Transcript NFRS Seminar - Dartmouth College

Selfish Designs:
What Computer Designs Need
from the Economy and How
They Get It
Carliss Y. Baldwin
Harvard Business School
University of British Columbia
October 14, 2004
Slide 1
© Carliss Y. Baldwin and Kim B. Clark, 2004
Four Points
 Designs
“need” to become real
– They become real by creating the perception of “value”
 Designs
act as a financial force
– In the process of becoming real, they can change the
structure of an industry
 A Modular
Design Architecture creates Options
with Option Value
– What is an “ORMDA”?
– What does an ORMDA need from the economy?
 The
economy bites back
– ORMDAs are dangerous places to make a living
Slide 2
© Carliss Y. Baldwin and Kim B. Clark, 2004
What are designs?
 Instructions
that turn knowledge into things
 Span all artifacts and human activities
– Tangible, intangible
– Transacting, contracting, dispute resolution
– Government
 The
wealth of an economy inheres in its
designs
Slide 3
© Carliss Y. Baldwin and Kim B. Clark, 2004
The Indictment
 “Selfish”
designs want to become real
 Their tool is human motivation
– A user perceives use-value => willingness to make or
willingness-to-pay
– Designers and producers add up the users’ willingnessto-pay, subtract costs
– The result is an asset => financial value
 Humans
move mountains for financial value
– Value operates “as a force” in the economy
– Designs have captured the value force, and thus today
we work to serve their needs
Slide 4
© Carliss Y. Baldwin and Kim B. Clark, 2004
Human-Design Symbiosis
 Designs,
when reified (made real), help
humans to:
– Survive
– Interact
– Create
 Humans
“Surprise and delight”
reify and also improve designs
– Complete them, make them, transport them
– Pay for design evolution — this is a recent
development
Mutualism or Parasitism?
Slide 5
© Carliss Y. Baldwin and Kim B. Clark, 2004
Design Evolution creates “value
forces” that can change the
structure of an industry
Look at the computer industry
from 1980-2002
Slide 6
© Carliss Y. Baldwin and Kim B. Clark, 2004
Industry Transformation

Andy Grove described a vertical-to-horizontal transition in
the computer industry:
“Vertical Silos”
“Modular Cluster”
Slide 7
© Carliss Y. Baldwin and Kim B. Clark, 2004
Andy’s Movie
The Computer Industry in 1980
Services
Systems Integration
Top 10 Public
Companies in
US Computer
Industry
Area reflects
Market Value
in Constant
US $
Slide 8
Applications Layer
Middleware Layer
Operating Systems
Hardware
IBM
S
P
E
R
R
Y
D CVC
U H E
N P C
S
Y
XRC
S
AMP
Components
TI
Intel
© Carliss Y. Baldwin and Kim B. Clark, 2004
Andy’s Movie
The Computer Industry in 1995
IBM
S
P
E
R
R
Y
D CVC
U H E
N P C
S
Y
XRC
S
AMP
TI
Services
Systems Integration
First Data
EDS
Oracle
Intel
Top 10 Public
Companies in
US Computer
Industry
Area reflects
Market Value
in Constant
US $
Slide 9
I
Applications Layer B MSFT
Middleware Layer M
Operating Systems
Hardware: Printers
Hardware: Servers
Hardware: Routers
Components
CA
HP
IBM
Cisco
Intel
Micron
© Carliss Y. Baldwin and Kim B. Clark, 2004
Andy’s Movie—the Sequel
The Computer Industry in 2002
IBM
S
P
E
R
R
Y
D CVC
U H E
N P C
S
Y
XRC
S
AMP
TI
Intel
Top 10 Public
Companies in
US Computer
Industry
Area reflects
Market Value
in Constant
US $
Slide 10
Services
First Data
Services
First Data
ADP EDS
Systems Integration
Systems Integration
I
CA
Applications Layer B MSFT
Applications
Layer IBM
Middleware
Layer M
Operating Systems
Middleware
Layer Printers
Hardware:
Hardware: Servers
Operating
Systems Routers
Hardware:
Components
Hardware: Printers
HP
Hardware: PCs
Dell
Hardware: Servers
IBM
Hardware: Routers
Cisco
Components
Intel
Oracle
Oracle
MSFT
HP
IBM
Cisco
Intel
Micron
TI
© Carliss Y. Baldwin and Kim B. Clark, 2004
Turbulence in the Industry
Departures from Top 10:
 Xerox (~ bankrupt)
 DEC (bought)
 Sperry (bought)
 Unisys (marginal)
 AMP (bought)
 Computervision (LBO)
Sic Transit Gloria Mundi
Slide 11
Arrivals to Top 10:
 Microsoft
 Cisco
 Oracle
 Dell
 ADP
 First Data
… Sic Transit
© Carliss Y. Baldwin and Kim B. Clark, 2004
What changed?
