Electronics firms face short product life cycles, low transaction costs, and low levels of asset specificity (meaning investments initially meant to support one transaction are likely to retain their value even if they are used for a different transaction). Automotive firms, on the other hand, have long product life cycles, high transaction costs, and high levels of asset specificity. Closed for comment; 0 Comments.
- 22 Feb 2011
- Research & Ideas
The Most Important Management Trends of the (Still Young) Twenty-First Century
HBS Dean Nitin Nohria and faculty look backward and forward at the most important business trends of the young twenty-first century. Closed for comment; 0 Comments.
- 12 Jan 2011
- Working Paper Summaries
Modularity for Value Appropriation--How to Draw the Boundaries of Intellectual Property
Many firms have adopted models of "open innovation," in which they seek ideas from external sources such as university labs, independent entrepreneurs, customers, and other companies. While such a business model has the potential to create value, the inherent intellectual property issues can be sticky. This paper discusses how companies can address these issues by adopting a system of modularity, wherein innovation in one part of a project will not require changes in all the other parts. Research was conducted by Joachim Henkel of Technische Universität München and Harvard Business School professor Carliss Y. Baldwin. Key concepts include: Controlling too much of the system's intellectual property will deter outside innovation, but controlling too little can prevent a firm from capturing value. A system can use different, incompatible forms of intellectual property and still be IP-modular, provided that the incompatible chunks of knowledge are associated with different modules within the whole system. The optimal modular structure for capturing value is not necessarily the same as the optimal structure for creating value. Closed for comment; 0 Comments.
- 31 Mar 2010
- Working Paper Summaries
When Open Architecture Beats Closed: The Entrepreneurial Use of Architectural Knowledge
Entrepreneurial firms rich in knowledge but poor in other resources can use superior architectural knowledge of a technical system to gain strategic advantage over larger and better endowed rivals. This paper presents a model and provides examples showing that architectural knowledge can be applied strategically to change a firm's scope and boundaries, make innovations more or less autonomous, and change the span of problems it must solve. Key concepts include: Architectural knowledge is knowledge about the components of a complex system and how they are related. Architectural knowledge includes knowledge about how the system performs its functions; how the components are linked together; and the behavior of the system, both planned and unplanned, in different environments. For a small entrepreneurial firm with limited financial resources facing larger rivals, the most valuable architectural knowledge pertains to bottlenecks and remodularizations that isolate the bottlenecks. Such knowledge can form the basis of a small footprint technical architecture that delivers an ROIC (higher return on invested capital) advantage. Technical systems that are susceptible to remodularization around bottlenecks are strategic targets of opportunity for entrepreneurial firms. Incumbents risk being displaced by smaller rivals with superior architectural knowledge leading to an ROIC advantage. Closed for comment; 0 Comments.
- 18 Feb 2010
- Working Paper Summaries
The Mirroring Hypothesis: Theory, Evidence and Exceptions
In its simplest form, the mirroring hypothesis suggests that the organizational patterns of a development project, such as communication links, geographic collocation, and team and firm membership, correspond to the technical patterns of dependency in the system under development. According to the hypothesis, independent, dispersed contributors develop largely modular designs, while richly interacting, collocated contributors develop highly integral designs. Yet many development projects do not conform to the mirroring hypothesis. HBS doctoral graduate Lyra Colfer and professor Carliss Y. Baldwin synthesize observations from a large number of cases that violate the hypothesis to explain when and how development organizations can "break the mirror." Key concepts include: While mirroring is common in practice, it is not universal. In the presence of compatible motivations and frameworks supporting expectations of good faith, there are new ways of building common ground, based on digitized designs; electronic archives; automated test suites; and instantaneous transmission of text, data, and pictures. These alternative means can be used as complements or substitutes for mirrored forms of organization. Managers of development organizations within and across firms and in open collaborative groups, who choose or are required by circumstances to "break the mirror," should be aware of these alternative means of achieving coordination. Closed for comment; 0 Comments.
- 11 Feb 2010
- Working Paper Summaries
The Architecture of Complex Systems: Do Core-periphery Structures Dominate?
