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

Selfish Designs: What Computer Designs Need from the Economy and How They Get It Carliss Y. Baldwin Harvard Business School University of British Columbia October 14, 2004 Four Points Designs “need” to become real They become real by creating the perception of “value”

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

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  1. Selfish Designs: What Computer Designs Need from the Economy and How They Get It Carliss Y. Baldwin Harvard Business School University of British Columbia October 14, 2004 Slide 1 © Carliss Y. Baldwin and Kim B. Clark, 2004

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

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

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

  5. Human-Design Symbiosis • 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 “Surprise and delight” Mutualism or Parasitism? Slide 5 © Carliss Y. Baldwin and Kim B. Clark, 2004

  6. Design Evolution creates “value forces” that can change the structure of an industry Look at the computer industry from 1980-2002 Slide 6 © Carliss Y. Baldwin and Kim B. Clark, 2004

  7. Industry Transformation • Andy Grove described a vertical-to-horizontal transition in the computer industry: “Vertical Silos” “Modular Cluster” Slide 7 © Carliss Y. Baldwin and Kim B. Clark, 2004

  8. Andy’s MovieThe Computer Industry in 1980 Top 10 Public Companies in US Computer Industry Area reflects Market Value in Constant US $ Slide 8 © Carliss Y. Baldwin and Kim B. Clark, 2004

  9. Andy’s MovieThe Computer Industry in 1995 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

  10. Andy’s Movie—the SequelThe Computer Industry in 2002 Top 10 Public Companies in US Computer Industry Area reflects Market Value in Constant US $ Slide 10 © Carliss Y. Baldwin and Kim B. Clark, 2004

  11. 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 Turbulence in the Industry Sic Transit Gloria Mundi … Sic Transit Slide 11 © Carliss Y. Baldwin and Kim B. Clark, 2004

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

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

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

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

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

  17. ORMDAs and Value Migration in the Computer Industry, 1950-1996 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 17 © Carliss Y. Baldwin and Kim B. Clark, 2004

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

  19. A Modular Architecture “frees up” Design Option Value Split options, decentralize decisions,fragment control Evolution Slide 19 © Carliss Y. Baldwin and Kim B. Clark, 2004

  20. As scientists, we can visualize and measure modularity in design— after the fact DSMs, Design Hierarchies Methods are tedious, non-automated Slide 20 © Carliss Y. Baldwin and Kim B. Clark, 2004

  21. For fun: Comparison of different software systems with DSM tools Mozilla just after becoming open source Linux of similar size Coord. Cost = 30,537,703 Change Cost = 17.35% Coord. Cost = 15,814,993 Change Cost = 6.65%

  22. Different organizations needed for different architectures Mozilla just after becoming open source Linux of similar size One Firm, Tight-knit Team, RAD methods Distributed Open Source Development Coord. Cost = 30,537,703 Change Cost = 17.35% Coord. Cost = 15,814,993 Change Cost = 6.65%

  23. Mozilla After Redesign Mozilla Before Redesign !!

  24. 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 s • Technical potential, s, varies by system and by module Modularity in the absence of high option value is an expensive waste of time Slide 24 © Carliss Y. Baldwin and Kim B. Clark, 2004

  25. 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? s = Low Medium Zero High Slide 25 © Carliss Y. Baldwin and Kim B. Clark, 2004

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

  27. In conclusion, an analogy… An ORMDA is like … Slide 27 © Carliss Y. Baldwin and Kim B. Clark, 2004

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

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

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

  31. Selfish ORMDAs “need” lots of design searches—and promise lots of $$$ Value Landscape of a minor ORMDA— Sun Microsystems Workstation circa 1992 Slide 31 © Carliss Y. Baldwin and Kim B. Clark, 2004

  32. Technical Potential and Cost of Design Search Vary by Module Slide 32 © Carliss Y. Baldwin and Kim B. Clark, 2004

  33. Thus each module has its own “value profile” Slide 33 © Carliss Y. Baldwin and Kim B. Clark, 2004

  34. Institutions get built to exploit opportunities like these, which are“created” by the design architecture This is where the economy bites back! Slide 34 © Carliss Y. Baldwin and Kim B. Clark, 2004

  35. 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 anteincentives and ex postrewards • Equilibria of linked games with self-confirming beliefs (Aoki and game theorists) Slide 35 © Carliss Y. Baldwin and Kim B. Clark, 2004

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

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

  38. Faced with this ORMDA, what would you do? One module or many? In each module you chose, how many design searches? Which modules are most attractive? Slide 38 © Carliss Y. Baldwin and Kim B. Clark, 2004

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

  40. One story before we close—ORMDAs and New Industries 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 40 © Carliss Y. Baldwin and Kim B. Clark, 2004

  41. The Bright Side of the ORMDAs Slide 41 © Carliss Y. Baldwin and Kim B. Clark, 2004

  42. But there was The Dark Side… $ 2.5 trillion appeared then disappeared in the space of four years! Slide 42 © Carliss Y. Baldwin and Kim B. Clark, 2004

  43. Bubble followed by a Crash A failure, not of the Internet’s design architecture, but of the institutions built on that architecture Slide 43 © Carliss Y. Baldwin and Kim B. Clark, 2004

  44. A victory for selfish designs? Good for the designs, not for the humans Slide 44 © Carliss Y. Baldwin and Kim B. Clark, 2004

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

  46. Unless we turn the ORMDA stories into science… Slide 46 © Carliss Y. Baldwin and Kim B. Clark, 2004

  47. Selfish designs will be in charge! Value-seeking design evolution— As we’ve seen it — the good, the bad, and the ugly… Slide 47 © Carliss Y. Baldwin and Kim B. Clark, 2004

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

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

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

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