Slide 12
© Carliss Y. Baldwin and Kim B. Clark, 2004
Design Architecture
 Small
designs “just get done” by one person
or a small team
 Large designs require architecture
– “The design of the design process”
– Forward-looking, future oriented
– Analogous to physical architectures
» Create and constrain” movement and search
 Major
social technology, but not much
studied
Slide 13
© Carliss Y. Baldwin and Kim B. Clark, 2004
Short History
 System/360:
first modular computer design
architecture (1962-1967)
– Proof of concept in hardware and application
software
– Proof of option value in market response and
product line evolution
– First ORMDA = “Option-rich Modular Design
Architecture”
– System software NOT modularizable
» Fred Brooks, “The Mythical Man Month”
Slide 14
© Carliss Y. Baldwin and Kim B. Clark, 2004
Short History (continued)

Bell and Newell, Computer Structures (1971)
– General principles of modular design for hardware
– Basis of PDP-11 design—another ORMDA

Thompson and Ritchie, Unix and C (1971-1973)
– Modular design of operating system software (contra
Brooks Law)
– Over time, general principles for evolvable software
design (Unix philosophy)

Mead and Conway, Intro to VLSI Systems (1980)
– Principles of modular design for large-scale chips
Slide 15
© Carliss Y. Baldwin and Kim B. Clark, 2004
Short History (continued)

IBM PC (1983)
–
–
–
–
–
–
Slide 16
DEC PDP-11 minimalist strategy (exclude and invite)
+ Intel 8088 chip
+ DOS system software
+ IBM manufacturing
+ Lotus 1-2-3
A mass-market ORMDA
© Carliss Y. Baldwin and Kim B. Clark, 2004
ORMDAs and Value Migration in the
Computer Industry, 1950-1996
Significant OptionRich Modular
Design Architectures
IBM System/360
DEC PDP 11; VAX
IBM PC
Sun 2; 3; Java VM
Internet Protocols
(end-to-end
principle)
50
53
56
Unix and C; Linux
59
62
65
68
71
74
77
80
83
86
89
92
95
7377
RISC
HTML; XML(?)
Slide 17
© Carliss Y. Baldwin and Kim B. Clark, 2004
This was the puzzle Kim Clark
and I began to tackle in 1987
Where was the value shown in the
slide coming from?
Designs, yes, but what part and why?
Slide 18
© Carliss Y. Baldwin and Kim B. Clark, 2004
A Modular Architecture “frees up” Design
Option Value
System after Modularization
System Before Modul arizati on
Design
Rules
System
Option
Option
Option
Option
Option
Split options,
decentralize decisions,
fragment control
Evolution
Slide 19
Option
Option
Option
© Carliss Y. Baldwin and Kim B. Clark, 2004
As scientists, we can visualize and
measure modularity in design
— after the fact
DSMs, Design Hierarchies
Methods are tedious, non-automated
Slide 20
© Carliss Y. Baldwin and Kim B. Clark, 2004
For fun: Comparison of different software systems with DSM tools
Mozilla just after becoming open source
Coord. Cost = 30,537,703
Change Cost = 17.35%
Linux of similar size
Coord. Cost = 15,814,993
Change Cost = 6.65%
Different organizations needed for different architectures
Mozilla just after becoming open source
One Firm,
Tight-knit
Team, RAD
methods
Coord. Cost = 30,537,703
Change Cost = 17.35%
Linux of similar size
Distributed
Open Source
Development
Coord. Cost = 15,814,993
Change Cost = 6.65%
Mozilla Before Redesign
Location
Size
Coordination Cost
Change Cost
Change Cost %
Mozilla After Redesign
Mozilla April 98 Mozilla Dec 98
On left
On right
1684
1508
30,527,703
10,234,903
292.0932
41.8561
17.35
2.78
!!
