28 Sep 2006Working Paper Summaries

Architectural Innovation and Dynamic Competition: The Smaller “Footprint” Strategy

by Carliss Y. Baldwin and Kim B. Clark

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.

Author Abstract

We describe a dynamic strategy that can be employed by firms capable of architectural innovation. The strategy involves using knowledge of the bottlenecks in an architecture together with the modular operator "splitting" to shrink the "footprint" of the firm's in-house activities. Modules not in the footprint are outsourced—module boundaries are redrawn and interfaces designed for this purpose. The result is an invested capital advantage, which can be used to drive the returns of competitors below their cost of capital. We explain how this strategy works and model its impact on competition through successive stages of industry evolution. We then show how this strategy was used by Sun Microsystems against Apollo Computer in the 1980s and by Dell against Compaq and other personal computer makers in the 1990s.