Innovation Blog

“Architecture” and Entrepreneurship

By Shlomo Maital

   Carliss Baldwin

A new research paper by Harvard Business School Professor Carliss Baldwin discusses “how entrepreneurial firms can use superior architectural knowledge of a technical system to gain strategic advantage”.[1]

   Loose translation:  How innovators can create sustained competitive advantage, by finding ways to improve the design of a business —  speed, quality, invention. 

   The paper extends the author’s work on The Power of Modularity,  title of a joint work with Kim Clark.

    Prof. Baldwin’s key point is this: “identify ‘bottlenecks’ in the existing system; create a new architecture that isolates the bottlenecks in ‘modules’; focus on supplying superior bottleneck components, while outsourcing non-bottleneck components.”  

  Architecture is defined as the list of functions (of a product), components needed to perform the functions, the interfaces among the components, and a description of how the system will operate over time and under different conditions.    “All  products and processes have architectures”.     

     She offers as case studies, Apollo Computers and Sun Microsystems; and Dell Computers.

  *    Sun’s architects identified memory access as a bottleneck.   They then developed two special hardware components that made memory access speedier.  Everything else, they bought from suppliers.   For instance, they used the UNIX operating system, rather than design their own.  And they adopted Ethernet.  Sun was thus able to defeat Apollo.  

  * Dell redesigned its manufacturing cells, in the 1990’s,  located them close to its main markets, employed just-in-time, and worked to smooth bottlenecks in order-taking, assembly and shipment.  It also identified a capital bottleneck.  It gave no credit to dealers or customers, but demanded generous credit terms from its suppliers, creating working capital acquired from its suppliers.  This helped Dell finance its activities. 

    Baldwin observes that in strategy, there are several approaches:  RBTF, resource-based theory of the firm (firm resources are crucial); KBTF (knowledge based theory of the firm, based on how knowledge is created and flows internally); DCTF (dynamic capabilities theory of the firm), interplay of production and transactions costs.  To this is added the Architecture Based Theory of the Firm (analysis of the business design and ‘architecture’).  When used together, these four approaches can yield powerful insights for innovators.     

[1] Carliss Y. Baldwin, “The strategic use of architectural knowledge by entrepreneurial firms”, Harvard Business School, Feb. 2010.   cbaldwin@hbs.edu