All complex systems can be divided into a nested hierarchy of subsystems. However, not all these subsystems are of equal importance: Some subsystems are core to system performance, whereas others are only peripheral. In this study, HBS professor Carliss Y. Baldwin and coauthors developed methods to detect the core components in a complex software system, establish whether these systems possess a core-periphery structure, and measure important elements of these structures. The general patterns highlight the difficulties a system architect faces in designing and managing such systems. Results represent a first step in establishing stylized facts about the structure of real-world systems. Key concepts include: Core-periphery structures dominate the sample, with 75-80 percent of systems in the sample possessing such a structure. It is significant that a substantial number of systems lack such a structure. This implies that a considerable amount of managerial discretion exists when choosing the "best" architecture for a system. Variations in system structure can be explained, in part, by the different models of development used to develop systems. Legacy code is rarely rewritten, but instead forms a platform upon which new systems are built. With such an approach, today's developers bear the consequences of design decisions made long ago. Closed for comment; 0 Comments.
- 01 Dec 2009
- Working Paper Summaries
Modeling a Paradigm Shift: From Producer Innovation to User and Open Collaborative Innovation
We are in the midst of a major paradigm shift: technological trends are causing a change in the way innovation gets done in advanced market economies. In addition to the model of producer-based design—the idea that most important designs for innovations would originate from producers and be supplied to consumers via goods and services that were for sale—two increasingly important models are innovations by single user firms or individuals, and open collaborative innovation projects. Each of these three models represents a different way to organize human effort and investments aimed at generating valuable new innovations. HBS professor Carliss Y. Baldwin and MIT Sloan School of Management professor Eric von Hippel analyze the three models in terms of their technological properties, specifically their design costs and architectures, and their communication requirements. The researchers argue that as design and communication costs decline, single user and open collaborative innovation models will be viable for a steadily wider range of design. These two models will present an increasing challenge to the traditional paradigm of producer-based design—but, when open, they are good for social welfare and should be encouraged by policymakers. Key concepts include: When it is technologically feasible, the transition from closed producer innovation or single user innovation to open single user or open collaborative innovation is desirable in terms of social welfare and is worthy of support by policymakers. Free dissemination of innovation designs is associated with the open model. Open innovation generates innovation without exclusivity or monopoly, and so should improve social welfare, other things being equal. Intellectual property rights grants can be used as the basis for licenses that help keep innovation open as well as closed. Policymakers should seek out and eliminate points of conflict between present intellectual property policies designed to support closed innovation that at the same time inadvertently interfere with open innovation. As design costs fall, many more innovations will originate with single users. Open collaborative innovation projects thrive on low communication costs. Closed for comment; 0 Comments.
- 27 Aug 2009
- Working Paper Summaries
Measuring and Understanding Hierarchy as an Architectural Element in Industry Sectors
In an industry setting, classic supply chains display strict hierarchy, whereas clusters of firms have linkages going in many different directions. Previous theory has often assumed the existence of the hierarchical relationships among firms, and empirical industry studies tend to focus on a single-layer industry, or a two-layer structure comprising buyers and suppliers. And yet, some industries have a multilayer structure with a multistep supply chain. Others comprise a cluster of complementary firms producing different parts of a large system. HBS professor Carliss Y. Baldwin and colleagues use network analysis to study multilayer industries both empirically (in the case of Japan) and theoretically and to explore how industries are organized at the sector level in an attempt to reveal the underlying rules that determine how industry architectures form and change. Key concepts include: Empirical analysis shows that the automotive sector in Japan exhibits a significantly higher degree of hierarchy and higher transaction breadth (average number of customers per firm) than the electronics sector. The degree of hierarchy in an industry sector may be traced back to fundamental properties of the underlying technologies. This research helps points the way to new approaches for understanding industry architectures and the factors that influence the architecture of industry sectors. Closed for comment; 0 Comments.
- 26 Nov 2008
- Working Paper Summaries
The Sciences of Design: Observations on an Emerging Field
This paper examines the sciences of design as an emerging field of study that cuts across disciplinary boundaries. The paper summarizes and synthesizes the positions, reflections, opportunities, and challenges expressed at the first doctoral consortium to explore the topic, held in 2008. It thus provides a useful agenda for clarifying and articulating important strands of this nascent field. Key concepts include: Design sciences is a movement that affects not only the information systems discipline but also several allied disciplines, which must also contribute to its definition and participation. When a common language exists across disciplines, it enables an ongoing, productive pursuit of scientific knowledge. But common languages only come about through intense, repeated conversations between individuals with disparate views and open minds. Closed for comment; 0 Comments.
