Slide 1 © Carliss Y. Baldwin and Kim B. Clark, 2004

Selfish Designs: What Computer Designs Need from the Economy and How They Get It

Carliss Y. BaldwinHarvard Business School

University of British ColumbiaOctober 14, 2004

Slide 2 © Carliss Y. Baldwin and Kim B. Clark, 2004

Four Points Designs “need” to become real

– They become real by creating the perception of “value” Designs act as a financial force

– In the process of becoming real, they can change the structure of an industry

A Modular Design Architecture creates Options with Option Value– What is an “ORMDA”?– What does an ORMDA need from the economy?

The economy bites back– ORMDAs are dangerous places to make a living

Slide 3 © Carliss Y. Baldwin and Kim B. Clark, 2004

What are designs?

Instructions that turn knowledge into things Span all artifacts and human activities

– Tangible, intangible– Transacting, contracting, dispute resolution– Government

The wealth of an economy inheres in its designs

Slide 4 © Carliss Y. Baldwin and Kim B. Clark, 2004

The Indictment “Selfish” designs want to become real Their tool is human motivation

– A user perceives use-value => willingness to make or willingness-to-pay

– Designers and producers add up the users’ willingness-to-pay, subtract costs

– The result is an asset => financial value

Humans move mountains for financial value– Value operates “as a force” in the economy

– Designs have captured the value force, and thus today we work to serve their needs

Slide 5 © Carliss Y. Baldwin and Kim B. Clark, 2004

Designs, when reified (made real), help humans to:– Survive– Interact– Create

Humans reify and also improve designs– Complete them, make them, transport them– Pay for design evolution — this is a recent

development

Human-Design Symbiosis

“Surprise and delight”

Mutualism or Parasitism?

Slide 6 © Carliss Y. Baldwin and Kim B. Clark, 2004

Design Evolution creates “value forces” that can change the structure of an industry

Look at the computer industry from 1980-2002

Slide 7 © Carliss Y. Baldwin and Kim B. Clark, 2004

Industry Transformation Andy Grove described a vertical-to-horizontal transition in

the computer industry:

“Modular Cluster”

“Vertical Silos”

Slide 8 © Carliss Y. Baldwin and Kim B. Clark, 2004

Andy’s Movie

The Computer Industry in 1980Services S

PSystems Integration E

RR

Applications Layer Y D CVCMiddleware Layer U H E

Operating Systems IBM N P CS

Hardware Y XRCSAMP

ComponentsTI Intel

Top 10 Public Companies in US Computer Industry

Area reflects Market Value in Constant US $

Slide 9 © Carliss Y. Baldwin and Kim B. Clark, 2004

Andy’s Movie

The Computer Industry in 1995SPERRY D CVCU H E

IBM N P CSY XRCSAMP

TI Intel

Top 10 Public Companies in US Computer Industry

Area reflects Market Value in Constant US $

ServicesFirst Data

Systems Integration EDSOracle

I CAApplications Layer B MSFTMiddleware Layer M

Operating Systems

Hardware: Printers HPHardware: Servers IBMHardware: Routers Cisco

Components IntelMicron

Slide 10 © Carliss Y. Baldwin and Kim B. Clark, 2004

Andy’s Movie—the Sequel

The Computer Industry in 2002SPERRY D CVCU H E

IBM N P CSY XRCSAMP

TI Intel

Top 10 Public Companies in US Computer Industry

Area reflects Market Value in Constant US $

ServicesFirst Data

Systems Integration EDSOracle

I CAApplications Layer B MSFTMiddleware Layer M

Operating Systems

Hardware: Printers HPHardware: Servers IBMHardware: Routers Cisco

Components IntelMicron

Services First DataADP

Systems Integration

OracleApplications Layer IBM

Middleware Layer MSFT

Operating Systems

Hardware: Printers HPHardware: PCs Dell

Hardware: Servers IBMHardware: Routers Cisco

Components Intel TI

Slide 11 © 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

Sic Transit Gloria Mundi … Sic Transit

Slide 12 © Carliss Y. Baldwin and Kim B. Clark, 2004

What changed?

