Transcript Fundamental ROIC Analysis

Where Do Transactions Come
From?
Carliss Y. Baldwin
Harvard Business School
Presented at NBER Organizational Economics
Conference, November 22, 2002
1
© Carliss Y. Baldwin and Kim B. Clark, 2002
Transaction Cost/Incomplete Contracts
Williamson, 1985:
A transaction occurs “when a good or service is
transferred across a technologically separable
interface. … [R]arely is the choice among alternative
organization forms determined by technology.”
Upstream
Downstream
“Technologically
separable interface”
In this literature, technologies and designs are fixed,
asset ownership and decision rights move
around.
2
© Carliss Y. Baldwin and Kim B. Clark, 2002
But suppose designs and product
definitions are not fixed a priori,
Then, where do Transactions
Come From?
3
© Carliss Y. Baldwin and Kim B. Clark, 2002
But suppose designs and product
definitions are not fixed a priori,
Then, where do Transactions
Come From?
From the engineering design of
a system of production…
4
© Carliss Y. Baldwin and Kim B. Clark, 2002
Our thesis:
 The
modular structure of a system of
production reveals the places where:
– The division of cognitive labor is high, and
– Mundane transaction costs are low.
 Transactions
should go/can go only at
those places.
5
© Carliss Y. Baldwin and Kim B. Clark, 2002
Outline of the paper
 T&T Network
defined
 Mapping technique—TSM
 Encapsulation of T&T “blocks”
 Pinching the T&T Network
 Conclusion: Modular structure and
mundane transaction costs
6
© Carliss Y. Baldwin and Kim B. Clark, 2002
Disclaimer
 We
believe what we are saying is neither
radical nor new
 Many predecessors:
–
–
–
–
–
Coase (1937)
Alchian and Demsetz (1972)
Barzel (1989) and North (1990)
Cremer (1980) and Aoki (2001)
Sako (1992) and Fixson and Sako (2001)
We aim for a clarification of language.
7
© Carliss Y. Baldwin and Kim B. Clark, 2002
The T&T Network Defined
8
© Carliss Y. Baldwin and Kim B. Clark, 2002
Task & Transfer (T&T) Network
 All
tasks and transfers needed to complete
production of artifacts in the economy
 Engineering Design is the work of
designing the T&T Network
 Transfers are ubiquitous
– Because “agents” have bounded cognition
and physical capacity
– True for both people and machines
9
© Carliss Y. Baldwin and Kim B. Clark, 2002
What gets transferred?
 Material
 Energy
 Information
– Data
– Designs
– “Tags”
» Property rights and decision rights are a special
form of tag
 Money
10
or credit = Purchasing Power
© Carliss Y. Baldwin and Kim B. Clark, 2002
Transfers are
 Dictated
by technology
 Complex
 Logical
 Necessary (because of bounded capacity)
 Designed
But not planned centrally
11
© Carliss Y. Baldwin and Kim B. Clark, 2002
Not all transfers are transactions

A “transaction” requires
– Standardizing transfers
– Counting transfers
– Payment for the units transferred

These are extra and costly tasks
– => “Mundane” Transaction Costs (MTC)

MTC vary depending on complexity of transfers
– Contingent, interdependent, iterative transfers are very
complex
– Hence such transfers are very costly to make into
transactions
12
© Carliss Y. Baldwin and Kim B. Clark, 2002
Mapping the T&T Network
13
© Carliss Y. Baldwin and Kim B. Clark, 2002
Mapping Technique =
“Task Structure Matrix” (TSM)
14
© Carliss Y. Baldwin and Kim B. Clark, 2002