But modularity is only half the
story—options matter, too
 “Creates”
vs. “Frees up”
 The sad story of auto front-end modules
 Design options have “technical potential”,
denoted s
 Technical potential, s, varies by system and
by module
Modularity in the absence of high option
value is an expensive waste of time
Slide 24
© Carliss Y. Baldwin and Kim B. Clark, 2004
Measuring Option Value
 Successive,
improving versions are evidence of
option values being realized over time—after the
fact
 Designers see option values before the fact
 What do they see?
Global Design Rules v.1
Version 1.0
Version 1.2
Version 1.5
Version 1.8
s = Low
Slide 25
Medium
Zero
High
© Carliss Y. Baldwin and Kim B. Clark, 2004
Sources of option value in computer
designs
 Moore’s
Law—
– Value of seamless, asynchronous upgrading
– Applies to chips
 Amdahl’s
Law “Make the frequent case fast”—
– Value of ex post optimization
– Applies to all complex artificial systems (“Build one and
throw it away.”)
 Wilkes-Alexander-Clark
observation “Valid
perceptions of desires emerge through use”—
– Value of ex post discovery, direct experience, play
– Applies to all new artifacts
Slide 26
© Carliss Y. Baldwin and Kim B. Clark, 2004
In conclusion, an analogy…
An ORMDA is like …
Slide 27
© Carliss Y. Baldwin and Kim B. Clark, 2004
Slide 28
© Carliss Y. Baldwin and Kim B. Clark, 2004
Where we are in the argument:
 Designs
“need” to become real
– They become real by creating the perception of “value”
 Designs
act as a financial force
– In the process of becoming real, they can change the
structure of an industry
 A Modular
Design Architecture creates Options
with Option Value
– What is an “ORMDA”?
– What do “selfish” ORMDAs need from the economy?
 The
economy bites back
– ORMDAs are dangerous places to make a living
Slide 29
© Carliss Y. Baldwin and Kim B. Clark, 2004
Selfish ORMDAs “need”
 Lots
of design searches
 Institutions of Innovation to
– Complete the designs
– Produce the artifacts
– Transport/Distribute the goods
 Mechanisms
for financing, selection,
compensation, reward (an advanced
economy…)
Slide 30
© Carliss Y. Baldwin and Kim B. Clark, 2004
Selfish ORMDAs “need” lots of design
searches—and promise lots of $$$
Value
Landscape of
a minor
ORMDA—
Sun
Microsystems
Workstation
circa 1992
Slide 31
© Carliss Y. Baldwin and Kim B. Clark, 2004
Technical Potential and Cost of Design
Search Vary by Module
Size
Visibility
Examples
large
hidden
disk drive; large application program
large
visible
microprocessor; operating system
small
hidden
cache memory; small application program
small
visible
instruction set; internal bus
Slide 32
© Carliss Y. Baldwin and Kim B. Clark, 2004
Thus each module has its own “value
profile”
Net Option Value as a percentage of the
50%
40%
30%
20%
10%
0%
0
5
10
15
20
25
-10%
-20%
-30%
-40%
-50%
No. of Expe ri m e n ts
Slide 33
© Carliss Y. Baldwin and Kim B. Clark, 2004
Institutions get built to exploit
opportunities like these, which are
“created” by the design architecture
This is where the economy bites back!
Slide 34
© Carliss Y. Baldwin and Kim B. Clark, 2004
What are institutions?
 Firms
and markets
 Transactions and contract types
 Rules and rights (eg, property rights)
 Stable patterns of behavior involving
several actors operating within a consistent
framework of ex ante incentives and ex post
rewards
– Equilibria of linked games with self-confirming
beliefs (Aoki and game theorists)
Slide 35
© Carliss Y. Baldwin and Kim B. Clark, 2004
ORMDAs “need” institutions
 But
not just any type will do
 In DR2, we argue that the “most suitable”
institutional forms for an ORMDA are:
– A modular cluster of complementary firms and
markets with “own your solution” property
rights
– A community of cooperating user-developers
with GPL-type property rights
 These
Slide 36
forms are “good for the designs”
© Carliss Y. Baldwin and Kim B. Clark, 2004
Three ways to frame the institutional
analysis
 Descriptive:
What has actually happened in
the ORMDAs we know about?
