Carliss Y. Baldwin

William L. White Professor of Business Administration

Unit: Finance

Contact:

(617) 495-6673

Send Email

Carliss Y. Baldwin is the William L. White Professor of Business Administration at the Harvard Business School. She studies the process of design and its impact on firm strategy and the structure of business ecosystems. With Kim Clark, she authored Design Rules, Volume 1: The Power of Modularity, the first of a projected two volumes. Volume 2, Modularity on Trial, will consider how modular technologies are affecting the basic structure of the global economy—for good and for bad.

Baldwin received a bachelor's degree in economics from MIT in 1972, and MBA and DBA degrees from Harvard Business School. She developed and taught Mergers & Acquisitions, a second-year MBA course, and presently teaches Finance 2, a first-year required course.

She has served on numerous corporate and non-profit boards. At Harvard Business School, she has been a Director of Research, Senior Associate Dean for Faculty Planning, and head of the Doctoral Programs. Within Harvard University, she has been on the Visiting Committee of the Harvard Graduate School of Design and the policy and admissions committee of the joint Ph.D program in Science, Technology and Management.

Featured Work

Publications

Books

Journal Articles

  1. IP Modularity: Profiting from Innovation by Aligning Product Architecture with Intellectual Property

    Firms seeking to take advantage of distributed innovation and outsourcing can bridge the tension between value creation and value capture by modifying the modular structure of their technical systems. Specifically, this article introduces the concept of "IP modularity," which seeks to protect and capture value from intellectual property. The article defines what it means for a system to be "IP-modular," illustrates the application of this concept in a number of practical situations, and presents a comprehensive framework that can be used to design and evaluate value capture strategies for modular systems.

    Keywords: modularity; value appropriation; distributed innovation; open innovation; intellectual property; Innovation Strategy; Intellectual Property; Value;

    Citation:

    Henkel, Joachim, Carliss Y. Baldwin, and Willy C. Shih. "IP Modularity: Profiting from Innovation by Aligning Product Architecture with Intellectual Property." California Management Review 55, no. 4 (Summer 2013): 65–82. View Details
  2. Prize-based Contests Can Provide Solutions to Computational Biology Problems

    Citation:

    Lakhani, Karim R., Kevin J. Boudreau, Po-Ru Loh, Lars Backstrom, Carliss Y. Baldwin, Eric Lonstein, Mike Lydon, Alan MacCormack, Ramy A Arnaout, and Eva C. Guinan. "Prize-based Contests Can Provide Solutions to Computational Biology Problems." Nature Biotechnology 31, no. 2 (February, 2013): 108–111. View Details
  3. Organization Design for Business Ecosystems

    The modern corporation has long been the central focus of the field of organization design. Such firms can be likened to nation-states: they have boundaries that circumscribe citizen-employees, and they engage in production and trade. But individual corporations are no longer adequate to serve as the primary unit of analysis. Over the years, systems of distributed innovation—so-called business ecosystems—have become increasingly prevalent in many industries (Adner & Kapoor, 2010; Iansiti & Levien, 2004; von Hippel, 1988). Ecosystems generally encompass numerous corporations, individuals, and communities that might be individually autonomous but related through their connection with an underlying, evolving technical system.

    In the future, I believe the key problem for organization design will be the management of distributed innovation in such dynamic ecosystems. Specifically, how should diverse entities be integrated into a coherent network that generates goods in the present and new designs for the future? To answer that question, organization designers must think about how to distribute property rights, people, and activities across numerous self-governing enterprises in ways that are advantageous for the group (ecosystem) as well as for the designer's own firm or community.

    Keywords: modularity; business ecosystems; distributed innovation; problem solving; property rights; organization design; Networks; Integration; Competition; Organizational Design; Innovation and Management;

    Citation:

    Baldwin, Carliss Y. "Organization Design for Business Ecosystems." Special Issue on The Future of Organization Design. Journal of Organization Design 1, no. 1 (2012). View Details
  4. The Architecture of Transaction Networks: A Comparative Analysis of Hierarchy in Two Sectors

    Many products are manufactured in networks of firms linked by transactions, but comparatively little is known about how or why such transaction networks differ. This article investigates the transaction networks of two large sectors in Japan at a single point in time. In characterizing these networks, our primary measure is "hierarchy," defined as the degree to which transactions flow in one direction, from "upstream" to "downstream." Our empirical results show that the electronics sector exhibits a much lower degree of hierarchy than the automotive sector because of the presence of numerous inter-firm transaction cycles. These cycles, in turn, reveal that a significant group of firms have two-way "vertically permeable boundaries": (i) they participate in multiple stages of an industry's value chain, hence are vertically integrated, but also (ii) they allow both downstream units to purchase intermediate inputs from and upstream units to sell intermediate goods to other sector firms. We demonstrate that the 10 largest electronics firms had two-way vertically permeable boundaries while almost no firms in the automotive sector had adopted that practice.

    Keywords: transactions; networks; Vertical Integration; hierarchy; industry architecture; innovation; Auto Industry; Electronics Industry; Japan;

    Citation:

    Luo, Jianxi, Carliss Y. Baldwin, Daniel E. Whitney, and Christopher L. Magee. "The Architecture of Transaction Networks: A Comparative Analysis of Hierarchy in Two Sectors." Industrial and Corporate Change 21, no. 6 (December 2012): 1307–1335. View Details
  5. Exploring the Duality Between Product and Organizational Architectures: A Test of the 'Mirroring' Hypothesis

    A variety of academic studies argue that a relationship exists between the structure of an organization and the design of the products that the organization produces. Specifically, products tend to "mirror" the architectures of the organizations in which they are developed. This dynamic occurs because the organization's governance structures, problem solving routines, and communication patterns constrain the space in which it searches for new solutions. Such a relationship is important, given that product architecture has been shown to be an important predictor of product performance, product variety, process flexibility, and even the path of industry evolution. We explore this relationship in the software industry. Our research takes advantage of a natural experiment, in that we observe products that fulfill the same function being developed by very different organizational forms. At one extreme are commercial software firms, in which the organizational participants are tightly coupled, with respect to their goals, structure, and behavior. At the other, are open-source software communities, in which the participants are much more loosely coupled by comparison. The mirroring hypothesis predicts that these different organizational forms will produce products with distinctly different architectures. Specifically, loosely coupled organizations will develop more modular designs than tightly coupled organizations. We test this hypothesis, using a sample of matched-pair products. We find strong evidence to support the mirroring hypothesis. In all of the pairs we examine, the product developed by the loosely coupled organization is significantly more modular than the product from the tightly coupled organization. We measure modularity by capturing the level of coupling between a product's components. The magnitude of the differences is substantial—up to a factor of six, in terms of the potential for a design change in one component to propagate to others. Our results have significant managerial implications, highlighting the impact of organizational design decisions on the technical structure of the artifacts that these organizations subsequently develop.

