14 August 2006 at 3:27 pm 3 comments

| Richard Langlois |

I too am at the Academy of Management meeting in Atlanta. And I have already run into Peter and Nicolai more than once.

It occurred to me that I ought to write about whatever important new idea I’ve picked up here. I now think that I see such an idea, and it would come under the heading of architecture.

When Paul Robertson (who is also here) and I wrote about modular systems in the early 90s, we looked at examples in which modular standards arose largely as the unintended byproduct of individual action (stereo systems, personal computers), even though we recognized that there were elements of conscious intention along the way. (See Peter’s post about Avner Greif.) We also recognized that standards could be set consciously by public or industry bodies — I have looked at such a case myself in the semiconductor equipment industry. The new idea — new to me at any rate — is the extent to which an existing firm can consciously try to take charge of the architecture of the product it produces or of its own organizational architecture in order to create and to profit from greater modularity and openness to markets. At a session this morning, Carliss Baldwin of Harvard talked about her idea (with Kim Clark) of footprint competition. She argues that a firm that understands the architecture of its product can profit by attempting to control not the whole value chain (or significant parts of it) but rather by controlling only certain critical bottlenecks — and then consciously allowing others to produce and sell the other parts of the system. As a result, the firm retains only a small footprint, but a footprint that generates rents. Baldwin offered Sun Microsystems in the 80s and Dell in the 90s as examples of firms that did this. (Amusingly, the respective prime competitors each vanquished — Apollo and Compaq — were both subsequently bought by HP.) Of course, although the small footprint approach is a conscious strategy, firms typically stumble upon it unselfconsciously.

A related idea will be presented in a paper tomorrow by Stephan Billinger and Michael Jacobides from the London Business School. They argue by means of a case study that the major effect of information technology on modularity and vertical disintegration has come not because such technology lowered the transaction costs of markets (as many naively thought in the 90s) but because architectural IT technology — including so-called enterprise resource planning (ERP) software — lowers the costs of standardizing the interfaces between stages of production within the firm, thus making the firm inherently more modular and permeable to outside markets.

Entry filed under: - Langlois -, Management Theory, Strategic Management, Theory of the Firm.

Joel Klein, Monopolist “Critical” This and “Critical” That

3 Comments Add your own

  • 1. Graham Douglas  |  14 August 2006 at 5:46 pm

    My interest in your work was sparked by comments by John Hagel at

    I offer practical tools for facilitating the sort of changes you identify. My offerings are outlined on my website. If you would like more information I would be happy to send you a thirteen page paper on Achieving Sustainable Development: The Integrative Improvement Institutes Project. The project is to diffuse, refine and implement Integrative Improvement: Sustainable Development as if People and Their Physical, Social and Cultural Environments Mattered.

  • 2. William Hall  |  16 August 2006 at 3:57 am

    I’m a Doctoral student with UNISA in South Africa just starting a thesis on the Theory of the Firm and would appreciate having access to “live” discussions on this subject. My literature review is in its infancy and thesis proposal due in September.

    Any insight from those more experienced will be most appreciated. Will it thus be okay if I request such guidance from time to time?

    Kind regrads

  • 3. Peter Klein  |  16 August 2006 at 8:28 am

    William, of course! Please participate as much as you like.

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