Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 13 Platform Systems vs. Step Processes - The Value of Options and the Power of Modularity

31 Pages Posted: 29 Jan 2019

See all articles by Carliss Y. Baldwin

Carliss Y. Baldwin

Harvard Business School, Finance Unit

Date Written: January 22, 2019

Abstract

This is the first chapter in Part 3. Its purpose is to contrast the value structure of platform systems with step processes from a technological perspective. I first review the basic technical architecture of computers and argue that every computer is inherently a platform for performing computations as dictated by their programs. I state and prove five propositions about platform systems, which stand in contrast to the propositions derived for step processes in Chapter 8. The propositions suggest that platform systems and step processes call for different forms of organization. Specifically, step processes reward technical integration, unified governance, risk aversion, and the use of direct authority, while platform systems reward modularity, distributed governance, risk taking, and autonomous decision-making.

Despite these differences, treating platform systems and step processes as mutually exclusive architectures sets up a false dichotomy. Creating any good requires carrying out a technical recipe, i.e., performing a series of steps. Step processes in turn can be modularized (at the cost of lower efficiency) by creating buffers between steps. I show that the optimal number of modules (and buffers) increases as the underlying rate of technical change goes up. When the underlying technologies are changing rapidly, it makes sense to sacrifice some degree of flow efficiency for options to mix-and-match modular components.

Suggested Citation

Baldwin, Carliss Y., Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 13 Platform Systems vs. Step Processes - The Value of Options and the Power of Modularity (January 22, 2019). Harvard Business School Research Paper Series No. 19-073. Available at SSRN: https://ssrn.com/abstract=3320494 or http://dx.doi.org/10.2139/ssrn.3320494

Carliss Y. Baldwin (Contact Author)

Harvard Business School, Finance Unit ( email )

Boston, MA 02163
United States

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