 Deductive: What do our models predict?
 Strategic/Normative: Faced with an
ORMDA (and access to financial capital),
what should “you” do?
Slide 37
© Carliss Y. Baldwin and Kim B. Clark, 2004
Faced with this ORMDA, what would
you do?
One module
or many?
In each
module you
chose, how
many design
searches?
Which
modules are
most
attractive?
Slide 38
© Carliss Y. Baldwin and Kim B. Clark, 2004
Lots of stories
 They
all make sense
 When you see them play out, the moves are
logical and in some cases “inevitable”
 But our strategic advice for managers and
financiers today comes down to:
–
–
–
–
Slide 39
“plunge in,”
“get lucky,”
“watch out for Microsoft,” and
“get bought by HP”
© Carliss Y. Baldwin and Kim B. Clark, 2004
One story before we close—
ORMDAs and New Industries
Significant OptionRich Modular
Design Architectures
IBM System/360
DEC PDP 11; VAX
IBM PC
Sun 2; 3; Java VM
Internet Protocols
(end-to-end
principle)
50
53
56
Unix and C; Linux
59
62
65
68
71
74
77
80
83
86
89
92
95
7377
RISC
HTML; XML(?)
Slide 40
© Carliss Y. Baldwin and Kim B. Clark, 2004
The Bright Side of the ORMDAs
Slide 41
© Carliss Y. Baldwin and Kim B. Clark, 2004
But there was The Dark Side …
4500
4000
3500
3000
$ billion
2500
2000
$ 2.5 trillion
appeared then
disappeared in
the space of four
years!
1500
1000
500
0
50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
Slide 42
© Carliss Y. Baldwin and Kim B. Clark, 2004
Bubble followed by a Crash
4500
4000
3500
3000
A failure,
not of the Internet’s
design architecture,
$ billion
2500
2000
1500
1000
but of the
institutions built on
that architecture
500
0
50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
Slide 43
© Carliss Y. Baldwin and Kim B. Clark, 2004
A victory for selfish designs?
4500
4000
3500
3000
$ billion
2500
Good for
the designs,
not for the
humans
2000
1500
1000
500
0
50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
Slide 44
© Carliss Y. Baldwin and Kim B. Clark, 2004
Other Cautionary Tales
 IBM
System/360 and “plug-compatible”
peripherals
 IBM PC vs. clones
 Sun Microsystems vs. Apollo Computer
 Dell Computer vs. Compaq Computer
Each illustrates Perils of ORMDAs
Slide 45
© Carliss Y. Baldwin and Kim B. Clark, 2004
Unless we turn the ORMDA
stories into science…
Slide 46
© Carliss Y. Baldwin and Kim B. Clark, 2004
Selfish designs will be in charge!
Value-seeking design evolution—
As we’ve seen it —
the good, the bad, and the ugly…
Slide 47
© Carliss Y. Baldwin and Kim B. Clark, 2004
Remember
 Designs
“need” to become real
– They do so by creating perceptions of “value”
 Value
is a powerful economic force
– Which can change the structure of an industry
 The
most powerful designs are ORMDAs
 ORMDAs are dangerous (but interesting)
places to live
 Designs, institutions and strategies are still
evolving
Slide 48
© Carliss Y. Baldwin and Kim B. Clark, 2004
Thank you!