Intel T&T Network—1993
A Task Structure Matr ix for the Design of a Semiconductor Chip
Compiled by Sean Osborne (1993)
Customer ta rget
Sal es vol um es
Pri ci ng d ir ecti on
Sched ule
Development method ol ogy
Ma cr o ta rgets/constr ai nts
Financia l a nal ysis (pr ofitabil ity)
Progra m ma p
Initia l QFD ma tri x
T echni ca l r equir ements
Customer specification
High level mod eli ng
T ar get speci fica tion
T est pl an
Prod uct va li da tion pl an
B ase pr ototype
Functional mod el ing
Prod uct mod ule d eveloped
Prod uct integr ation d evel opment
Integra ti on mod el ing
Rand om testing
T est pa ra meters d eveloped
Schema tics final iz ed
Va lid a ti on simula ti on
Rel ia bi li ty mod el ing
Com pl ete pr od uct la yout
Continui ty ver ification
Design r ul e check
Design package
Genera te mocks
Ver ify mocks i n fa b
Run wa fer s
Sor t wafer s
T est pr ogr ams
Debug pr oducts
Package pr oducts
Functional ity testi ng
Samples to customers
Feed ba ck from customers
Sample functional ity veri fied
Packaged pr od cuts veri fi ed
E nvi ronmenta l va li da ti on
Prod uct va li da tion completed
Develop techni ca l publi ca ti ons
Ser vi ce cour se d evel oped
Ma rketing name d etermi ned
L icensi ng str a tegy d eter mined
Dem o cr ea ted
Qual ity goal s met
L ife testi ng
Infr a red morta l ity testi ng
Ma nufacturi ng pr ocess stabil iz a tion
Field suppor t pl an d eveloped
T her mal testing
Process meets stand ar d s
Package meets sta nd a rd s
Meets certi fi ca ti on envelope
Volume pr od uction
Distr ibution networ k pr epa red
Del iver prod ucts to customer s
15
0
X
X
X X
0 X X
0 X
X
X
X
0 X
X
Generat iv e Learning
0 X
X X X
X
X
0 X X X X
X X X X X 0
X
0 X
X
X X X 0
X
X
X X
X X
It erat ive Loops
0 X
X X X
X X
X X X
X
X X
X X
Concurrent Act iv ity Blocks
0
X X X X
X
X
X
X
X
X
X
X
X X X X
X X X X
X
X X
X
X X
X
X
X X
X X
X
X
X
X
X X
X
X
X
X
X
X
X
X
X
X
X
X
X X
X
X
X X
X X X 0
X X
X X X X 0 X X
X X X X 0 X
X
X X X
X
X
X
X
X
X
X
X X
X
0
X
X
X X X
X
0
0
X
0 X
X 0
X
X
X X X
X
X X X
X
X
0
X
X
X X
X
0
0
X
X
X
X
X X X
0
X
X
X
X
0
X
Sequential
Act iv ites
0
X
0
X
0
X
X
X X
X
X
X X
X
X
0
0
X
0
X X X
0
X
X
X
X
X X X X
0 X X
X X
X X
X
X
X X
X X
X X
X
X
X
X X X X
X X X
X
X
0
X 0 X X X X X X
X X 0
X
X 0
X
X 0 X
0 X
X X X X X 0 X
X X
X X
X
X X 0 X X X
X X X X X 0 X X
X X X
0 X
X
X 0
X
X
0 X X
X 0
X
X
0 X
0
X X
0
X
X X
X X
X X
0
X
X
0 X X
X 0 X
X
X X
0
X
X X
0
X X X
X
0
X
0 X X
X X
X X X 0 X
X X X X X X X 0
X X X
X
X X
X
X X X X X
X X X X X
X X
X
X
0
X
X
0
X
0
© Carliss Y. Baldwin and Kim B. Clark, 2002
Intel T&T Network—1993
A Task Structure Matr ix for the Design of a Semiconductor Chip
Compiled by Sean Osborne (1993)
Customer target
Sales volum es
Pricing direction
Schedule
Development methodology
Macro targets/constraints
Financial analysis (profitability)
Program map
Initial QFD matrix
Technical requirements
Customer specification
High level modeling
Target specification
Test plan
16
Product validation plan
0
X X
X 0 X X
X
0 X
0 X
X 0 X
X X X
X
X
0 X X X X
X X X X X 0
X
0 X
X
X X X 0
X
X
X X
X X
X X X
X
X X
X X
Concurrent Activity B
X X 0 X
X X X 0
X X X X
X X 0 X X X
X X X X X 0 X X
X Xand Kim0B.XClark, 2002
© Carliss Y.XBaldwin
X
X 0
TSMs show where transfers occur,
but not what gets transferred
17
© Carliss Y. Baldwin and Kim B. Clark, 2002
Where do transactions go?