Slide 13 © Carliss Y. Baldwin and Kim B. Clark, 2004

Design Architecture

Small designs “just get done” by one person or a small team

Large designs require architecture– “The design of the design process”– Forward-looking, future oriented– Analogous to physical architectures

» Create and constrain” movement and search

Major social technology, but not much studied

Slide 14 © Carliss Y. Baldwin and Kim B. Clark, 2004

Short History

System/360: first modular computer design architecture (1962-1967)– Proof of concept in hardware and application

software– Proof of option value in market response and

product line evolution– First ORMDA = “Option-rich Modular Design

Architecture”– System software NOT modularizable

» Fred Brooks, “The Mythical Man Month”

Slide 15 © Carliss Y. Baldwin and Kim B. Clark, 2004

Short History (continued) Bell and Newell, Computer Structures (1971)

– General principles of modular design for hardware– Basis of PDP-11 design—another ORMDA

Thompson and Ritchie, Unix and C (1971-1973)– Modular design of operating system software (contra

Brooks Law)– Over time, general principles for evolvable software

design (Unix philosophy) Mead and Conway, Intro to VLSI Systems (1980)

– Principles of modular design for large-scale chips

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

Short History (continued) IBM PC (1983)

– DEC PDP-11 minimalist strategy (exclude and invite) – + Intel 8088 chip– + DOS system software – + IBM manufacturing – + Lotus 1-2-3– A mass-market ORMDA

Slide 17 © Carliss Y. Baldwin and Kim B. Clark, 2004

ORMDAs and Value Migration in the Computer Industry, 1950-1996

5053

5659

6265

6871

7477

8083

8689

9295

73

77

Significant Option-Rich Modular Design Architectures

IBM System/360

DEC PDP 11; VAX

IBM PC

Sun 2; 3; Java VM

RISC

Internet Protocols (end-to-end principle)

Unix and C; Linux

HTML; XML(?)

Slide 18 © Carliss Y. Baldwin and Kim B. Clark, 2004

This was the puzzle Kim Clark and I began to tackle in 1987

Where was the value shown in the slide coming from?

Designs, yes, but what part and why?

Slide 19 © Carliss Y. Baldwin and Kim B. Clark, 2004

A Modular Architecture “frees up” Design Option Value

System Before Modularization System after Modularization

System DesignOption Rules

Option Option

Option Option

Option Option

OptionSplit options, decentralize decisions,fragment control Evolution

Slide 20 © Carliss Y. Baldwin and Kim B. Clark, 2004

As scientists, we can visualize and measure modularity in design— after the fact

DSMs, Design Hierarchies

Methods are tedious, non-automated

Mozilla just after becoming open source Linux of similar size

Coord. Cost = 30,537,703Change Cost = 17.35%

Coord. Cost = 15,814,993Change Cost = 6.65%

For fun: Comparison of different software systems with DSM tools

Mozilla just after becoming open source Linux of similar size

Coord. Cost = 30,537,703Change Cost = 17.35%

Coord. Cost = 15,814,993Change Cost = 6.65%

Different organizations needed for different architectures

One Firm, Tight-knit Team, RAD methods

Distributed Open Source Development

Mozilla April 98 Mozilla Dec 98Location On left On rightSize 1684 1508Coordination Cost 30,527,703 10,234,903 Change Cost 292.0932 41.8561Change Cost % 17.35 2.78

Mozilla Before Redesign Mozilla After Redesign

!!

Slide 24 © Carliss Y. Baldwin and Kim B. Clark, 2004

But modularity is only half the story—options matter, too

“Creates” vs. “Frees up” The sad story of auto front-end modules Design options have “technical potential”,

denoted Technical potential, , varies by system and

by module

Modularity in the absence of high option value is an expensive waste of time

Slide 25 © Carliss Y. Baldwin and Kim B. Clark, 2004

Global Design Rules v.1

Version 1.0Version 1.2

Version 1.5Version 1.8

Low Medium Zero High

Measuring Option Value Successive, improving versions are evidence of

option values being realized over time—after the fact Designers see option values before the fact What do they see?

Slide 26 © Carliss Y. Baldwin and Kim B. Clark, 2004

Sources of option value in computer designs

Moore’s Law—– Value of seamless, asynchronous upgrading– Applies to chips

Amdahl’s Law “Make the frequent case fast”—– Value of ex post optimization– Applies to all complex artificial systems (“Build one and

throw it away.”) Wilkes-Alexander-Clark observation “Valid

perceptions of desires emerge through use”— – Value of ex post discovery, direct experience, play– Applies to all new artifacts

Slide 27 © Carliss Y. Baldwin and Kim B. Clark, 2004

In conclusion, an analogy…

An ORMDA is like …

Slide 28 © Carliss Y. Baldwin and Kim B. Clark, 2004

Slide 29 © Carliss Y. Baldwin and Kim B. Clark, 2004

Where we are in the argument: Designs “need” to become real

– They become real by creating the perception of “value” Designs act as a financial force

– In the process of becoming real, they can change the structure of an industry

A Modular Design Architecture creates Options with Option Value– What is an “ORMDA”?– What do “selfish” ORMDAs need from the economy?