    Keywords: organization design; Product design; architecture; modularity; open source software; Communication; Design; Governance; Management Practices and Processes; Open Source Distribution; Product Design; Mission and Purpose; Organizational Structure; Performance; Problems and Challenges; Behavior; Software;

    Citation:

    MacCormack, Alan, Carliss Y. Baldwin, and John Rusnak. "Exploring the Duality Between Product and Organizational Architectures: A Test of the 'Mirroring' Hypothesis." Research Policy 41, no. 8 (October, 2012): 1309–1324. View Details
  6. Modeling a Paradigm Shift: From Producer Innovation to User and Open Collaborative Innovation

    In this paper, we assess the economic viability of innovation by producers relative to two increasingly important alternative models: innovations by single-user individuals or firms and open collaborative innovation. We analyze the design costs and architectures and communication costs associated with each model. We conclude that both innovation by individual users and open collaborative innovation increasingly compete with and may displace producer innovation in many parts of the economy. We explain why this represents a paradigm shift with respect to innovation research, policy making, and practice. We discuss important implications and offer suggestions for further research.

    Keywords: Collaborative Innovation and Invention; Design; Cost; Communication; Competition; Economy; Research; Policy; Practice;

    Citation:

    Baldwin, Carliss, and Eric von Hippel. "Modeling a Paradigm Shift: From Producer Innovation to User and Open Collaborative Innovation." Organization Science 22, no. 6 (November–December 2011): 1399–1417. View Details
  7. Where Do Transactions Come From? Modularity, Transactions, and the Boundaries of Firms

    This article constructs a theory of the location of transactions and the boundaries of firms in a productive system. It proposes that systems of production can be viewed as networks, in which tasks-cum-agents are the nodes and transfers—of material, energy and information—between tasks and agents are the links. Transactions are defined as mutually agreed-upon transfers with compensation and are located within the task network. Placing a transaction in a particular location in turn requires work to define, count (or measure), and pay for the transacted objects. The costs of this work (labeled mundane transaction costs) are generally low at the thin crossing points of the task network, which correspond to module boundaries. Therefore, transactions are more likely to be located at module boundaries than in their interiors. Several implications arise from this theory. Among these: Modularizations create new module boundaries, hence new transaction locations. Areas in the task network where transfers are dense and complex should be located in transaction-free zones, so that the cost of transacting does not overburden the system. The thin crossing points between transaction-free zones constitute breakpoints, where firms and industries may split apart.

    Keywords: Boundaries; Production; Market Transactions; Supply Chain; Management; Cost; Theory; Performance Productivity; Information Management; Complexity;

    Citation:

    Baldwin, Carliss Y. "Where Do Transactions Come From? Modularity, Transactions, and the Boundaries of Firms." Industrial and Corporate Change 17, no. 1 (February 2008): 155–195. (Selected as one of the top twenty articles in the first twenty years of publication, 1992-2011.) View Details
  8. The Sciences of Design: Observations on an Emerging Field

    he boundaries and contours of design sciences continue to undergo definition and refinement. In many ways, the sciences of design defy disciplinary characterization. They demand multiple epistemologies, theoretical orientations (e.g. construction, analysis or intervention) and value considerations. As our understanding of this emerging field of study grows, we become aware that the sciences of design require a systemic perspective that spans disciplinary boundaries. The Doctoral Consortium at the Design Science Research Conference in Information Sciences and Technology (DESRIST) was an important milepost in their evolution. It provided a forum where students and leading researchers in the design sciences challenged one another to tackle topics and concerns that are similar across different disciplines. This paper reports on the consortium outcomes and insights from mentors who took part in it. We develop a set of observations to guide the evolution of the sciences of design. It is our intent that the observations will be beneficial, not only for IS researchers, but also for colleagues in allied disciplines who are already contributing to shaping the sciences of design.

    Keywords: Design; Engineering; Knowledge Use and Leverage; Research; Science; Boundaries; Value;

    Citation:

    Purao, S., C. Y. Baldwin, A. Hevner, V. Storey, J. Pries-Heje, and B. Smith. "The Sciences of Design: Observations on an Emerging Field." Art. 29. Communications of the Association for Information Systems 3 (2008). View Details
  9. How User Innovations Become Commercial Products: A Theoretical Investigation and a Case Study

    Keywords: Innovation and Invention; Product; Theory; Information;

    Citation:

    Baldwin, Carliss Y., Christoph Hienerth, and Eric von Hippel. "How User Innovations Become Commercial Products: A Theoretical Investigation and a Case Study." Research Policy 35, no. 9 (December 2006). View Details
  10. The Architecture of Participation: Does Code Architecture Mitigate Free Riding in the Open Source Development Model?

    Keywords: Design; Technology; Online Technology;

    Citation:

    Baldwin, Carliss Y., and Kim B. Clark. "The Architecture of Participation: Does Code Architecture Mitigate Free Riding in the Open Source Development Model?" Management Science 52, no. 7 (July 2006). View Details
  11. Exploring the Structure of Complex Software Designs: An Empirical Study of Open Source and Proprietary Code

    Keywords: Software; Design; Information; Online Technology;

    Citation:

    MacCormack, Alan, John Rusnak, and Carliss Y. Baldwin. "Exploring the Structure of Complex Software Designs: An Empirical Study of Open Source and Proprietary Code." Management Science 52, no. 7 (July 2006). View Details
  12. Capital Budgeting Systems and Capabilities Investments in U.S. Companies after World War II

    Keywords: Capital Budgeting; System; Investment; Business Ventures; United States;

    Citation:

    Clark, K. B., and C. Y. Baldwin. "Capital Budgeting Systems and Capabilities Investments in U.S. Companies after World War II." Business History Review 68, no. 1 (spring 1994): 73–109. (Winner of Newcomen-Harvard Award For the best article published each year in the Business History Review.) View Details
  13. The Evolution of Market Risk in the U.S. Steel Industry and Implications for Required Rates of Return

    Keywords: Risk and Uncertainty; Markets; Investment Return; Steel Industry;

    Citation:

    Baldwin, Carliss Y., J. J. Tribendis, and J. P. Clark. "The Evolution of Market Risk in the U.S. Steel Industry and Implications for Required Rates of Return." Journal of Industrial Economics 32, no. 5 (September 1984). View Details

Book Chapters

  1. Return on Invested Capital (ROIC)

    Return on invested capital (ROIC) is a financial measure of the profitability of a firm or business unit. If it is greater than the business's cost of capital, then reinvestment of earnings increases shareholder VALUE. The ROIC also determines a maximum self-sustaining growth rate for the business in the absence of outside funding. Finally, for businesses engaged in Schumpeterian competition, innovators with an ROIC advantage can drive out their predecessors by making them unprofitable. In this fashion, relative ROIC determines an innovation's potential for 'creative destruction'.

