slide 1 © carliss y. baldwin and kim b. clark, 2004 selfish designs: what computer designs need...
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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 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
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9295
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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 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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-20%
-10%
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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
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 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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$ bi
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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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$ bi
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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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$ bi
llion
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 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 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!