Slide 49
© Carliss Y. Baldwin and Kim B. Clark, 2004
IBM System/360
 The
first modular computer design
 IBM did not understand the option value it
had created
 Did not increase its inhouse product R&D
 Result: Many engineers left
– to join “plug-compatible peripheral” companies
 San
Jose labs —> Silicon Valley
“Compelling, surprising, dangerous”
Slide 50
© Carliss Y. Baldwin and Kim B. Clark, 2004
1965—IBM wanted to be the sole source of
all of System/360’s Modules
1
1
2
3
4
5
6
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35
SLT architecture and standard circuits
Erich Bloch - August 1961
New Processor Line Architectural Ground Rules
SPREAD Task Group - 12/28/61
New Processor Line control, product and programming standards
Corporate Processor Control Group (CPC) - 4/1/62
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
SLT
SLT
SLT
SLT
Transistors
Modules
Cards
Boards and Automatic Wiring
Processor 1 - Endicott, N ew Y ork
Processor 2 - Hursley , England
Processor 3 - Poughkeepsie, New Y ork
Processor 4 - Poughkeepsie, New Y ork
Processor 5 - Poughkeepsie, New Y ork
Main memories, Corporate Memory Group (1)
Internal memories, C MG
Read-only memories f or control, CMG
"Binary -addressed" Random Access Files
Corporate File Group (2)
Tape dev ices running at 5000+ char/sec
Corporate Tape Group (3)
Time-multiplex sy stem f or switching I/O dev ices
DSD Technical Dev elopment Group
Techniques to measure processor perf ormance, sy stem
throughput and sof tware ef f iciency , Group Staf f
A unif ied Input/output Control Structure (IOCS)
Sy stem Sof tware f or Conf iguration I (4)
Sy stem Sof tware f or Conf iguration II (4)
Sy stem Sof tware f or Conf iguration III (4)
FORTRAN and COBOL compilers
A unif ied programming language
33
34
35
Announcement and Marketing
Production, Testing and Integration
Shipment, D eliv ery and Installation
Slide 51
© Carliss Y. Baldwin and Kim B. Clark, 2004
1975—
What actually happened: Entry on modules
1
1
2
3
4
5
6
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35
SLT architecture and standard circuits
Erich Bloch - August 1961
New Processor Line Architectural Ground Rules
SPREAD Task Group - 12/28/61
New Processor Line control, product and programming standards
Corporate Processor Control Group (CPC) - 4/1/62
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
SLT
SLT
SLT
SLT
Transistors
Modules
Cards
Boards and Automatic Wiring
Processor 1 - Endicott, N ew Y ork
Processor 2 - Hursley , England
Processor 3 - Poughkeepsie, New Y ork
Processor 4 - Poughkeepsie, New Y ork
Processor 5 - Poughkeepsie, New Y ork
Main memories, Corporate Memory Group (1)
Internal memories, C MG
Read-only memories f or control, CMG
"Binary -addressed" Random Access Files
Corporate File Group (2)
Tape dev ices running at 5000+ char/sec
Corporate Tape Group (3)
Time-multiplex sy stem f or switching I/O dev ices
DSD Technical Dev elopment Group
Techniques to measure processor perf ormance, sy stem
throughput and sof tware ef f iciency , Group Staf f
A unif ied Input/output Control Structure (IOCS)
Sy stem Sof tware f or Conf iguration I (4)
Sy stem Sof tware f or Conf iguration II (4)
Sy stem Sof tware f or Conf iguration III (4)
FORTRAN and COBOL compilers
A unif ied programming language
33
34
35
Announcement and Marketing
Production, Testing and Integration
Shipment, D eliv ery and Installation
Slide 52
© Carliss Y. Baldwin and Kim B. Clark, 2004
By 1980, 100s of firms made S/360
“plug-compatible” components
Cod e Categ ory Definiti on
3570
3571
3572
3575
3576
3577
3670
3672
3674
3678
7370
7371
7372
7373
7374
7377
Computer and Of f ice Equipment
Electronic Comput ers
Computer Storage Dev ices
Computer Terminals
Computer Communication Equipment
Computer Peripheral Dev ices, n.e.c.
Electronic Components and Accessories
Printed Circuit Boards
Semiconductors and Related Dev ices
Electronic Connectors
Computer Programming, Data Processing,
and Other Serv ices
Computer Programming Serv ices
Prepackaged Sof tware
Computer Integrated Sy stems Design
Computer Processing, Data Preparation
and Processing
Computer Leasing
1960
1970
1980
5
1
1
2
1
3
11
2
8
5
2
8
6
5
1
5
7
19
4
15
9
29
36
23
10
12
11
39
10
16
1
0
0
1
9
2
7
3
26 *
12 *
13 *
16
0
0
41
5
10
108
29 *
7 *
298
*
*
*
*
*
*
*
*
* Firms in these subindustries make modules of larger comput er sy stems.
