When Open Architecture Beats Closed: The Entrepreneurial Use of Architectural Knowledge
AbstractThis paper describes how entrepreneurial firms can use superior architectural knowledge to open up a technical system to gain strategic advantage. The strategy involves, first, identifying "bottlenecks" in the existing system, and then creating a new open architecture that isolates the bottlenecks in modules and allows others to connect to the system at key interfaces. An entrepreneurial firm with limited financial resources can then focus on supplying superior bottleneck modules, and while outsourcing and allowing complementors to supply non-bottleneck components. I show that a firm pursuing this strategy will have a higher return on invested capital (ROIC) than competitors with a less modular, closed architecture. Over time, the more open firm can drive the ROIC of competitors below their cost of capital, causing them to shrink and possibly exit the market. The strategy was used by Sun Microsystems in the 1980s and Dell Computer in the 1990s.
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Bibliographic InfoPaper provided by Harvard Business School in its series Harvard Business School Working Papers with number 10-063.
Length: 45 pages
Date of creation: Feb 2010
Date of revision: Oct 2010
architecture; innovation; knowledge; modularity; dynamics; competition; industry evolution;
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-17 (All new papers)
- NEP-BEC-2010-04-17 (Business Economics)
- NEP-CSE-2010-04-17 (Economics of Strategic Management)
- NEP-ENT-2010-04-17 (Entrepreneurship)
- NEP-KNM-2010-04-17 (Knowledge Management & Knowledge Economy)
- NEP-TID-2010-04-17 (Technology & Industrial Dynamics)
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