- 10 Oct 2008
- Working Paper Summaries
The Architecture of Platforms: A Unified View
Product and system designers have long exploited opportunities to create families of complex artifacts by developing and recombining modular components. An especially common design pattern is associated with the concept of a platform, which Baldwin and Woodard define as a set of stable components that supports variety and evolvability in a system by constraining linkages among the other components. In this paper, the authors shed light on the relationships between platforms and the systems in which they are embedded to better understand and explain firms and industries where platforms play an important role. Key concepts include: There is a fundamental unity in the architecture of platforms. The combination of stability and variety in the architecture makes it possible to create novelty without developing a new system from scratch. Thus platform systems are evolvable. Although they display a fundamental unity at the level of architecture, platform systems vary a great deal in construction and appearance. A benefit of viewing platform architectures in a unified way is that theories and observations of seemingly disparate phenomena in diverse fields can be brought into focus as part of a coherent whole. Closed for comment; 0 Comments.
- 27 Mar 2008
- Working Paper Summaries
Exploring the Duality between Product and Organizational Architectures: A Test of the Mirroring Hypothesis
Products are often said to "mirror" the architectures of the organization from which they come. Is there really a link between a product's architecture and the characteristics of the organization behind it? The coauthors of this working paper chose to analyze software products because of a unique opportunity to examine two different organizational modes for development, comparing open-source with proprietary "closed-source" software. The results have important implications for development organizations given the recent trend toward "open" approaches to innovation and the increased use of partnering in research and development projects. Key concepts include: A product's architecture tends to mirror the structure of the organization within which it is developed. New organizational arrangements can have a distinct impact on the nature of the resulting design, and hence may affect product performance in unintended ways. There are substantial differences in relative levels of modularity between software systems of similar size and function. Closed for comment; 0 Comments.
- 24 Jan 2008
- Working Paper Summaries
The Impact of Component Modularity on Design Evolution: Evidence from the Software Industry
What factors should influence the design of a complex system? And what is the impact of choices on both product and organizational performance? These issues are of particular importance in the field of software given how software is developed: Rarely do software projects start from scratch. The authors analyzed the evolution of a commercial software product from first release to its current design, looking specifically at 6 major versions released at varying periods over a 15-year period. These results have important implications for managers, highlighting the impact of design decisions made today on both the evolution and the maintainability of a design in subsequent years. Key concepts include: Data show strong support for the existence of a relationship between component modularity and design evolution. Tightly coupled components have a higher probability of survival as a design evolves compared with loosely coupled components. Tightly coupled components are also harder to augment, in that the mix of new components added in each version is significantly more modular than the legacy design. Closed for comment; 0 Comments.
- 17 Jan 2008
- Working Paper Summaries
Competition in Modular Clusters
The last 20 years have witnessed the rise of disaggregated "clusters," "networks," or "ecosystems" of firms in a number of industries, including computers, telecommunications, and pharmaceuticals. In these clusters, different firms design and produce the various components of a complex artifact (such as the processor, peripherals, and software of a computer system), and different firms specialize in the various stages of a complex production process. This paper considers the pricing behavior and profitability of these so-called modular clusters. Baldwin and Woodard isolate the offsetting price effects in a model, and show how they might operate in large as well as in small clusters. Key concepts include: Clusters operating under open, public standards may have higher prices and profits than those operating under closed, proprietary standards. Cluster forms of industrial organization may not be conducive to all kinds of innovation. In particular, innovations that add new layers of functionality to the system, and thus increase total demand, will not be adequately rewarded relative to the value they create. It is important to learn how cluster configurations affect incentives to supply different forms of innovation, and how firms respond to these cross-layer dependencies in formulating their long-term strategies. Closed for comment; 0 Comments.
- 18 Sep 2007
- Working Paper Summaries
Modularity, Transactions, and the Boundaries of Firms: A Synthesis
For the last 30 years economists have used the concepts of "transaction," "transaction cost," and "contract" to illuminate a wide range of phenomena, including vertical integration; the design of employment, debt, and equity contracts; and the structure of industries. These concepts are now deeply embedded in the fields of economics, sociology, business, and law. Theories explain how to choose between different forms of transactional governance. But why does a transaction occur where it does? Without this answer, the forces driving the location of transactions in a system of production remain largely unexplored. This paper explains the location of transactions (and contracts) in a system of production. It also presents a theory of technological change that predicts changes in the location of transactions and therefore in the structure of industries. Key concepts include: Transaction locations are not technologically determined, but arise through the interplay of firms' strategies and knowledge and the requirements of specific technologies. Because strategies, knowledge, and technologies all change over time, the location of transactions changes as well. Each firm participating in a task network will have inexhaustible opportunities to gain advantage by redesigning the portions of the task network it controls and the transactions it influences. At the same time, new firms can quite easily attach themselves to the network at the boundaries of modules. Closed for comment; 0 Comments.