Firms making modules =
34
95
244
Percent of total =
83%
88%
82%
Slide 53
© Carliss Y. Baldwin and Kim B. Clark, 2004
IBM PC, early 1980s
 IBM
was chasing Apple
 Created an ORMDA— for “fast evolution”
 Outsourced:
– microprocessor to Intel
– operating system to Microsoft
 Kept
for itself:
– BIOS
– Final-stage assembly
Slide 54
© Carliss Y. Baldwin and Kim B. Clark, 2004
1980—
IBM provided few PC Modules
1
1
2
3
4
5
6
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35
Intel 8088
Instruction Set
IBM PC Technical Ref erence Manual
f or Hardware and Sof tware —published
Microsof t DOS
Application Programmer Interf aces (APIs)
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
PC Hardware Components
Intel 8088 Microprocessor
Japanese DRAMs
Outsourced Floppy Disk Driv es
Tape driv es
Time-multiplex sy stem f or switching I/O dev ices
Techniques to measure processor perf ormance, sy stem
throughput and sof tware ef f iciency , Group Staf f
IBM BIOS
Microsof t DOS
Microsof t Basic
Lotus 1-2-3
Word Perf ect
Other Applications
33
34
35
Announcement and Marketing
Production, Testing and Integration
Shipment, D eliv ery and Installation
Slide 55
© Carliss Y. Baldwin and Kim B. Clark, 2004
But then …
 Compaq
reverse engineered the BIOS
 Chips and Technologies made “chipsets”
 Taiwanese clones had cheaper/better
manufacturing
 Intel refused to second-source 80386
 Microsoft sabotaged OS/2
Slide 56
© Carliss Y. Baldwin and Kim B. Clark, 2004
1990—IBM PC is the standard, but IBM
makes no money
1
1
2
3
4
5
6
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35
Intel 8088
Instruction Set
IBM PC Technical Ref erence Manual
f or Hardware and Sof tware —published
Microsof t DOS
Application Programmer Interf aces (APIs)
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
PC Hardware Components
Intel 8088 Microprocessor
Japanese DRAMs
Outsourced Floppy Disk Driv es
Tape driv es
Time-multiplex sy stem f or switching I/O dev ices
Magazines rate components' quality and compatibility
Clones
Microsof t DOS
Microsof t Basic
Lotus 1-2-3
Word Perf ect
Other Applications
33
34
35
Clones
Slide 57
Announcement and Marketing
Production, Testing and Integration
Shipment, D eliv ery and Installation
© Carliss Y. Baldwin and Kim B. Clark, 2004
Back up to 1980—Apollo Computer did not
make the same mistake as IBM PC managers
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Processor chip—CPU
Outsourced—Motorola 680x0
Floating Point Accelerator
Outsourced
O
Memory chips DRAMs, ROM
Outsourced—Commodity
O
Storage—Disk Driv es
Outsourced
O
Storage—Tape Driv e
Outsourced
O
Printed circuit boards
Outsourced—Commodity
O
Display Monitor
Outsourced
O
Key board, Cabinet, Fans
Outsourced
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Inhouse
Design
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OS
Network
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Key:
x= transf er of material or inf ormation f rom column
task to row task;
T= transaction: sale of good by column owner to row
owner;
O= outsourced task blocks;
D= downstream or complementary task blocks;
highly interdependent task blocks with many iterations
and high within-block mundane transaction costs;
Apollo's f ootprint (tasks perf ormed inhouse).
Aegis proprietary
Operating Sy stem
DOMAIN proprietary
Network Architecture
x
Hardware Design
DN series = 3-4 boards incl.
