1. Slide 1 © Carliss Y. Baldwin and Kim B. Clark, 2004 Design Architecture — Is What Links Knowledge to the Economy Carliss Y. Baldwin Advancing Knowledge in the Knowledge-based Economy January 11, 2005

2. Slide 2 © Carliss Y. Baldwin and Kim B. Clark, 2004 "Modular Cluster""Vertical Silos" A Strategic Perspective  In 1995, Andy Grove described a vertical-to- horizontal transition in the computer industry: IBMDECSperry Univac Wang Sales & distribution Software Operating system Chips Hardware retail storessuper stores dealersdirect wordexcel lotusetc. DOSOS/2 MACUNIX IBMCompaq DellHP IntelMotorola Risc

3. Slide 3 © Carliss Y. Baldwin and Kim B. Clark, 2004 The Computer Industry: 1980 Top 10 Public Companies in US Computer Industry (Area reflects market value in constant US $)

4. Slide 4 © Carliss Y. Baldwin and Kim B. Clark, 2004 The Computer Industry: 1995 Top 10 Public Companies in US Computer Industry (Area reflects market value in constant US $)

5. Slide 5 © Carliss Y. Baldwin and Kim B. Clark, 2004 The Computer Industry: Today Top 10 Public Companies in US Computer Industry (Area reflects market value in constant US $)

6. Slide 6 © Carliss Y. Baldwin and Kim B. Clark, 2004 Turbulence in the Industry Departures from Top 10:  Xerox (~ bankrupt)  DEC (bought)  Sperry (bought)  Unisys (marginal)  AMP (bought)  Computervision (LBO) Arrivals to Top 10:  Microsoft  Cisco  Oracle  Dell  ADP  First Data

7. Slide 7 © Carliss Y. Baldwin and Kim B. Clark, 2004 What Changed?  Look to the underlying designs "Option-rich" modular design architectures (ORMDAs) preceded and enabled these transformations

8. Slide 8 © Carliss Y. Baldwin and Kim B. Clark, 2004 Modularity  Division of knowledge and effort  Module = a set of tasks separable from others –Unit of design architecture Global Design Rules Module AModule BModule CModule D

9. Slide 9 © Carliss Y. Baldwin and Kim B. Clark, 2004 Design Structure Matrix Map of a Laptop Computer

10. Slide 10 © Carliss Y. Baldwin and Kim B. Clark, 2004 Modularization of a Laptop Computer Design

11. Slide 11 © Carliss Y. Baldwin and Kim B. Clark, 2004 The Power of Modularity  Makes complexity manageable  Enables parallel work  “Welcomes experimentation”  Creates options

12. Slide 12 © Carliss Y. Baldwin and Kim B. Clark, 2004 A Modular Architecture “Frees Up” Design Option Value Split options, decentralize decisions, fragment control evolution Option System before ModularizationSystem after Modularization System Option Design Rules

13. Slide 13 © Carliss Y. Baldwin and Kim B. Clark, 2004 Global Design Rules v.1 Version 1.0 Version 1.2 Version 1.5 Version 1.8  = Low Medium Zero High Option-Rich Modular Architecture  Design options have "technical potential," denoted   Technical potential, , varies by module  Versions are evidence of option values being realized over time

14. Slide 14 © Carliss Y. Baldwin and Kim B. Clark, 2004 Options and Modules Together Create Lots of Value

15. In conclusion, an analogy… An ORMDA is like …

16. Slide 16 © Carliss Y. Baldwin and Kim B. Clark, 2004

17. Slide 17 © Carliss Y. Baldwin and Kim B. Clark, 2004 Public Policy—Involve the Users  Eric Raymond: –If you treat your beta testers [users] as your most valuable resource, they will be…  In an ORMDA, new sources of value are most easily perceived by users  Motivated users can do new things at a radically low cost: Apple II, Napster, Linux  The rights of use are as important… perhaps more important than low price  Interface ownership is a problem

18. Slide 18 © Carliss Y. Baldwin and Kim B. Clark, 2004 Public Policy—Intellectual Capital  Map the ORMDAs  Track the evolution of designs  Track the movement of value  Understand institutions—what the ORMDAs need from the economy Requires integration of engineering, economics and management knowledge—a true science of design

19. Slide 19 © Carliss Y. Baldwin and Kim B. Clark, 2004 Public Policy—Safety Net  Turbulence and wealth disparities are endemic to ORMDAs –Designs come and go –Products come and go –Firms come and go  Regions must balance overall value against social costs of turbulence and inequities  In competition with other regions …

20. Slide 20 © Carliss Y. Baldwin and Kim B. Clark, 2004 Public Policy—Regulation  ORMDAs create conflict, need economical rulemaking –Competitive practices –Intellectual property –Mergers & Acquisitions –Corporate governance –Bankruptcy Quick, informed, consistent, accessible

21. Thank you!