18
© Carliss Y. Baldwin and Kim B. Clark, 2002
The Smiths and the Cooks
Smithy
Kitchen
S1 S2 S3 S4 S5 K1 K2 K3 K4 K5
Smithy
Kitchen
S1 .
x
x
x
x
S2 x
S3 x
.
x
x
.
x
x
x
x
S4 x
S5 x
x x . x
x x x .
Pot Hook x
Transf er
K1
K2
K3
K4
K5
19
.
x
x
.
x
x
x
x
x
x
x
x
x
x
.
x
x
.
x
x
x
x
x
x
.
© Carliss Y. Baldwin and Kim B. Clark, 2002
TSMs reveal T&T “Bottlenecks”
Smithy
Kitchen
S1 S2 S3 S4 S5 K1 K2 K3 K4 K5
Smithy
Kitchen
S1 .
x
x
x
x
S2 x
S3 x
.
x
x
.
x
x
x
x
S4 x
S5 x
x x . x
x x x .
Pot Hook x
Transf er
K1
K2
K3
K4
K5
20
Transfer
Bottleneck
.
x
x
.
x
x
x
x
x
x
x
x
x
x
.
x
x
.
x
x
x
x
x
x
.
© Carliss Y. Baldwin and Kim B. Clark, 2002
Bottlenecks = Transactional “Gateways”
Smithy
Kitchen
S1 S2 S3 S4 S5 K1 K2 K3 K4 K5
Smithy
Kitchen
S1 .
x
x
x
x
S2 x
S3 x
.
x
x
.
x
x
x
x
S4 x
S5 x
x x . x
x x x .
Pot Hook x
Transf er
K1
K2
K3
K4
K5
21
.
x
x
.
x
x
x
x
x
x
x
x
x
x
.
x
x
.
x
x
x
x
x
x
.
“Place
Transaction
HERE” —
Few
transfers;
One-way
transfers;
Maximum
“Division of
cogitive
labor”
© Carliss Y. Baldwin and Kim B. Clark, 2002
Bottlenecks = Transactional “Gateways”
Smithy
Kitchen
S1 S2 S3 S4 S5 K1 K2 K3 K4 K5
Smithy
Kitchen
S1 .
x
x
x
x
S2 x
S3 x
.
x
x
.
x
x
x
x
S4 x
S5 x
x x . x
x x x .
Pot Hook x
Transf er
K1
K2
K3
K4
K5
22
.
x
x
.
x
x
x
x
x
x
x
x
x
x
.
x
x
.
x
x
x
x
x
x
.
“Place
Transaction
HERE” —
Because
Mundane
Transaction
Costs are
Probably
Low
© Carliss Y. Baldwin and Kim B. Clark, 2002
Encapsulation
23
© Carliss Y. Baldwin and Kim B. Clark, 2002
Design Problem:
 If
every transfer had to be a transaction,
little work would get done.
24
© Carliss Y. Baldwin and Kim B. Clark, 2002
Solution:
 Transaction-free
zones
 “Encapsulated Local Systems”
– Predecessors: Families, communes, tribes
– Merchants and Proto-firms
– Then: Full-functioned firms (1750s) and
Limited-liability Corporations (1830s) with
Affirmative and Defensive Asset Partitioning
25
© Carliss Y. Baldwin and Kim B. Clark, 2002
Creating an Encapsulated Local System 1
People
Machines
Data
A B
G H I
J
.
x
x
x
x
x
B
x
.
x
x
x
x
x
C
D
x
x
x
x
.
x
x
.
x
x
x
x
x
E
x
x
x
x
.
x
x
x
x
F
x
x
x
x
x
.
x
x
x
G
H
x
x
x
x
x
x
x
x
x
x
.
x
x
.
x
x
x
x
x
x
x
x
x
x
x
x
x
x
J
K
L
Energy
F
A
I
Materials
C D E
M
N
x
x
x
x
x
x
x
x
K L
x
x
x
M N
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
.
x
x
x
x
x
x
x
x
x
.
x
x
.
x
x
x
x
x
x
x
x
x
x
x
.
x
x
x
x
x
x
x
x
x
x
x
x
x
x
.
x
x
.