    Keywords: capital efficiency; competitive advantage; Dupont analysis; financial metrics; financial strategy; resource allocation; Schumpeterian competition; sustainable growth; valuation; value creation; Competitive Advantage; Financial Strategy; Resource Allocation; Valuation; Value Creation;

    Citation:

    Baldwin, Carliss Y. "Return on Invested Capital (ROIC)." In The Palgrave Encyclopedia of Strategic Management, edited by Mie Augier and David J. Teece. Palgrave Macmillan, forthcoming. (Published online October 2013.) View Details
  2. IP Modularity in Software Ecosystems: How SugarCRM's IP and Business Model Shape Its Product Architecture

    Keywords: Business Model; Technology Platform; Open Source Distribution; Complexity; Software; Intellectual Property;

    Citation:

    Waltl, Josef, Joachim Henkel, and Carliss Y. Baldwin. "IP Modularity in Software Ecosystems: How SugarCRM's IP and Business Model Shape Its Product Architecture." In Software Business: Proceedings of the Third International Conference, ICSOB 2012, by M. A. Cusumano, B. Iyer, and N. Venkatraman, 94–106. Berlin, Germany: Springer-Verlag, 2012. View Details
  3. Modularity in the Design of Complex Engineering Systems

    Keywords: Complexity; Design; Engineering;

    Citation:

    Baldwin, Carliss Y., and Kim B. Clark. "Modularity in the Design of Complex Engineering Systems." In Complex Engineered Systems: Science Meets Technology, edited by Ali Minai, Dan Braha, and Yaneer Bar Yam. New England Complex Systems Institute Series on Complexity. NY: Springer, 2006. View Details
  4. Between 'Knowledge' and 'the Economy': Notes on the Scientific Study of Designs

    Keywords: Design; Knowledge; Economy;

    Citation:

    Baldwin, Carliss Y., and Kim B. Clark. "Between 'Knowledge' and 'the Economy': Notes on the Scientific Study of Designs." In Advancing Knowledge and the Knowledge Economy, edited by B. Kahin and D. Foray. Cambridge, MA: MIT Press, 2006. View Details
  5. Managing in an Age of Modularity

    Keywords: Management;

    Citation:

    Baldwin, C. Y., and Kim B. Clark. Comment on "Managing in an Age of Modularity." Managing in the Modular Age: Architectures, Networks, and Organizations, edited by Raghu Garud, Arun Kumaraswamy, and Richard Langlois. Blackwell Publishing, 2002. View Details
  6. Organizations and Markets at Harvard Business School, 1984-1996

    Keywords: Higher Education; Markets; Organizations;

    Citation:

    Baker, George P., Michael C. Jensen, Carliss Y. Baldwin, and Karen H. Wruck. "Organizations and Markets at Harvard Business School, 1984-1996." In The Intellectual Venture Capitalist: John H. McArthur and the Work of the Harvard Business School, 1980-1995, edited by T. K. McCraw and J. L. Cruikshank. Boston: Harvard Business School Press, 1999. View Details
  7. Evaluation of Government Financial Incentives to Large Scale Energy Projects: A Contingent Claims Approach

    Keywords: Energy; Projects; Motivation and Incentives; Sovereign Finance; Business and Government Relations; Mathematical Methods; Energy Industry;

    Citation:

    Baldwin, Carliss Y., and Scott P. Mason. "Evaluation of Government Financial Incentives to Large Scale Energy Projects: A Contingent Claims Approach." In Advances in Futures and Options Research. 3 vols. Edited by F. Fabozzi. JAI Press, 1988. View Details

Working Papers

  1. Visualizing and Measuring Software Portfolio Architectures: A Flexibility Analysis

    In this paper, we test a method for visualizing and measuring software portfolio architectures and use our measures to predict the costs of architectural change. Our data is drawn from a biopharmaceutical company, comprising 407 architectural components with 1,157 dependencies between them. We show that the architecture of this system can be classified as a "core-periphery" system, meaning it contains a single large dominant cluster of interconnected components (the "Core") representing 32% of the system. We find that the classification of software applications within this architecture, as being either Core or Peripheral, is a significant predictor of the costs of architectural change. Using OLS regression models, we show that this measure has greater predictive power than prior measures of coupling used in the literature.

    Keywords: Design structure matrices; Software architecture; Flexibility; Software application portfolio; Complexity; Software; Forecasting and Prediction;

    Citation:

    Lagerstrom, Robert, Carliss Y. Baldwin, Alan MacCormack, and David Dreyfus. "Visualizing and Measuring Software Portfolio Architectures: A Flexibility Analysis." Harvard Business School Working Paper, No. 14-083, March 2014. View Details
  2. Modularity and Intellectual Property Protection

    Modularity is a means of partitioning technical knowledge about a product or process. When state-sanctioned intellectual property (IP) rights are ineffective or costly to enforce, modularity can be used to hide information and thus protect IP. We investigate the impact of modularity on IP protection by formally modeling the threat of expropriation by agents. The principal has three options to address this threat: trust, licensing, and paying agents to stay loyal. We show how the principal can influence the value of these options by modularizing the system and by hiring clans of agents, thus exploiting relationships among them. Extensions address screening and signaling in hiring, the effects of an imperfect legal system, and social norms of fairness. We illustrate our arguments with examples from practice.

    Keywords: modularity; value appropriation; intellectual property; relational contracts; clans; Rights; Complexity; Intellectual Property;

    Citation:

    Baldwin, Carliss Y., and Joachim Henkel. "Modularity and Intellectual Property Protection." Harvard Business School Working Paper, No. 14-046, December 2013. (Revised June 2014.) View Details
  3. Sharing Design Rights: A Commons Approach for Developing Infrastructure

    This study empirically investigates the relationship between design structure and organization structure in the context of new infrastructure development projects. Our research setting is a capital program to develop new school buildings in the city of Manchester, UK. Instead of creating a controlled, hierarchical organization, which would mirror the buildings' design structure, the Manchester City Council created a "commons organization," and chose to share decision-rights with local claimants. Each school's faculty was thus given rights equal to Council staff to participate in the design process and to approve the school's design. In the natural resources literature, commons theory predicts that, if a robust governance structure is created, this complex form of organizing gives claimants incentives to contribute to the enterprise whilst dampening collective action problems (Ostrom 1990). Here we extend this claim to the production of man-made artifacts. The design commons induced teachers to volunteer time and effort to communicate their practical knowledge, but created corresponding tensions over interdependent choices for the final design. Yet, none of the projects succumbed to collective action problems in the form of budget overruns, bogged-down processes, or users feeling disenfranchised. Applying Ostrom's (1990) principles of robust commons governance, we show that the Manchester design commons organization was robust by her criteria and propose that robustness contributed positively to the outcome. We also discuss design flexibility as an intervening variable that was critical in reconciling differences that governance alone could not resolve. We conclude with the rudiments of a theory describing when and why a commons organization can be advantageous for production of designs.

    Keywords: Design; Buildings and Facilities; Education;

    Citation:

    Gil, Nuno, and Carliss Y. Baldwin. "Sharing Design Rights: A Commons Approach for Developing Infrastructure." Harvard Business School Working Paper, No. 14-025, September 2013. (Revised January 2014.) View Details
  4. Visualizing and Measuring Enterprise Architecture: An Exploratory BioPharma Case

    We test a method that was designed and used previously to reveal the hidden internal architectural structure of software systems. The focus of this paper is to test if it can also uncover new facts about the components and their relationships in an enterprise architecture, i.e., if the method can reveal the hidden external structure between architectural components. Our test uses data from a biopharmaceutical company. In total, we analyzed 407 components and 1,157 dependencies. Results show that the enterprise structure can be classified as a core-periphery architecture with a propagation cost of 23%, core size of 32%, and architecture flow through of 67%. We also found that business components can be classified as control elements, infrastructure components as shared, and software applications as belonging to the core. These findings suggest that the method could be effective in uncovering the hidden structure of an enterprise architecture.