The economy bites back– ORMDAs are dangerous places to make a living

Slide 30 © Carliss Y. Baldwin and Kim B. Clark, 2004

Selfish ORMDAs “need”

Lots of design searches Institutions of Innovation to

– Complete the designs– Produce the artifacts– Transport/Distribute the goods

Mechanisms for financing, selection, compensation, reward (an advanced economy…)

Slide 31 © Carliss Y. Baldwin and Kim B. Clark, 2004

Selfish ORMDAs “need” lots of design searches—and promise lots of $$$

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No. of Experiments

Value Landscape of a minor ORMDA—

Sun Microsystems Workstation circa 1992

Slide 32 © Carliss Y. Baldwin and Kim B. Clark, 2004

Technical Potential and Cost of Design Search Vary by Module

Size Visibility Examples

large hidden disk drive; large application program

large visible microprocessor; operating system

small hidden cache memory; small application program

small visible instruction set; internal bus

Slide 33 © Carliss Y. Baldwin and Kim B. Clark, 2004

Thus each module has its own “value profile”

-50%

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No. of Experiments

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tag

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Slide 34 © Carliss Y. Baldwin and Kim B. Clark, 2004

Institutions get built to exploit opportunities like these, which are“created” by the design architecture

This is where the economy bites back!

Slide 35 © Carliss Y. Baldwin and Kim B. Clark, 2004

What are institutions?

Firms and markets Transactions and contract types Rules and rights (eg, property rights) Stable patterns of behavior involving

several actors operating within a consistent framework of ex ante incentives and ex post rewards– Equilibria of linked games with self-confirming

beliefs (Aoki and game theorists)

Slide 36 © Carliss Y. Baldwin and Kim B. Clark, 2004

ORMDAs “need” institutions

But not just any type will do In DR2, we argue that the “most suitable”

institutional forms for an ORMDA are:– A modular cluster of complementary firms and

markets with “own your solution” property rights

– A community of cooperating user-developers with GPL-type property rights

These forms are “good for the designs”

Slide 37 © Carliss Y. Baldwin and Kim B. Clark, 2004

Three ways to frame the institutional analysis

Descriptive: What has actually happened in the ORMDAs we know about?

Deductive: What do our models predict? Strategic/Normative: Faced with an

ORMDA (and access to financial capital), what should “you” do?

Slide 38 © Carliss Y. Baldwin and Kim B. Clark, 2004

Faced with this ORMDA, what would you do?

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No. of Experiments

One module or many?

In each module you chose, how many design searches?

Which modules are most attractive?

Slide 39 © Carliss Y. Baldwin and Kim B. Clark, 2004

Lots of stories They all make sense When you see them play out, the moves are

logical and in some cases “inevitable” But our strategic advice for managers and

financiers today comes down to: – “plunge in,”

– “get lucky,”

– “watch out for Microsoft,” and

– “get bought by HP”

Slide 40 © Carliss Y. Baldwin and Kim B. Clark, 2004

One story before we close—ORMDAs and New Industries

5053

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6265

6871

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8083

8689

9295

73

77

Significant Option-Rich Modular Design Architectures

IBM System/360

DEC PDP 11; VAX

IBM PC

Sun 2; 3; Java VM

RISC

Internet Protocols (end-to-end principle)

Unix and C; Linux

HTML; XML(?)

Slide 41 © Carliss Y. Baldwin and Kim B. Clark, 2004

The Bright Side of the ORMDAs

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Slide 42 © Carliss Y. Baldwin and Kim B. Clark, 2004

But there was The Dark Side …

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$ 2.5 trillion appeared then disappeared in the space of four years!

Slide 43 © Carliss Y. Baldwin and Kim B. Clark, 2004

Bubble followed by a Crash

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A failure,

not of the Internet’s design architecture,

but of the institutions built on that architecture

Slide 44 © Carliss Y. Baldwin and Kim B. Clark, 2004

A victory for selfish designs?