- 12 Apr 2007
- Working Paper Summaries
From Manufacturing to Design: An Essay on the Work of Kim B. Clark
The interdisciplinary research of economist Kim Clark, former dean of Harvard Business School and now President of Brigham Young University-Idaho, occupies a unique place in management scholarship for three reasons. First, he tended to focus on little known and under-appreciated management groups such as manufacturing managers, product development managers, and product and process architects. Thus, he directly positioned himself outside the "traditional" management disciplines of strategy, finance, marketing, and organizational behavior. Second, he swam against the academic tide by recognizing the power of comparative and longitudinal field studies. Third, he sought frameworks beyond his own field in design theory, the engineering sciences, and finance. This paper reviews his research contributions over almost thirty years. Key concepts include: Throughout his career, Clark has brought fresh insights to old questions and opened up new territories of research. He helped to replace Frederick Taylor's scientific management principles with the dynamic concepts of continual learning and learning organizations. Clark showed how product development could be actively managed for greater efficiency and effectiveness. He developed a theory of the embedding of knowledge in organizations, which he used to explain why established firms often fail in the face of "seemingly minor innovations." He showed how changes in the modular structure of products and processes could bring about fundamental change in the structure of industries. Finally, in Clark's later works, he built bridges from design theory to user innovation, transaction- and knowledge-based theories of the firm, and strategy. Closed for comment; 0 Comments.
- 28 Sep 2006
- Working Paper Summaries
Architectural Innovation and Dynamic Competition: The Smaller “Footprint” Strategy
To study dynamic competition, Baldwin and Clark build upon a design principle in computer architecture known as Amdahl's Law. The authors show that firms can study the underlying cause-and-effect relationships in a complex architecture in order to identify "bottlenecks." Firms may then redesign the interfaces of key components to make them more modular. They can then outsource more activities without sacrificing performance or cost. As a result, firms can offer competitive products or services, while investing less, and so enjoy an "invested capital advantage" over competitors. Baldwin and Clark explain how the strategy works and then model its impact on competition through successive stages of industry evolution. Key concepts include: Architectural innovation involves rearranging known parts (components) into new patterns (architectures) to achieve higher levels of system performance on one or more dimensions. The strategy described in this paper was used in the 1980s by Sun Microsystems against Apollo Computer and in the 1990s by Dell against Compaq and other personal computer makers. Sun's invested capital advantage can be linked to specific architectural innovations. As for Dell, indirect evidence shows that architectural knowledge and innovation contributed in important ways to Dell's success. Closed for comment; 0 Comments.
Organization Design for Distributed Innovation
MIT professor Eric von Hippel first coined the term "distributed innovation" to describe a system in which innovation emanates not only from the manufacturer of a product but from many sources including users and rivals. Over the years, systems of distributed innovation—so-called business ecosystems—have become increasingly prevalent in many industries. These entities generally encompass numerous corporations, individuals, and communities that might be individually autonomous but related through their connection with an underlying, evolving technical system. In this paper, prepared for the 1st Organizational Design Conference, held at Harvard Business School in August 2012, HBS professor Carliss Baldwin examines four central themes: 1) Distributed innovation as the unintended consequence of modularity; 2) The advantage of business ecosystems for creative problem-solving; 3) Organizational design of business ecosystems; and 4) Competition and technological innovation in business ecosystems. Overall, Baldwin argues that the potential benefits of distributed innovation must be recognized, and the field of organization design must broaden its traditional focus on the individual firm to encompass this compelling new approach for creating value. Key concepts include: In the future, the key problem for organization design will be the management of distributed innovation in dynamic systems. Specifically, how should diverse entities be integrated into a coherent network that generates goods in the present and new designs for the future? Organization designers must think about how to distribute property rights, people, and activities across numerous self-governing enterprises in ways that are advantageous for the group as well as for the designer's own firm or community. Many creative problem-solvers will not (or simply cannot) work effectively under standard employment or supply contracts. That is why distributed innovation in a business ecosystem is such a desirable organizational form. The rise of modular systems occurred hand-in-hand with the upsurge of ever-cheaper information technology in the second half of the 20th century. Distributed innovation was an unintended consequence of modularity. Closed for comment; 0 Comments.