    Keywords: Complexity; Software; Product Design; Pharmaceutical Industry;

    Citation:

    Lagerstrom, Robert, Carliss Baldwin, Alan MacCormack, and David Dreyfus. "Visualizing and Measuring Enterprise Architecture: An Exploratory BioPharma Case." Harvard Business School Working Paper, No. 13-105, June 2013. View Details
  5. Visualizing and Measuring Enterprise Application Architecture: An Exploratory Telecom Case

    We test a method for visualizing and measuring enterprise application architectures. The method was designed and previously used to reveal the hidden internal architectural structure of software applications. The focus of this paper is to test if it can also uncover new facts about the applications and their relationships in an enterprise architecture, i.e., if the method can reveal the hidden external structure between software applications. Our test uses data from a large international telecom company. In total, we analyzed 103 applications and 243 dependencies. Results show that the enterprise application structure can be classified as a core-periphery architecture with a propagation cost of 25%, core size of 34%, and architecture flow through of 64%. These findings suggest that the method could be effective in uncovering the hidden structure of an enterprise application architecture.

    Keywords: Communication Technology; Complexity; Software; Product Design; Telecommunications Industry;

    Citation:

    Lagerstrom, Robert, Carliss Y. Baldwin, Alan MacCormack, and Stephan Aier. "Visualizing and Measuring Enterprise Application Architecture: An Exploratory Telecom Case." Harvard Business School Working Paper, No. 13-103, June 2013. View Details
  6. Hidden Structure: Using Network Methods to Map System Architecture

    In this paper, we describe an operational methodology for characterising the architecture of complex technical systems and demonstrate its application to a large sample of software releases. Our methodology is based upon directed network graphs, which allows us to identify all of the direct and indirect linkages between the components in a system. We use this approach to define three fundamental architectural patterns, which we label core-periphery, multi-core, and hierarchical. Applying our methodology to a sample of 1,286 software releases from 17 applications, we find that the majority of releases possess a "core-periphery" structure. This architecture is characterized by a single dominant cyclic group of components (the "Core") that is large relative to the system as a whole as well as to other cyclic groups in the system. We show that the size of the Core varies widely, even for systems that perform the same function. These differences appear to be associated with different models of development—open, distributed organizations develop systems with smaller Cores, while closed, co-located organizations develop systems with larger Cores. Our findings establish some "stylized facts" about the fine-grained structure of large, real-world technical systems, serving as a point of departure for future empirical work.

    Keywords: Complexity; Software; Product Design;

    Citation:

    Baldwin, Carliss, Alan MacCormack, and John Rusnak. "Hidden Structure: Using Network Methods to Map System Architecture." Harvard Business School Working Paper, No. 13-093, May 2013. (Revised April 2014.) View Details
  7. Modularity and Organizations

    Modularity describes the degree to which a complex system can be broken apart into subunits (modules) that can be recombined in various ways. Modularity is important for organizations and the economy because the boundaries of organizational units and corporations are likely to match the boundaries of underlying technological modules. (This correspondence is called "mirroring.") In this essay, I explain the concept of modularity and describe how systems can be modularized. I then explain why mirroring is likely to be a commonly observed organizational pattern and review the empirical evidence. I conclude with open research questions.

    Keywords: complex systems; information hiding; loosely-coupled systems; mirroring; mirroring hypothesis; modules; modularity; organizational design; near-decomposable systems; product architecture; option value; Organizational Design; Complexity;

    Citation:

    Baldwin, Carliss Y. "Modularity and Organizations ." Harvard Business School Working Paper, No. 13-046, November 2012. (To appear in the Elsevier International Encyclopedia of the Social and Behavioral Sciences, 2nd edition; available on request to the author.) View Details
  8. The Impact of Modularity on Intellectual Property and Value Appropriation

    Modularity is a means of partitioning technical knowledge about a product or process. When state-sanctioned intellectual property rights are ineffective or costly to enforce, modularity can be used to hide information and thus protect intellectual property (IP). We investigate the impact of modularity on IP protection by formally modeling three different threats to the value of IP: unauthorized use by known agents, imitation or substitution by third parties, and the withdrawal of IP by agents or third-party owners. For each threat, we consider the impact of modularity in the presence or absence of an effective legal system. The models permit us to identify specific strategies for protecting IP and thus capturing value in modular systems. We illustrate each of the major strategies with examples from practice.

    Keywords: Strategy; Open Source Distribution; Value; Complexity; Intellectual Property;

    Citation:

    Baldwin, Carliss Y., and Joachim Henkel. "The Impact of Modularity on Intellectual Property and Value Appropriation." Harvard Business School Working Paper, No. 12-040, December 2011. (Revised November 2012.) View Details
  9. Risky Business: The Impact of Property Rights on Investment and Revenue in the Film Industry

    Our paper tests a key prediction of property rights theory, specifically, that agents will respond to marginal incentives embedded in property rights when making non-contractible, revenue-enhancing investments (Grossman and Hart, 1986; Hart and Moore, 1990). Using rich project-level data from the U.S. film industry, we investigate variation in property right allocations, investment choices, and film revenues to test the distinctive aspects of property rights theory. Empirical tests of these key theoretical predictions have been relatively sparse due to the lack of appropriate data. The U.S. film industry deploys two distinct allocations of property rights, which differentially affect marginal returns on a particular class of investments. In many cases, films are both produced and distributed by studios that then take in the lion's share of revenue. In other cases, films are produced independently and distributed by studios under revenue sharing agreements, which give studios 30% to 40% of the revenue stream. Under either regime, the studio determines and pays for the allocation of scarce marketing resources. After accounting for the endogenous nature of property right allocations, we find that studio-financed films receive superior marketing investments compared to independent films and that these investments fully mediate the positive effect of vertical integration on film revenues. As a result, this study contributes to the empirical literature on property rights by showing that both of the predicted linkages (from marginal returns to investment and from investment to revenue) exist in a single empirical setting.

    Keywords: property rights; Property; Rights; Investment; Contracts; Revenue; Motivation and Incentives; Motion Pictures and Video Industry; United States;

    Citation:

    Kuppuswamy, Venkat, and Carliss Y. Baldwin. "Risky Business: The Impact of Property Rights on Investment and Revenue in the Film Industry." Harvard Business School Working Paper, No. 13-007, July 2012. (Revised August 2012.) View Details
  10. Organization Design for Distributed Innovation

    Systems of distributed innovation—so-called business ecosystems—have become increasingly prevalent in many industries. These entities generally encompass numerous corporations, individuals, and communities that might be individually autonomous but related through their connection with an underlying, evolving technical system. In the future, I believe the key problem for organization design will be the management of distributed innovation in such dynamic systems. Organization designers must think about how to distribute property rights, people, and activities across numerous self-governing enterprises in ways that are advantageous for the group as well as for the designer's own firm or community.

    Keywords: Organizational Design; Innovation and Management; Social and Collaborative Networks; Intellectual Property; Rights; Governance Controls;

    Citation:

    Baldwin, Carliss Y. "Organization Design for Distributed Innovation." Harvard Business School Working Paper, No. 12-100, May 2012. View Details
  11. When Open Architecture Beats Closed: The Entrepreneurial Use of Architectural Knowledge

    This 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, 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.

