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

45 Pages Posted: 9 Feb 2010 Last revised: 23 Oct 2010

See all articles by Carliss Y. Baldwin

Carliss Y. Baldwin

Harvard Business School, Finance Unit

Date Written: October 19, 2010

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.

Keywords: architecture, innovation, knowledge, modularity, dynamics, competition, industry evolution

JEL Classification: D23, L22, L23, M11, O31, O34, P13

Suggested Citation

Baldwin, Carliss Y., When Open Architecture Beats Closed: The Entrepreneurial Use of Architectural Knowledge (October 19, 2010). Harvard Business School Finance Working Paper No. 10-063. Available at SSRN: https://ssrn.com/abstract=1549645 or http://dx.doi.org/10.2139/ssrn.1549645

Carliss Y. Baldwin (Contact Author)

Harvard Business School, Finance Unit ( email )

Boston, MA 02163
United States

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