x
x
x
x
x
Agents and
Resources
Come In;
Products
Come Out
Internal Flows are Designed by Engineers
26
© Carliss Y. Baldwin and Kim B. Clark, 2002
Creating an Encapsulated Local System 2
People
$
Machines $
Data $
A B
G H I
J
.
x
x
x
x
x
B
x
.
x
x
x
x
x
C
D
x
x
x
x
.
x
x
.
x
x
x
x
x
E
x
x
x
x
.
x
x
x
x
F
x
x
x
x
x
.
x
x
x
G
H
x
x
x
x
x
x
x
x
x
x
.
x
x
.
x
x
x
x
x
x
x
x
x
x
x
x
x
x
J
K
L
Energy $
F
A
I
Materials $
C D E
M
N
x
x
x
x
x
x
x
x
K L
x
x
x
M N
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
.
x
x
x
x
x
x
x
x
x
.
x
x
.
x
x
x
x
x
x
x
x
x
x
x
.
x
x
x
x
x
x
x
x
x
x
x
x
x
x
.
x
x
.
x
x
x
x
x
Today
All are
Obtained
Via
Transactions
$$$$
Internal Flows are Designed by Engineers
27
© Carliss Y. Baldwin and Kim B. Clark, 2002
Creating an Encapsulated Local System 3
People
Machines
Data
A B
G H I
J
.
x
x
x
x
x
B
x
.
x
x
x
x
x
C
D
x
x
x
x
.
x
x
.
x
x
x
x
x
E
x
x
x
x
.
x
x
x
x
F
x
x
x
x
x
.
x
x
x
G
H
x
x
x
x
x
x
x
x
x
x
.
x
x
.
x
x
x
x
x
x
x
x
x
x
x
x
x
x
J
K
L
Energy
F
A
I
Materials
C D E
M
N
x
x
x
x
x
x
x
x
K L
x
x
x
M N
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
.
x
x
x
x
x
x
x
x
x
.
x
x
.
x
x
x
x
x
x
x
x
x
x
x
.
x
x
x
x
x
x
x
x
x
x
x
x
x
x
.
x
x
.
x
x
x
x
x
TransactionFree Zone:
By design,
many complex,
contingent
transfers
occur inside
the TFZ
Internal Flows are Designed by Engineers
28
© Carliss Y. Baldwin and Kim B. Clark, 2002
Boundaries of the Capsule
People
Machines
Data
A B
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
.
x
x
x
x
x
x
x
.
x
x
.
x
x
x
x
x
x
x
.
x
x
x
x
x
x
x
x
x
x
x
x
x
x
.
x
x
.
G H I
J
.
x
x
x
x
x
B
x
.
x
x
x
x
x
C
D
x
x
x
x
.
x
x
.
x
x
x
x
x
E
x
x
x
x
.
x
x
x
x
F
x
x
x
x
x
.
x
x
x
G
H
x
x
x
x
x
x
x
x
x
x
.
x
x
.
x
x
x
x
x
x
x
x
x
x
x
x
x
x
J
K
L
Energy
F
A
I
Materials
C D E
Boundaries =
Where Transfers
M N
x
take the form of
Transactions,
x
according to
x
x x
the Design
x x
x x
of the
x x
Enterprise
x x
M
N
x
x
x
x
x
x
x
x
x
x
x
x
K L
x
x
x
Boundaries are Designed by
Engineers, too!
29
© Carliss Y. Baldwin and Kim B. Clark, 2002
Financial Sufficiency
Costs:
People
Machines $
Data $
Materials $
Energy $
30
When all
Claimants
Have been
Paid…
$
$$$$$$$$$$$
Money is left over!
Revenue
$$$$
© Carliss Y. Baldwin and Kim B. Clark, 2002
Financial Sufficiency =
Survival in a Money/Market Economy
Costs:
People
Machines $
Data $
Materials $
Energy $
31
When all
Claimants
Have been
Paid…
$
$$$$$$$$$$$
Money is left over!
Local System can
survive.
Revenue
$$$$
© Carliss Y. Baldwin and Kim B. Clark, 2002
Encapsulated Local System =
the “Kernel” of a Firm
32
© Carliss Y. Baldwin and Kim B. Clark, 2002
Encapsulated Local System =
the “Kernel” of a Firm
Why only “kernel”?