    Keywords: Entrepreneurship; Investment Return; Growth and Development Strategy; Product Design; Organizational Design; Competitive Advantage; Technology Industry;

    Citation:

    Baldwin, Carliss Y. "When Open Architecture Beats Closed: The Entrepreneurial Use of Architectural Knowledge." Harvard Business School Working Paper, No. 10-063, February 2010. (Revised July 2010, October 2010.) View Details
  12. The Mirroring Hypothesis: Theory, Evidence and Exceptions

    The mirroring hypothesis predicts that the organizational patterns of a development project (e.g. communication links, geographic collocation, team and firm co-membership) will correspond to the technical patterns of dependency in the system under development. Scholars in a range of disciplines have argued that mirroring is either necessary or a highly desirable feature of development projects, but evidence pertaining to the hypothesis is widely scattered across fields, research sites, and methodologies. In this paper, we formally define the mirroring hypothesis and review 102 empirical studies spanning three levels of organization: within a single firm, across firms, and in open community-based development projects. The hypothesis was supported in 69% of the cases. Support for the hypothesis was strongest in the within-firm sample, less strong in the across-firm sample, and relatively weak in the open collaborative sample. Based on a detailed analysis of the cases in which the mirroring hypothesis was not supported, we introduce the concept of actionable transparency as a means of achieving coordination without mirroring. We present examples from practice and describe the more complex organizational patterns that emerge when actionable transparency allows designers to "break the mirror."

    Keywords: Infrastructure; Product Design; Organizational Design; Practice; Groups and Teams; Social and Collaborative Networks; Information Technology;

    Citation:

    Colfer, Lyra J., and Carliss Y. Baldwin. "The Mirroring Hypothesis: Theory, Evidence and Exceptions ." Harvard Business School Working Paper, No. 10-058, January 2010. (Revised June 2010.) View Details
  13. The Impact of Component Modularity on Design Evolution: Evidence from the Software Industry

    Much academic work asserts a relationship between the design of a complex system and the manner in which this system evolves over time. In particular, designs which are modular in nature are argued to be more "evolvable," in that these designs facilitate making future adaptations, the nature of which do not have to be specified in advance. In essence, modularity creates "option value" with respect to new and improved designs, which is particularly important when a system must meet uncertain future demands.

    Despite the conceptual appeal of this research, empirical work exploring the relationship between modularity and evolution has had limited success. Three major challenges persist: first, it is difficult to measure modularity in a robust and repeatable fashion; second, modularity is a property of individual components, not systems as a whole, hence we must examine these dynamics at the microstructure level; and third, evolution is a temporal phenomenon, in that the conditions at time t affect the nature of the design at time t+1, hence exploring this phenomenon requires longitudinal data.

    In this paper, we tackle these challenges by analyzing the evolution of a successful commercial software product over its entire lifetime, comprising six major "releases." In particular, we develop measures of modularity at the component level, and use these to predict patterns of evolution between successive versions of the design. We find that modularity has a strong and unambiguous impact on design evolution. Specifically, we show that i) tightly-coupled components are "harder to kill," in that they have a greater likelihood of survival in subsequent versions of a design; ii) tightly-coupled components are "harder to maintain," in that they experience more surprise changes to their dependency relationships that are not associated with new functionality; and iii) tightly-coupled components are "harder to augment," in that the mix of new components added in each version is significantly more modular than the legacy design.

    Keywords: Product Design; Adaptation; Software; Information Technology Industry;

    Citation:

    MacCormack, Alan, John Rusnak, and Carliss Y. Baldwin. "The Impact of Component Modularity on Design Evolution: Evidence from the Software Industry." Harvard Business School Working Paper, No. 08-038, December 2007. View Details
  14. Competition in Modular Clusters

    The last twenty years have witnessed the rise of disaggregated "clusters," "networks," or "ecosystems" of firms. In these clusters the activities of R&D, product design, production, distribution, and system integration may be split up among hundreds or even thousands of firms. Different firms will design and produce the different components of a complex artifact (like the processor, peripherals, and software of a computer system), and different firms will specialize in different stages of a complex production process. This paper considers the pricing behavior and profitability of these so-called modular clusters. In particular, we investigate a possibility hinted at in prior work: that for composite goods, a vertical pricing externality operating across complements can offset horizontal competition between substitutes. In this paper, we isolate the offsetting price effects and show how they operate in large (as well as small) clusters. We argue that it is possible in principle for a modular cluster of firms to mimic the pricing behavior and profitability of a vertically integrated monopoly. We then use our model to compare open and closed standards regimes, to understand how commoditization affects a cluster, to determine the relative profits of platform firms and firms that depend on the platform, and to assess the impact of horizontal and vertical mergers. Our model highlights a collective action problem: what is good for an individual firm is often not good for the cluster. We speculate that this conflict may be a source of strategic tension in platform firms.

    Keywords: Price; Profit; Market Platforms; Industry Clusters; Competition; Horizontal Integration; Vertical Integration;

    Citation:

    Baldwin, Carliss Y., and C. Jason Woodard. "Competition in Modular Clusters." Harvard Business School Working Paper, No. 08-042, December 2007. View Details

Cases and Teaching Materials

  1. Paramount Equipment, Inc.

    Paramount Equipment, Inc., based in Fort Wayne, Indiana, is a large manufacturer of cranes and compact construction equipment, aerial work platforms, and food service equipment. Founded in 1987, Paramount now had manufacturing operations in 24 countries. However, it lost its competitive position because it took on too much debt in the form of bank borrowings relative to the risk level of its business. Now the company must seek funding and guarantees in order to restructure its debt. Paramount's future depends on whether existing lenders, management, and the government of Ontario—where the company employs more than 7,000—can reach a feasible restructuring and refinancing plan fast and whether Paramount was able to secure a capital injection from new investors. Students must determine the optimal capital structure policy consistent with competitive risks and assess available tools for financing a company in financial distress. The case requires students to perform only limited quantitative analysis and is ideal for use in first-year MBA courses in financial strategy or corporate finance. It would also work well in advanced undergraduate finance courses that cover capital structure and financial distress.

    Citation:

    Baldwin, Carliss Y., and Wei Wang. "Paramount Equipment, Inc." Harvard Business School Brief Case 914-557, July 2014. View Details
  2. Saks Incorporated

    Saks Fifth Avenue, a luxury department store chain, has been hard hit by the 2008 financial crisis and stock market crash. Speculation about impending bankruptcy is rampant in the press. The CEO, Stephen Sadove, must decide how to respond.

    Keywords: retail; fashion; Insolvency and Bankruptcy; Financial Crisis; Fashion Industry; Retail Industry; United States;

    Citation:

    Baldwin, Carliss, and Stefon Burns. "Saks Incorporated." Harvard Business School Case 212-060, February 2012. (Revised December 2013.) View Details
  3. The Auction for Burger King (A)

    Paul Walsh, CEO of Diageo, must evaluate bids received in an auction of the Burger King restaurant unit. Describes how Diageo came to own Burger King, the attempts to turn the unit around, the strategic reasons for its sale, the auction process, and various bidders' tactics to gain advantage in the auction. Four bids with quite complex terms arrive by the auction deadline. Walsh is facing the task of ranking the bids and determining what enhancements to the inferior bids would make them equivalent to the first-ranked bid.