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Good for the designs, not for the humans

Slide 45 © Carliss Y. Baldwin and Kim B. Clark, 2004

Other Cautionary Tales

IBM System/360 and “plug-compatible” peripherals

IBM PC vs. clones Sun Microsystems vs. Apollo Computer Dell Computer vs. Compaq Computer

Each illustrates Perils of ORMDAs

Slide 46 © Carliss Y. Baldwin and Kim B. Clark, 2004

Unless we turn the ORMDA stories into science…

Slide 47 © Carliss Y. Baldwin and Kim B. Clark, 2004

Selfish designs will be in charge!

Value-seeking design evolution—

As we’ve seen it —

the good, the bad, and the ugly…

Slide 48 © Carliss Y. Baldwin and Kim B. Clark, 2004

Remember

Designs “need” to become real– They do so by creating perceptions of “value”

Value is a powerful economic force– Which can change the structure of an industry

The most powerful designs are ORMDAs ORMDAs are dangerous (but interesting)

places to live Designs, institutions and strategies are still

evolving

Slide 49 © Carliss Y. Baldwin and Kim B. Clark, 2004

Thank you!

Slide 50 © Carliss Y. Baldwin and Kim B. Clark, 2004

IBM System/360 The first modular computer design IBM did not understand the option value it

had created Did not increase its inhouse product R&D Result: Many engineers left

– to join “plug-compatible peripheral” companies San Jose labs —> Silicon Valley

“Compelling, surprising, dangerous”

Slide 51 © Carliss Y. Baldwin and Kim B. Clark, 2004

1965—IBM wanted to be the sole source of all of System/360’s Modules

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

1 SLT architecture and standard circuits2 Erich Bloch - August 19613 New Processor Line Architectural Ground Rules4 SPREAD Task Group - 12/28/615 New Processor Line control, product and programming standards6 Corporate Processor Control Group (CPC) - 4/1/62

7 SLT Transistors8 SLT Modules9 SLT Cards

10 SLT Boards and Automatic Wiring11 Processor 1 - Endicott, New York12 Processor 2 - Hursley, England13 Processor 3 - Poughkeepsie, New York14 Processor 4 - Poughkeepsie, New York15 Processor 5 - Poughkeepsie, New York16 Main memories, Corporate Memory Group (1)17 Internal memories, CMG18 Read-only memories for control, CMG19 "Binary-addressed" Random Access Files20 Corporate File Group (2)21 Tape devices running at 5000+ char/sec22 Corporate Tape Group (3)23 Time-multiplex system for switching I/O devices24 DSD Technical Development Group

25 Techniques to measure processor performance, system26 throughput and software efficiency, Group Staff27 A unified Input/output Control Structure (IOCS)28 System Software for Configuration I (4)29 System Software for Configuration II (4)30 System Software for Configuration III (4)31 FORTRAN and COBOL compilers32 A unified programming language

33 Announcement and Marketing34 Production, Testing and Integration35 Shipment, Delivery and Installation

Slide 52 © Carliss Y. Baldwin and Kim B. Clark, 2004

1975—What actually happened: Entry on modules

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

1 SLT architecture and standard circuits2 Erich Bloch - August 19613 New Processor Line Architectural Ground Rules4 SPREAD Task Group - 12/28/615 New Processor Line control, product and programming standards6 Corporate Processor Control Group (CPC) - 4/1/62

7 SLT Transistors8 SLT Modules9 SLT Cards

10 SLT Boards and Automatic Wiring11 Processor 1 - Endicott, New York12 Processor 2 - Hursley, England13 Processor 3 - Poughkeepsie, New York14 Processor 4 - Poughkeepsie, New York15 Processor 5 - Poughkeepsie, New York16 Main memories, Corporate Memory Group (1)17 Internal memories, CMG18 Read-only memories for control, CMG19 "Binary-addressed" Random Access Files20 Corporate File Group (2)21 Tape devices running at 5000+ char/sec22 Corporate Tape Group (3)23 Time-multiplex system for switching I/O devices24 DSD Technical Development Group

25 Techniques to measure processor performance, system26 throughput and software efficiency, Group Staff27 A unified Input/output Control Structure (IOCS)28 System Software for Configuration I (4)29 System Software for Configuration II (4)30 System Software for Configuration III (4)31 FORTRAN and COBOL compilers32 A unified programming language

