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When Open Architecture Beats Closed: The Entrepreneurial Use of Architectural Knowledge

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  • Carliss Y. Baldwin

    (Harvard Business School, Finance Unit)

Abstract

This paper describes how entrepreneurial firms can use superior architectural knowledge to open up a technical system to gain strategic advantage. The strategy involves, first, identifying "bottlenecks" in the existing system, and then creating a new open architecture that isolates the bottlenecks in modules and allows others to connect to the system at key interfaces. An entrepreneurial firm with limited financial resources can then focus on supplying superior bottleneck modules, and while outsourcing and allowing complementors to supply non-bottleneck components. I show that a firm pursuing this strategy will have a higher return on invested capital (ROIC) than competitors with a less modular, closed architecture. Over time, the more open firm can drive the ROIC of competitors below their cost of capital, causing them to shrink and possibly exit the market. The strategy was used by Sun Microsystems in the 1980s and Dell Computer in the 1990s.

Suggested Citation

  • Carliss Y. Baldwin, 2010. "When Open Architecture Beats Closed: The Entrepreneurial Use of Architectural Knowledge," Harvard Business School Working Papers 10-063, Harvard Business School, revised Oct 2010.
    • Handle: RePEc:hbs:wpaper:10-063
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    File URL: http://www.hbs.edu/research/pdf/10-063.pdf
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    Citations

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    Cited by:

    1. Anu Wadhwa & Isabel Maria Bodas Freitas & M. B. Sarkar, 2017. "The Paradox of Openness and Value Protection Strategies: Effect of Extramural R&D on Innovative Performance," Organization Science, INFORMS, vol. 28(5), pages 873-896, October.
    2. Alfonso Gambardella & Christina Raasch & Eric von Hippel, 2017. "The User Innovation Paradigm: Impacts on Markets and Welfare," Management Science, INFORMS, vol. 63(5), pages 1450-1468, May.

    More about this item

    Keywords

    architecture; innovation; knowledge; modularity; dynamics; competition; industry evolution;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital
    • P13 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Cooperative Enterprises

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