33
© Carliss Y. Baldwin and Kim B. Clark, 2002
Because…
Can assemble several Encapsulated Local Systems
within “a bigger firm”
 Can have transactions within “a bigger firm”
 Transaction costs/incomplete contracts/ property
rights economics basically looks at different
configurations of kernels within/across firms
 In practice, Mergers, Acquisitions & Alliances
serve to adjust kernel boundaries across firms

34
© Carliss Y. Baldwin and Kim B. Clark, 2002
In summary—
Encapsulation is a technology in the engineering
design of the T&T Network
 Encapsulation creates the kernels of firms
 Kernel boundaries are artifacts, which can be
designed and re-designed (within constraints of
physics and logic of technology)
 Mergers, Acquisitions & Alliances are visible
adjustments of kernel boundaries

35
© Carliss Y. Baldwin and Kim B. Clark, 2002
“Pinching” the T&T Network
36
© Carliss Y. Baldwin and Kim B. Clark, 2002
An Example from Practice:
 Engineering
plastics company (=designer
and supplier)
 Auto manufacturing company (=customer
and user)
 Product to be designed:
– High heat resistant plastic compound
37
© Carliss Y. Baldwin and Kim B. Clark, 2002
“Natural” TSM
Engineering Plast ics Company
Engineering
Plast ics
Product
and
Process
Design
Aut omot iv e
Company
Product
and
Process
Design
38
. x x
x .
x x .
x x x
x x
x x
x
x
x
x
x
x
x
x
x
x
x x
x x
x
x
. x
x
x . x
x .
x .
x
x x
x
x
x
x x x
Aut o Company
x
x x
x
x
x
x
x x
x
x
x
x
.
x
x
x
x
x
x
x
x
x
.
x
x x
x .
x
x
x x
x
x
. x
x
x .
x
x
x
x x .
x
x
x x
x x
x
x
x
x x
x
x x
x
x
x x
x
x
x
x x
x
x
x x
x x
x x
x
x
x
x
x
x
x x x
. x
x . x
x x .
x x
x
x
x x
x
x
x
x
x
x
x
x
x
x
x
x
x
.
x
x
x
x
x
x
x
x
. x
.
x x
x x
x
x
x
x
x
x
x
x
.
x
x
x
x
x
x
x
x
x
x
x
.
x
x
x
x
x
x
x
x
x
x
x
.
x
x
x
x
x
x
.
x
x
x
x
x
x
x
x
x
x
x
© Carliss Y. Baldwin and Kim B. Clark, 2002
Transaction-supporting TSM
Negotiat ion:
(8 Specs
& Test s)
Engineering
Plast ic s
Produc t
and
Proc es s
Design
Negotiat ion between
Aut o and Engineering
Plast ic s Companies
. x x x x x x x
x . x x x x x x
x x . x x x x x
x x x . x x x x
x x x x . x x x
x x x x x . x x
x x x x x x . x
x x x x x x x .
x
x
Eight
x
Formal Tests
x
Ex ante
x
x
x
x
Engineering Plast ic s Company
Aut o Company
Is “more Modular”
. x x
x .
x x .
x x x
x x
x x
x
x
x
x
x
x
x
x
x
x
x x
x x
x
x
. x
x
x . x
x .
x .
x
x x
x
x
x
x x x
x
x
x
.
x
x
x
x x
x x
x x
x x
x x
x
x
x
x
x
x
x x x
. x
x . x
x x .
x x
x
x
x x
(by defn of Design
Rules, Vol. 1)
x
x
x
x
x
x
x
x
x
x x
x
x
x
x
x
x
.
x
x .
x
Rich
Lustrous
Appearance
x
Aut omot iv e
Company
Produc t
and
Proc es s
Design
39
Eight
Formal Tests
Ex ante
x
x
x
x
x
x
x
x
Eight
Formal Tests
Ex post
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
.
x x
x
x . x
x x
x
.
x x
x
x . x x
x
x
. x
x
x x x .
x
x x x x
x
x
x x
x
x x
x
x
x
x
x
x
.