33 Announcement and Marketing34 Production, Testing and Integration35 Shipment, Delivery and Installation

Slide 53 © Carliss Y. Baldwin and Kim B. Clark, 2004

By 1980, 100s of firms made S/360 “plug-compatible” components

Code Category Definition 1960 1970 1980

3570 Computer and Office Equipment 5 2 93571 Electronic Computers 1 8 293572 Computer Storage Devices 1 6 36 *3575 Computer Terminals 2 5 23 *3576 Computer Communication Equipment 1 1 10 *3577 Computer Peripheral Devices, n.e.c. 3 5 12 *3670 Electronic Components and Accessories 11 7 11 *3672 Printed Circuit Boards 2 19 39 *3674 Semiconductors and Related Devices 8 4 10 *3678 Electronic Connectors 5 15 16 *7370 Computer Programming, Data Processing,

and Other Services 1 9 26 *7371 Computer Programming Services 0 2 12 *7372 Prepackaged Software 0 7 13 *7373 Computer Integrated Systems Design 1 3 167374 Computer Processing, Data Preparation

and Processing 0 5 29 *7377 Computer Leasing 0 10 7 *

41 108 298

* Firms in these subindustries make modules of larger computer systems. Firms making modules = 34 95 244Percent of total = 83% 88% 82%

Slide 54 © Carliss Y. Baldwin and Kim B. Clark, 2004

IBM PC, early 1980s IBM was chasing Apple Created an ORMDA— for “fast evolution” Outsourced:

– microprocessor to Intel – operating system to Microsoft

Kept for itself:– BIOS– Final-stage assembly

Slide 55 © Carliss Y. Baldwin and Kim B. Clark, 2004

1980—IBM provided few PC Modules

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

1 Intel 80882 Instruction Set3 IBM PC Technical Reference Manual4 for Hardware and Software —published5 Microsoft DOS6 Application Programmer Interfaces (APIs)

78 PC Hardware Components9

10111213 Intel 8088 Microprocessor14151617 Japanese DRAMs181920 Outsourced Floppy Disk Drives2122 Tape drives 2324 Time-multiplex system for switching I/O devices

25 Techniques to measure processor performance, system26 throughput and software efficiency, Group Staff27 IBM BIOS28 Microsoft DOS29 Microsoft Basic30 Lotus 1-2-331 Word Perfect32 Other Applications

33 Announcement and Marketing34 Production, Testing and Integration35 Shipment, Delivery and Installation

Slide 56 © Carliss Y. Baldwin and Kim B. Clark, 2004

But then … Compaq reverse engineered the BIOS Chips and Technologies made “chipsets” Taiwanese clones had cheaper/better

manufacturing Intel refused to second-source 80386 Microsoft sabotaged OS/2

Slide 57 © Carliss Y. Baldwin and Kim B. Clark, 2004

1990—IBM PC is the standard, but IBM makes no money

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

1 Intel 80882 Instruction Set3 IBM PC Technical Reference Manual4 for Hardware and Software —published5 Microsoft DOS6 Application Programmer Interfaces (APIs)

78 PC Hardware Components9

10111213 Intel 8088 Microprocessor14151617 Japanese DRAMs181920 Outsourced Floppy Disk Drives2122 Tape drives 2324 Time-multiplex system for switching I/O devices

2526 Magazines rate components' quality and compatibility27 Clones28 Microsoft DOS29 Microsoft Basic30 Lotus 1-2-331 Word Perfect32 Other Applications

33 Announcement and Marketing34 Clones Production, Testing and Integration35 Shipment, Delivery and Installation

Slide 58 © Carliss Y. Baldwin and Kim B. Clark, 2004

Back up to 1980—Apollo Computer did not make the same mistake as IBM PC managers

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42

1 O Processor chip—CPU2 Outsourced—Motorola 680x0 Key:3 O Floating Point Accelerator x= transfer of material or information from column4 Outsourced task to row task;5 O Memory chips DRAMs, ROM T= transaction: sale of good by column owner to row6 Outsourced—Commodity owner;7 O Storage—Disk Drives O= outsourced task blocks;8 Outsourced D= downstream or complementary task blocks;9 O Storage—Tape Drive highly interdependent task blocks with many iterations

10 Outsourced and high within-block mundane transaction costs;

11 O Printed circuit boards Apollo's footprint (tasks performed inhouse).

12 Outsourced—Commodity13 O Display Monitor14 Outsourced15 O Keyboard, Cabinet, Fans16 Outsourced

17 x x x x x x x x x x x x x x x x Aegis proprietary18 Inhouse Operating System19 Design20 x x x x x x x x x x x x x x x x OS DOMAIN proprietary21 Network Network Architecture2223 x x x x x x x x x x x x x x x x Hardware Design24 DN series = 3-4 boards incl.

