1. Slide 1 © Carliss Y. Baldwin 2006 Innovation in Systems Industries— Discussion Carliss Y. Baldwin HBS Strategy Conference October 14, 2006 Boston, MA

2. Slide 2 © Carliss Y. Baldwin 2006 First, I claim (and you will have to bear with me) …

3. Slide 3 © Carliss Y. Baldwin 2006 We need new ways to envision the structure of systems industries  Andy Grove’s vision of a systems industry changing structure 1995-“Modular Cluster” 1980-“Vertical Silos”

4. Slide 4 © Carliss Y. Baldwin 2006 The Computer Industry in1985

5. Slide 5 © Carliss Y. Baldwin 2006 It changed— 19851995 Verticals are giving up ground…

6. Slide 6 © Carliss Y. Baldwin 2006 And then some more! 19852004

7. Slide 7 © Carliss Y. Baldwin 2006 Same time period… the auto industry stayed very vertical Why the difference? We don’t know! 19842003

8. Slide 8 © Carliss Y. Baldwin 2006 The two papers highlight a puzzle we have yet to solve “Quo Vadis?”

9. Slide 9 © Carliss Y. Baldwin 2006 “Image” vs. “Logic”  Peter Galison: Two empirical approaches  “Logic” –Phenomenon is broken down and counted –Small units of analysis correlated –Power in disaggregation  “Image” –A “shining example”—a single image, carefully recorded, reveals how things work –Focus on mechanisms and causality –Power in synthesis

10. Slide 10 © Carliss Y. Baldwin 2006 Boudreau = “Logic” or “Counting”  Handheld PDAs are a Platform industry –How? Why? — outside scope of analysis  Data = 103 products on three platforms  Question: –Does openness of the platform contribute to innovation on the platform?  Strategy is to decompose, then reaggregate –63—> 12 dimensions of innovation –5—> 2 measures of openness –8 control variables, trends, fixed effects

11. Slide 11 © Carliss Y. Baldwin 2006 Boudreau—Results  Openness is positively correlated with innovation in the outsourced modules (not the platforms) –Could have gone the other way—missed opportunity in framing the question  Two dimensions of openness—“Span of control” and “Access” –Access matters, Span does not  Access has diminishing, perhaps decreasing impact (negative quadratic term) –But Access is a composite of four underlying measures –Causal drivers and managerial implications not clear

12. Slide 12 © Carliss Y. Baldwin 2006 Fixson and Park—Bike Drive Trains  Bike Drive Trains were a vertically fragmented industry  In the beginning (1980), there were 6 components with mix-and-match modularity  Then Shimano introduced “index shifting” –An “integral” product architecture –All pieces had to fit together, no more mix and match

13. Slide 13 © Carliss Y. Baldwin 2006 In the beginning (1980)

14. Slide 14 © Carliss Y. Baldwin 2006 Introduction of Index Shifting (1985)

15. Slide 15 © Carliss Y. Baldwin 2006 In 1990, only Vertical Silos left

16. Slide 16 © Carliss Y. Baldwin 2006 In Mountain Bikes… Only Shimano

17. Slide 17 © Carliss Y. Baldwin 2006 The PUZZLE — Quo Vadis?  Established firms in systems industries innovate by changing their product architecture and vertical scope in concert  But “good moves” and “trends” go in both directions: –More integral/integrated —> Shimano drive trains –More modular + open/distributed —> Palm, Microsoft PDAs

18. Slide 18 © Carliss Y. Baldwin 2006 Thus industries evolve into new—and different— structures AutosComputers Something we can’t predict and don’t really understand!