    Keywords: Management Teams; Leveraged Buyouts; Bids and Bidding; Valuation; Auctions; Decision Choices and Conditions; Negotiation Tactics; Service Industry; Food and Beverage Industry;

    Citation:

    Baldwin, Carliss Y., and James Quinn. "The Auction for Burger King (A)." Harvard Business School Case 906-012, November 2005. (Revised October 2012.) View Details
  4. The Congressional Oversight Panel's Valuation of the TARP Warrants (A)

    The Congressional Oversight Panel wants to value the warrants issued to the government in connection with the TARP investments of 2008, in order to increase the transparency of options repurchases. The case describes the methodology used to value the warrants. Students have the opportunity to value warrants issued by 10 of the largest banks and to evaluate whether the Black-Scholes model can be used to value these very long-lived 10 options. Can be used to teach basic option valuation using Black-Scholes, but also raise dynamic hedging issues of interest to advanced students.

    Keywords: Financial Crisis; Asset Pricing; Financial Instruments; Investment; Business and Government Relations; Mathematical Methods; Valuation; Banking Industry; Public Administration Industry; United States;

    Citation:

    Baldwin, Carliss Y. "The Congressional Oversight Panel's Valuation of the TARP Warrants (A)." Harvard Business School Case 210-035, January 2010. (Revised October 2011.) View Details
  5. Roche's Acquisition of Genentech

    Franz Humer, CEO of the Roche Group, must decide whether to mount a hostile tender offer for the publicly-owned shares of Roche's biotechnology subsidiary, Genentech. The case provides opportunities to analyze Roche's strategy with respect to Genentech, the pros and cons of merging the two companies with different cultures, the value of Genentech, and the tactics of a hostile tender offer.

    Keywords: Mergers and Acquisitions; Business Subsidiaries; Negotiation Offer; Organizational Culture; Corporate Strategy; Biotechnology Industry; Pharmaceutical Industry; Switzerland;

    Citation:

    Baldwin, Carliss Y., Bo Becker, and Vincent Marie Dessain. "Roche's Acquisition of Genentech." Harvard Business School Case 210-040, February 2010. (Revised September 2011.) View Details
  6. PepsiCo's Bid for Quaker Oats (A)

    Throughout 1999, PepsiCo closely tracked several potential strategic acquisitions. In the fall of 2000, it appeared that the right moment for an equity-financed acquisition had arrived. At this time, PepsiCo management decided to initiate confidential discussions with The Quaker Oats Co. about a potential business combination. Gatorade, a key brand in Quaker's portfolio, had long been on PepsiCo's wish list, but PepsiCo's managers, led by CEO Roger Enrico and CFO Indra Nooyi, were committed to upholding the value of PepsiCo's shares and, as a result, were determined not to pay too much for Quaker. This case provides information that allows students: to assess the value of Quaker's businesses, estimate potential synergies associated with a Pepsi-Quaker merger, and come up with an effective negotiation strategy.

    Keywords: Mergers and Acquisitions; Private Equity; Stock Shares; Negotiation; Strategy; Valuation; Food and Beverage Industry;

    Citation:

    Baldwin, Carliss Y., and Leonid P Sudakov. "PepsiCo's Bid for Quaker Oats (A)." Harvard Business School Case 801-458, June 2001. (Revised September 2011.) View Details
  7. PepsiCo's Bid for Quaker Oats (C)

    Third in a series of PepsiCo's bid for Quaker Oats. Describes the auction for Quaker Oats including terms of the bids. After winning the auction, Coke's stock price fell dramatically. Coke's Board then refused to approve the deal and withdrew. Quaker then approached Pepsi, the losing bidder, and asked them to submit another bid. The case can be used to teach the mechanics of collared consideration, announcement effects, the prerogatives of a board of directors, and negotiating strategy.

    Keywords: Mergers and Acquisitions; Stocks; Governing and Advisory Boards; Auctions; Bids and Bidding; Negotiation Tactics; Valuation; Food and Beverage Industry;

    Citation:

    Baldwin, Carliss Y. "PepsiCo's Bid for Quaker Oats (C)." Harvard Business School Supplement 209-070, October 2008. (Revised September 2011.) View Details
  8. PepsiCo's Bid for Quaker Oats (D)

    Describes the final deal struck between PepsiCo and Quaker Oats, including the terms of collared consideration. Summarizes stock price announcement effects.

    Keywords: Mergers and Acquisitions; Announcements; Stocks; Price; Risk Management; Negotiation Deal; Valuation; Food and Beverage Industry;

    Citation:

    Baldwin, Carliss Y. "PepsiCo's Bid for Quaker Oats (D)." Harvard Business School Supplement 209-071, October 2008. (Revised September 2011.) View Details
  9. PepsiCo's Bid for Quaker Oats (B)

    Second in a series on PepsiCo's bid for Quaker Oats. Describes the negotiations between PepsiCo and Quaker including due-diligence process, first bid, and counteroffer. Quaker's counteroffer included a collar on equity consideration, and thus the case offers an opportunity to discuss and value these contractual devices.

    Keywords: Mergers and Acquisitions; Equity; Bids and Bidding; Negotiation Offer; Negotiation Preparation; Valuation; Food and Beverage Industry;

    Citation:

    Baldwin, Carliss Y., and Leonid Soudakov. "PepsiCo's Bid for Quaker Oats (B)." Harvard Business School Supplement 209-078, October 2008. (Revised September 2011.) View Details
  10. Roche's Acquisition of Genentech (TN)

    Teaching Note for 210-040.

    Keywords: Mergers and Acquisitions; Stock Shares; Opportunities; Strategy; Organizational Culture; Value; Negotiation Tactics; Biotechnology Industry; Health Industry;

    Citation:

    Becker, Bo, and Carliss Y. Baldwin. "Roche's Acquisition of Genentech (TN)." Harvard Business School Teaching Note 211-039, December 2010. View Details
  11. Mellon Financial and The Bank of New York (TN)

    Teaching Note for 208129.

    Keywords: Valuation; Business and Shareholder Relations; Mergers and Acquisitions; Banks and Banking; Equity; Business Earnings; Banking Industry; New York (state, US);

    Citation:

    Taliaferro, Ryan D., and Carliss Y. Baldwin. "Mellon Financial and The Bank of New York (TN)." Harvard Business School Teaching Note 211-054, November 2010. View Details
  12. Evaluating M&A Deals-Equity Consideration

    What the acquiring company pays for a target in a merger or acquisition is called "consideration." Consideration can be in the form of cash, shares, or a combination of the two. Lays out the basic mechanics of equity consideration. Derives formulas for the Deal NPV of an all-equity deal and shows how to calculate and interpret key parameters, including percentage ownership, the exchange ratio, the acquisition premium, the wealth transfer, and the target's downside protection. Explains how synergies and over-valued shares affect the Deal NPV. Also shows how to calculate critical break-even exchange ratios. Ends by looking at cash-and-stock deals.

