Design Rules, Volume 2: How Technology Shapes Organizations

In Design Rules, volume 2, Carliss Baldwin offers a comprehensive view of the digital economy by putting forth an original theory that explains how technology shapes organizations in a market economy. The theory claims that complementarities arising from the physical nature of technologies can be arrayed on a spectrum ranging from strong to very weak. Two basic types of technologies in turn exhibit different degrees of complementarity between their internal components. Flow production technologies, which are found in steel mills and auto factories, specify a series of steps, each of which is essential to the final product. In contrast, platform technologies, which are characteristic of computer hardware, software, and networks, are modular systems designed to provide options.

Baldwin then investigates the dynamics of strategy for firms in platform ecosystems. Such firms create value by solving technical bottlenecks--technical barriers to performance that arise in different parts of the system as it evolves. They capture value by controlling and defending strategic bottlenecks--components that are (1) essential to the functioning of some part of the system; (2) unique; and (3) controlled by a profit-seeking enterprise. Strategic bottlenecks can be acquired by solving technical bottlenecks. They can be destroyed via tactics such as substitution, reverse engineering, bypassing the bottleneck, and enveloping a smaller bottleneck within a larger one. Strategy in platform ecosystems can thus be viewed as the effective management of technical and strategic bottlenecks within a modular technical system.