x
x
x x x
x x x
x x x
x x
x x x
x x x
x x x
. x x
x . x
© Carliss Y. Baldwin and Kim B. Clark, 2002
Transaction-supporting TSM
Negotiat ion:
(8 Specs
& Test s)
Engineering
Plast ic s
Produc t
and
Proc es s
Design
Negotiat ion between
Aut o and Engineering
Plast ic s Companies
. x x x x x x x
x . x x x x x x
x x . x x x x x
x x x . x x x x
x x x x . x x x
x x x x x . x x
x x x x x x . x
x x x x x x x .
x
x
Eight
x
Formal Tests
x
Ex ante
x
x
x
x
Engineering Plast ic s Company
Aut o Company
“Mundane” transaction costs
. x x
x .
x x .
x x x
x x
x x
x
x
x
x
x
x
x
x
x
x
x x
x x
x
x
. x
x
x . x
x .
x .
x
x x
x
x
x
x x x
x
x
x
.
x
x
x
x x
x x
x x
x x
x x
x
x
x
x
x
x
x x x
. x
x . x
x x .
x x
x
x
x x
x
x
x
x
x
x
x
x
x
x x
x
x
x
x
x
x
.
x
x .
x
Rich
Lustrous
Appearance
x
Aut omot iv e
Company
Produc t
and
Proc es s
Design
40
Eight
Formal Tests
Ex ante
x
x
x
x
x
x
x
x
Eight
Formal Tests
Ex post
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
.
x x
x
x . x
x x
x
.
x x
x
x . x x
x
x
. x
x
x x x .
x
x x x x
x
x
x x
x
x x
x
x
x
x
x
x
.
x
x
x x x
x x x
x x x
x x
x x x
x x x
x x x
. x x
x . x
© Carliss Y. Baldwin and Kim B. Clark, 2002
Transaction-supporting TSM
Negotiat ion:
(8 Specs
& Test s)
Engineering
Plast ic s
Produc t
and
Proc es s
Design
Negotiat ion between
Aut o and Engineering
Plast ic s Companies
. x x x x x x x
x . x x x x x x
x x . x x x x x
x x x . x x x x
x x x x . x x x
x x x x x . x x
x x x x x x . x
x x x x x x x .
x
x
Eight
x
Formal Tests
x
Ex ante
x
x
x
x
Engineering Plast ic s Company
Aut o Company
Standards: To Define “Gateway”
. x x
x .
x x .
x x x
x x
x x
x
x
x
x
x
x
x
x
x
x
x x
x x
x
x
. x
x
x . x
x .
x .
x
x x
x
x
x
x x x
x
x
x
.
x
x
x
x x
x x
x x
x x
x x
x
x
x
x
x
x
x x x
. x
x . x
x x .
x x
x
x
x x
x
x
x
x
x
x
x
x
x
x x
x
x
x
x
x
x
.
x
x .
x
Rich
Lustrous
Appearance
x
Aut omot iv e
Company
Produc t
and
Proc es s
Design
41
Eight
Formal Tests
Ex ante
x
x
x
x
x
x
x
x
Eight
Formal Tests
Ex post
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
.
x x
x
x . x
x x
x
.
x x
x
x . x x
x
x
. x
x
x x x .
x
x x x x
x
x
x x
x
x x
x
x
x
x
x
x
.
x
x
x x x
x x x
x x x
x x
x x x
x x x
x x x
. x x
x . x
© Carliss Y. Baldwin and Kim B. Clark, 2002
But Standards were incomplete…
[A]s development proceeded, it became clear ... that
there were other characteristics of the material that
were very important to important players in the auto
company, which were not in the specs. (Example:
the interior designers wanted a material with a “rich,
lustrous appearance.”) They were not in the specs,
because the auto company had no way to make the
requirement specific, no testing protocol and no
standard to use in the specifications.