    Keywords: Mergers and Acquisitions; Equity;

    Citation:

    Baldwin, Carliss Y. "Evaluating M&A Deals-Equity Consideration." Harvard Business School Module Note 208-077, October 2007. (Revised November 2010.) View Details
  13. Mellon Financial and The Bank of New York

    Bob Kelly, the new CEO of Mellon Financial, is considering the terms of a proposed "merger of equals" with The Bank of New York, just before the final Board meeting to approve the deal. The combination offers a great strategic fit, and the expected synergies are large. However, the proposed exchange ration values Mellon at a discount to its last closing price, even though it is the smaller and non-surviving bank. Kelly must consider the various dimensions of the deal-specifically the value of synergies, the form of consideration, and the deal's impact on the EPS of both sides-and determine whether it is in the best interests of Mellon, the city of Pittsburgh, and Mellon's shareholders.

    Keywords: Mergers and Acquisitions; Equity; Banks and Banking; Business and Shareholder Relations; Valuation; Banking Industry; Pittsburgh;

    Citation:

    Baldwin, Carliss Y., and Ryan Taliaferro. "Mellon Financial and The Bank of New York." Harvard Business School Case 208-129, February 2008. (Revised October 2010.) View Details
  14. The Congressional Oversight Panel's Valuation of the TARP Warrants (B)

    The Congressional Oversight Panel wants to value the warrants issued to the government in connection with the TARP investments of 2008, in order to increase the transparency of options repurchases. The case describes the methodology used to value the warrants. This case follows "The Congressional Oversight Panel's Valuation of the TARP Warrants (A)"; it describes the findings of the panel's TARP Warrants Report and public and congressional reactions.

    Keywords: Financial Crisis; Investment; Public Opinion; Valuation; Banking Industry; Public Administration Industry; United States;

    Citation:

    Baldwin, Carliss Y. "The Congressional Oversight Panel's Valuation of the TARP Warrants (B)." Harvard Business School Supplement 210-036, January 2010. (Revised March 2010.) View Details
  15. Framedia (A) Abridged

    Examines an acquisition in the highly competitive outdoor media advertising industry in China in late 2005. The transaction leads to eventual consolidation of the whole industry and positive stock reactions. Discusses equity consideration in the context of an M&A transaction, and the role of private equity and venture capital in the development and the eventual consolidation of the industry in emerging markets. Provides a context in which to discuss the impact of antitrust regulation, or lack thereof, on the industrial organization in China.

    Keywords: Mergers and Acquisitions; Venture Capital; Equity; Private Equity; Corporate Governance; Emerging Markets; Organizations; Consolidation; Valuation; Advertising Industry; China;

    Citation:

    Jin, Li, Carliss Y. Baldwin, Li Liao, Huabing Li, and Jielun Zhu. "Framedia (A) Abridged." Harvard Business School Case 208-048, January 2008. (Revised March 2009.) View Details
  16. Evaluating M&A Deals: Floors, Caps, and Collars

    As equity consideration has become more popular in acquisitions, so has the use of the "pricing-protection" mechanisms, such as floors, caps, and collars. These contractual devices provide insurance to the shareholders of the target and may protect the buyer as well. The purpose of this note is to define the main categories of price protection and explain their impact on the payoffs and value of the deal to the target's shareholders.

    Keywords: Mergers and Acquisitions; Equity; Price; Contracts; Business and Shareholder Relations;

    Citation:

    Baldwin, Carliss Y. "Evaluating M&A Deals: Floors, Caps, and Collars." Harvard Business School Background Note 209-138, March 2009. View Details
  17. Evaluating M&A Deals: How Poison Pills Work

    The poison pill defense against hostile takeovers was invented in 1982 by Martin Lipton, of Wachtell, Lipton, Rosen and Katz. Pills are considered the most effective of all the normal defenses against a hostile bidder. Describes the two basic types of poison pills (flip-ins and flip-overs), and explains how the form of a tender offer changes the impact of a pill on the bidder. Also describes how bidders can set up tender offers to avoid poison pills.

    Keywords: Negotiation Deal; Mergers and Acquisitions;

    Citation:

    Baldwin, Carliss Y. "Evaluating M&A Deals: How Poison Pills Work." Harvard Business School Background Note 208-061, October 2007. (Revised December 2008.) View Details
  18. Evaluating M&A Deals: Introduction to the Deal NPV

    Introduces a framework for evaluating mergers and acquisitions. Assumes that the criterion of a good deal is that it creates value for shareholders; i.e., has a positive deal NPV. Looks at the deal NPV from both the buyer's and seller's point of view. Explains how a positive deal NPV leads to positive predicted cumulation of abnormal returns. It then presents a framework for calculating deal NPVs based on the consideration paid, the work to be done, the value of the target, and the value created through restructuring or synergy. Concludes by introducing the concept of 'fragility risk,' which is basically the risk that the buyer's plans will go awry.

    Keywords: Mergers and Acquisitions; Value Creation;

    Citation:

    Baldwin, Carliss Y. "Evaluating M&A Deals: Introduction to the Deal NPV." Harvard Business School Module Note 208-060, October 2007. (Revised February 2008.) View Details
  19. Evaluating M&A Deals: Accretion vs. Dilution of Earnings-per-share

    When discussing the pros and cons of an acquisition, practitioners often talk about the impact of the deal on the buyer's earnings-per-share (eps). An acquisition is said to be "accretive" if the buyer's eps goes up post-deal; it is "dilutive" if the buyer's eps goes down. Describes why managers are concerned with accretion and dilution; how to tell if a deal is accretive; why high P-E buyers can pay a premium and still have an accretive deal; how accretive deals can be bad (and dilutive deals good); and how much accretion or dilution to expect based on the terms of a deal.

    Keywords: Business Earnings; Mergers and Acquisitions; Private Equity; Negotiation Deal;

    Citation:

    Baldwin, Carliss Y. "Evaluating M&A Deals: Accretion vs. Dilution of Earnings-per-share." Harvard Business School Background Note 208-059, October 2007. (Revised February 2008.) View Details
  20. Northrop versus TRW

    TRW, a leading supplier of advanced technology products for the auto, defense, and aerospace markets, receives an unexpected stock-for-stock offer from defense company Northrop Grumman Corp. The $11.4 billion aggregate offer, which represents a 22% premium over the average trading price for the previous 12 months, comes just two days after TRW's CEO has, without notice, resigned. TRW's board is faced with a difficult decision on which they vote in a few days: Should they "just say no," rejecting the offer out of hand? Should they negotiate a friendly deal with Northrop? Or should they put TRW in so-called "Revlon mode" and auction the company to the highest bidder? This case, grounded in the specifics of Ohio's strict antitaker laws, explores defensive tactics, hostile tender offers, the duties of the board, and fixed-price exchange. It is for use in an advanced course on mergers and acquisitions.