IO and Display controllers,
Power supply
Purchase Components
Hardware
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Keeps
Design
Control
Slide 58
T
T
T
T
Component Test
Kits
Board stuf f and Solder
Test Boards
Board Assembly
Sy stem Assembly
Sy stem Test
Quality Assurance
Consolidate and Ship
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Inhouse
Manufacturing
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D
Many Sof tware Applications
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T
Many OEMs T
T
D
D
D
© Carliss Y. Baldwin and Kim B. Clark, 2004
Then Sun came along…
Apollo Computer
Aegis proprietary
Operating Sy stem
Inhouse
Design
OS
DOMAIN proprietary
Network Architecture
Network
Hardware
Component Test
Kits
Board stuf f and Solder
Test Boards
Board Assembly
Sy stem Assembly
Sy stem Test
Quality Assurance
Consolidate and Ship
x
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x
x
x
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x
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And did even less!
Hardware Design
DN series = 3-4 boards incl.
IO and Display controllers,
Power supply
Purchase Components
x
x
x
x
x
x
x
x
x
x
Inhouse
Manufacturing
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x
How?
Slide 59
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x x
T
T T
T
Component Test
Kits
Board stuf f and Solder
Test Boards
Board Assembly
Sy stem Assembly
Sy stem Test
Quality Assurance
Consolidate and Ship
Customize Unix
Proprietary MMU
Internal bus
Single Board Lay out
Purchase Components
Inhouse
Design
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x
x
x
O
T
x
Manufacturing
O
T
x
x
x
x
x
© Carliss Y. Baldwin and Kim B. Clark, 2004
Then Sun came along…
Apollo Computer
Aegis proprietary
Operating Sy stem
Inhouse
Design
OS
DOMAIN proprietary
Network Architecture
Network
Hardware
Component Test
Kits
Board stuf f and Solder
Test Boards
Board Assembly
Sy stem Assembly
Sy stem Test
Quality Assurance
Consolidate and Ship
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
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x
x
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x
x
x
Inhouse
Manufacturing
x
x
x
x
x
Design Architecture for
performance
Public Standards for
outsourcing
Slide 60
And did even less!
Hardware Design
DN series = 3-4 boards incl.
IO and Display controllers,
Power supply
Purchase Components
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x x
T
T T
T
Component Test
Kits
Board stuf f and Solder
Test Boards
Board Assembly
Sy stem Assembly
Sy stem Test
Quality Assurance
Consolidate and Ship
Customize Unix
Proprietary MMU
Internal bus
Single Board Lay out
Purchase Components
Inhouse
Design
x
x
x
x
x
x
x
x
x
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O
T
x
Manufacturing
O
T
x
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x
x
x
© Carliss Y. Baldwin and Kim B. Clark, 2004
Result: ROIC advantage to Sun
Average over 16 Quarters:
Apollo
Computer
Sun
Microsystems
29%
24%
57%
15%
13%
31%
Low is good
Low is good
Low is good
Profitability
Net Income/Sales
0%
6%
High is good
ROIC
ROIC (excl Cash, Annualized)
2%
20%
High is good
Invested Capital Ratios (Annualized)
Net Working Capital/ Sales (%)
Ending Net PPE / Sales (%)
Inv ested Capital/Sales (%)
Sun used its ROIC advantage to drive
Apollo out of the market
Slide 61
© Carliss Y. Baldwin and Kim B. Clark, 2004
Compaq vs. Dell
 Dell
did to Compaq what Sun did to Apollo …
 Dell
created an equally good machine, and
 Used modularity-in-production to reduce its
production, logistics and distribution costs and
increase ROIC
– Negative Net Working Capital
– Direct sales, no dealers
Slide 62
© Carliss Y. Baldwin and Kim B. Clark, 2004
Dell vs. Compaq 1997
1997
Invested Capital Ratios (Annualized)
Net Working Capital/ Sales (%)
Ending Net PPE / Sales (%)
Inv ested Capital/Sales (%)
Profitability
Net Income/Sales
ROIC
ROIC (excl Cash, Annualized)
Compaq
Computer
Dell
Computer
-2%
8%
8%
-5%
3%
-2%
Low is good
Low is good
Low is good
8%
7%
High is good
101%
-287%
!!!
Dell started cutting prices; Compaq struggled, but in
the end had to exit.
Like Apollo, they were acquired by HP!
Slide 63
© Carliss Y. Baldwin and Kim B. Clark, 2004