25 Hardware IO and Display controllers,26 Power supply27 T T T T T T T T T T T T T T T T x x x x Purchase Components28 Component Test x x x x x29 Kits x x x x x x Inhouse30 Board stuff and Solder x x x x x x Manu-31 Test Boards x x x x x x facturing32 Board Assembly x x x x x x33 System Assembly x x x x x x34 System Test x x x x x x35 Quality Assurance x x x x x x36 Consolidate and Ship x x x x x x

37 x x x x x x D38 x x x x x x Many Software Applications D39 x x x x x x D40 x x x x x x x x x x T D41 x x x x x x x x x x Many OEMs T D42 x x x x x x x x x x T D

Keeps Design Control

Slide 59 © Carliss Y. Baldwin and Kim B. Clark, 2004

Then Sun came along…Apollo Computer

Aegis proprietaryInhouse Operating SystemDesignOS DOMAIN proprietary

Network Network Architecture

Hardware DesignDN series = 3-4 boards incl.

Hardware IO and Display controllers,Power supply

x x x x Purchase ComponentsComponent Test x x x x x

Kits x x x x x x InhouseBoard stuff and Solder x x x x x x Manu-

Test Boards x x x x x x facturingBoard Assembly x x x x x x

System Assembly x x x x x xSystem Test x x x x x x

Quality Assurance x x x x x xConsolidate and Ship x x x x x x

And did even less!

How?

x x x x x Customize Unixx x x x x Inhouse Proprietary MMU

x x x x x Design Internal busx x Single Board Layout

T T T T x x x x Purchase ComponentsComponent Test x x x x x O

Kits x x x x T Manu-Board stuff and Solder x x x x x O facturing

Test Boards x x x x TBoard Assembly x x x x x

System Assembly x x x x xSystem Test x x x x x

Quality Assurance x x x x xConsolidate and Ship x x x x x

Slide 60 © Carliss Y. Baldwin and Kim B. Clark, 2004

Then Sun came along…Apollo Computer

Aegis proprietaryInhouse Operating SystemDesignOS DOMAIN proprietary

Network Network Architecture

Hardware DesignDN series = 3-4 boards incl.

Hardware IO and Display controllers,Power supply

x x x x Purchase ComponentsComponent Test x x x x x

Kits x x x x x x InhouseBoard stuff and Solder x x x x x x Manu-

Test Boards x x x x x x facturingBoard Assembly x x x x x x

System Assembly x x x x x xSystem Test x x x x x x

Quality Assurance x x x x x xConsolidate and Ship x x x x x x

And did even less!

x x x x x Customize Unixx x x x x Inhouse Proprietary MMU

x x x x x Design Internal busx x Single Board Layout

T T T T x x x x Purchase ComponentsComponent Test x x x x x O

Kits x x x x T Manu-Board stuff and Solder x x x x x O facturing

Test Boards x x x x TBoard Assembly x x x x x

System Assembly x x x x xSystem Test x x x x x

Quality Assurance x x x x xConsolidate and Ship x x x x x

Design Architecture for performance

Public Standards for outsourcing

Slide 61 © Carliss Y. Baldwin and Kim B. Clark, 2004

Result: ROIC advantage to SunAverage over 16 Quarters: Apollo Sun

Computer MicrosystemsInvested Capital Ratios (Annualized)Net Working Capital/ Sales (%) 29% 15% Low is goodEnding Net PPE / Sales (%) 24% 13% Low is goodInvested Capital/Sales (%) 57% 31% Low is good

ProfitabilityNet Income/Sales 0% 6% High is good

ROICROIC (excl Cash, Annualized) 2% 20% High is good

Sun used its ROIC advantage to drive Apollo out of the market

Slide 62 © Carliss Y. Baldwin and Kim B. Clark, 2004

Compaq vs. Dell Dell did to Compaq what Sun did to Apollo …

Dell created an equally good machine, and Used modularity-in-production to reduce its

production, logistics and distribution costs and increase ROIC– Negative Net Working Capital– Direct sales, no dealers

Slide 63 © Carliss Y. Baldwin and Kim B. Clark, 2004

Dell vs. Compaq 19971997 Compaq Dell

Computer ComputerInvested Capital Ratios (Annualized)Net Working Capital/ Sales (%) -2% -5% Low is goodEnding Net PPE / Sales (%) 8% 3% Low is goodInvested Capital/Sales (%) 8% -2% Low is good

ProfitabilityNet Income/Sales 8% 7% High is good

ROICROIC (excl Cash, Annualized) 101% -287% !!!

Dell started cutting prices; Compaq struggled, but in the end had to exit.

Like Apollo, they were acquired by HP!