42
© Carliss Y. Baldwin and Kim B. Clark, 2002
Transaction-supporting TSM
Negotiat ion:
(8 Specs
& Test s)
Engineering
Plast ic s
Produc t
and
Proc es s
Design
Negotiat ion between
Aut o and Engineering
Plast ic s Companies
. x x x x x x x
x . x x x x x x
x x . x x x x x
x x x . x x x x
x x x x . x x x
x x x x x . x x
x x x x x x . x
x x x x x x x .
x
x
Eight
x
Formal Tests
x
Ex ante
x
x
x
x
Engineering Plast ic s Company
Aut o Company
“Relational” or “Obligational”
contract needed
. x x
x .
x x .
x x x
x x
x x
x
x
x
x
x
x
x
x
x
x
x x
x x
x
x
. x
x
x . x
x .
x .
x
x x
x
x
x
x x x
x
x
x
.
x
x
x
x x
x x
x x
x x
x x
x
x
x
x
x
x
x x x
. x
x . x
x x .
x x
x
x
x x
x
x
x
x
x
x
x
x
x
x x
x
x
x
x
x
x
.
x
x .
x
Rich
Lustrous
Appearance
x
Aut omot iv e
Company
Produc t
and
Proc es s
Design
43
Eight
Formal Tests
Ex ante
x
x
x
x
x
x
x
x
Eight
Formal Tests
Ex post
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
.
x x
x
x . x
x x
x
.
x x
x
x . x x
x
x
. x
x
x x x .
x
x x x x
x
x
x x
x
x x
x
x
x
x
x
x
.
x
x
x x x
x x x
x x x
x x
x x x
x x x
x x x
. x x
x . x
© Carliss Y. Baldwin and Kim B. Clark, 2002
Mundane transactions costs are used to
create a “more modular” task structure
Negotiat ion:
(8 Specs
& Test s)
Engineering
Plast ic s
Produc t
and
Proc es s
Design
Negotiat ion between
Aut o and Engineering
Plast ic s Companies
. x x x x x x x
x . x x x x x x
x x . x x x x x
x x x . x x x x
x x x x . x x x
x x x x x . x x
x x x x x x . x
x x x x x x x .
x
x
Eight
x
Formal Tests
x
Ex ante
x
x
x
x
Engineering Plast ic s Company
Aut o Company
“Mundane” transaction costs
Standards: To Define “Gateway”
. x x
x .
x x .
x x x
x x
x x
x
x
x
x
x
x
x
x
x
x
x x
x x
x
x
. x
x
x . x
x .
x .
x
x x
x
x
x
x x x
x
x
x
.
x
x
x
x x
x x
x x
x x
x x
x
x
x
x
x
x
x x x
. x
x . x
x x .
x x
x
x
x x
“Relational” or “obligational”
contract needed
x
x
x
x
x
x
x
x
x
x x
x
x
x
x
x
x
.
x
x .
x
Rich
Lustrous
Appearance
x
Aut omot iv e
Company
Produc t
and
Proc es s
Design
44
Eight
Formal Tests
Ex ante
x
x
x
x
x
x
x
x
Eight
Formal Tests
Ex post
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
.
x x
x
x . x
x x
x
.
x x
x
x . x x
x
x
. x
x
x x x .
x
x x x x
x
x
x x
x
x x
x
x
x
x
x
x
.
x
x
x x x
x x x
x x x
x x
x x x
x x x
x x x
. x x
x . x
© Carliss Y. Baldwin and Kim B. Clark, 2002
“Pinching” is an Investment
In a Task Structure and Relationships that
support a strict(er) partition of cognitive labor
 Value of “Pinching” =

+ Avoided cost of real-time interdependency/iteration (clt)
– MTC (mundane transaction costs)
+ Free-riding (smaller unit, better individual incentives)
– Upstream-Downstream opportunism (in supply chain)
45
© Carliss Y. Baldwin and Kim B. Clark, 2002
Conclusion
46
© Carliss Y. Baldwin and Kim B. Clark, 2002
Where do Transactions Come From?
The modular structure of a system of
production reveals where:
 The
division of cognitive labor is high…
and
 Mundane
47
transaction costs are low.
© Carliss Y. Baldwin and Kim B. Clark, 2002
The modular structure of a T&T Network
Can be mapped using TSM graphs
 Transactions go at the “bottlenecks” of network

– Transfers few and simple
– Division of cognitive labor high

Blocks need to be “transaction-free zones”
– Encapsulated via transactions at the boundaries of the
zone
– Encapsulated Local Systems = Kernels of Firm

“Pinching” can create a more modular structure
– Costs = Mundane Transaction Costs
– Standardizing, Counting, Valuing, Payment
48
© Carliss Y. Baldwin and Kim B. Clark, 2002
Thank you!
49
© Carliss Y. Baldwin and Kim B. Clark, 2002