12 Dec 2014Working Paper Summaries

Bottlenecks, Modules and Dynamic Architectural Capabilities

by Carliss Y. Baldwin

Large technical systems made up of many interoperable components are becoming more common every day. Many of these systems, like tablet computers, smartphones, and the Internet, are based on digital information technologies. Others, like the electrical grid, the financial payments system, and all modern factories, rely on digital technologies. How do firms create and capture value in large technical systems? To answer this question, the author argues, it is first necessary to develop ways of describing such systems. One useful lens is architecture. Architectural capabilities are an important subset of dynamic capabilities that provide managers with the ability to see a complex technical system in an abstract way and change the system's structure by rearranging its components. Purposeful architectural change can then be used to create and capture value at different points in the technical system. Furthermore, value-enhancing architectural change arises through the effective management of bottlenecks and modules in conjunction with the firm's organizational boundaries and property rights. Key concepts include:

Bottlenecks are points of value creation and capture in any complex man-made system.
The architecture of a system defines its components, describes interfaces between components, and specifies ways of testing performance.
The tools a firm can use to manage bottlenecks are 1) an understanding of the modular structure of the technical system and how it can be changed; and 2) an understanding of the contract structure of the firm, especially its organizational boundaries and property rights.

Author Abstract

Architectural capabilities are an important subset of dynamic capabilities that provide managers with the ability to see a complex technical system in an abstract way and change the system's structure by rearranging its components. In this paper, I argue that the essence of dynamic architectural capabilities lies in the effective management of bottlenecks and modules in conjunction with organizational boundaries and property rights in a technical system. Bottlenecks are points of value creation and capture in any complex man-made system. The tools a firm can use to manage bottlenecks are first, an understanding of the modular structure of the technical system, and second, an understanding of the contract structure of the firm, especially its organizational boundaries and property rights. Although these tools involve disparate bodies of knowledge, they must be used in tandem to achieve maximum effect.