    Keywords: Mergers and Acquisitions; Decision Choices and Conditions; Governing and Advisory Boards; Laws and Statutes; Negotiation Tactics; Valuation; Aerospace Industry; Auto Industry; Ohio;

    Citation:

    Baldwin, Carliss Y., and James Quinn. "Northrop versus TRW." Harvard Business School Case 903-115, March 2003. (Revised January 2008.) View Details
  21. Evaluating M&A Deals-Announcement Effects, Risk Arbitrage and Event Risk

    The announcement of merger or acquisition conveys new information to the capital markets. This note describes how the stock prices of a Buyer and Target behave after the announcement of a deal. First, for an all-stock deal that is certain to go through, the note defines accouchement effects and describes the fundamental arbitrage relationship between Target and Buyer stock prices. It shows how post-announcement prices may be used to infer the market's estimate of synergies. It then explains how the betas of the two companies change post-announcement and the arbitrage relationship between prices in a cash-and-stock deal. Finally, it defines event risk and explains how it affects the prices of the Buyer and the Target.

    Keywords: Mergers and Acquisitions; Announcements; Capital Markets; Stocks; Price; Risk and Uncertainty;

    Citation:

    Baldwin, Carliss Y. "Evaluating M&A Deals-Announcement Effects, Risk Arbitrage and Event Risk." Harvard Business School Background Note 208-103, December 2007. (Revised January 2008.) View Details
  22. Mike Finkelstein (B)

    Following his successful turnaround of WTXX, Waterbury, Mike Finkelstein joined Odyssey Partners with a mandate to build a communications company. From 1982-1985, he acquired three more stations, financing each as an independent partnership. However, increasing competition has caused some of his stations to experience cash shortfalls. Finkelstein must decide whether to sell the stations, hold and finance them out of Odyssey Partners capital, or incorporate them into a single company with a new financial structure based on zero coupon bonds.

    Keywords: Business Exit or Shutdown; Cash; Business or Company Management; Bonds; Cost vs Benefits; SWOT Analysis; Alignment; Acquisition; Financial Strategy; Corporate Finance; Communications Industry;

    Citation:

    Baldwin, Carliss Y., Charles Bryan, and Ken Leet. "Mike Finkelstein (B)." Harvard Business School Case 287-021, August 1986. (Revised May 2005.) View Details
  23. M&A Legal Context: Hostile Takeovers

    Introduces students to the main tactical maneuvers used by hostile bidders, including bear hugs, proxy fights, tender offers, and toeholds. Also describes how, in the United States, tender offers are regulated by the federal government via the Williams Act.

    Keywords: Acquisition; Cash; Governing Rules, Regulations, and Reforms; Code Law; Bids and Bidding; United States;

    Citation:

    Baldwin, Carliss Y., Constance E. Bagley, and James Quinn. "M&A Legal Context: Hostile Takeovers." Harvard Business School Background Note 904-005, July 2003. (Revised February 2004.) View Details
  24. M&A Legal Context: Standards Related to the Sale or Purchase of a Company

    Introduces students to the legal standards affecting officers and directors when selling or purchasing a company. Provides a practical understanding of the Revlon Standard, the Securities and Exchange Act of 1934, Rule 10b-5, and the legal criteria for a cause of action for securities fraud. Recounts three precedential cases decided by the Delaware Supreme Court.

    Keywords: Laws and Statutes; Law Enforcement; Government Legislation; Acquisition; Business Exit or Shutdown; Corporate Governance; Going Public; Courts and Trials;

    Citation:

    Baldwin, Carliss Y., Constance E. Bagley, and James Quinn. "M&A Legal Context: Standards Related to the Sale or Purchase of a Company." Harvard Business School Background Note 904-004, July 2003. (Revised February 2004.) View Details
  25. New Wachovia (A), The

    In April 2001, First Union Corp. announced an agreement to merge with Wachovia Corp., a fellow North Carolina-based commercial bank. While the banks were preparing to consummate the merger, SunTrust Banks, Inc. of Atlanta, made a hostile offer for Wachovia, setting in motion an intense proxy fight with a forum encompassing the media, the courts, the investor community, and Wall Street. In July 2002, Kenneth Thompson, CEO of First Union, was considering First Union's next move knowing that Wachovia shareholders would convene on August 3 to decide the fate of the proposed transaction.

    Keywords: Voting; Mergers and Acquisitions; Conflict and Resolution; Banks and Banking; Banking Industry; Atlanta; North Carolina;

    Citation:

    Baldwin, Carliss Y., and Jeremy Swinson. "New Wachovia (A), The." Harvard Business School Case 903-033, August 2002. (Revised June 2003.) View Details
  26. IBM and Linux (A)

    In the fall of 1998, Dan Frye, member of IBM's emerging technologies and business team, is trying to decide whether to forge a strategic alliance with the Linux Development Community (LDC). Just two years earlier, IBM had its first exposure to an "open source" software program when it selected Apache as the web server program for the web site of the Atlanta Summer Olympic Games. Based on its success with Apache, and Frye's intuition that Linux could be a critical, strategic step in the new "network-centric" computing environment, Frye and his colleagues are trying to decide whether an alliance between IBM and LDC would serve their interests--and, if so, how IBM could manage the alliance with a loosely affiliated group of software developers.

    Keywords: Mergers and Acquisitions; Open Source Distribution; Problems and Challenges; Alliances; Cooperation; Computer Industry; Information Technology Industry;

    Citation:

    Baldwin, Carliss Y., Siobhan O'Mahony, and James Quinn. "IBM and Linux (A)." Harvard Business School Case 903-083, June 2003. View Details
  27. M & A Legal Context: Basic Framework for Corporate Governance

    Students are introduced to the basic framework for corporate governance. Begins by describing the complex role of the modern corporation, then proceeds by discussing the fiduciary duties to which a board of trustees is bound (duty of care, duty of loyalty, etc.), and concludes by proposing seven factors officers and directors should consider when overseeing the sale or purchase of a company. Recounts the precedential case Smith vs. Van Gorkom.

    Keywords: Framework; Corporate Governance;

    Citation:

    Baldwin, Carliss Y., Constance E. Bagley, and James Quinn. "M & A Legal Context: Basic Framework for Corporate Governance." Harvard Business School Background Note 803-200, June 2003. (Revised June 2003.) View Details
  28. New Wachovia (B), The

    On August 3, 2001, after a hotly contested proxy fight, Wachovia Corp.'s shareholders voted to merge with First Union Corp. The managers of the two banks then turned to face the challenges of integrating the two organizations. Their task was to implement a "merger of equals" that would preserve the best parts of the two former companies while realizing the potential cost savings, operational efficiencies, and revenue gains that justified the combination in the eyes of the shareholders.

    Keywords: Integration; Mergers and Acquisitions; Problems and Challenges; Banks and Banking; Banking Industry; North Carolina;

    Citation:

    Baldwin, Carliss Y., and Jeremy Swinson. "New Wachovia (B), The." Harvard Business School Case 903-034, August 2002. (Revised May 2003.) View Details
  29. Compaq's Struggle

    In 1997, Compaq Computer was locked in price competition with industry leader Dell. Although Compaq sought to escape difficulty by acquiring Digital Equipment Corp. ,a maker of more lucrative servers and minicomputers, in 1998 the simultaneous effort to remain a competitive PC maker while transforming itself into a full-service computer firm proved arduous.

    Keywords: Mergers and Acquisitions; Business Exit or Shutdown; Asset Pricing; Alliances; Competitive Strategy; Computer Industry;

    Citation:

    Baldwin, Carliss Y., and David Lane. "Compaq's Struggle." Harvard Business School Case 903-021, March 2003. View Details
  30. Fundamental Enterprise Valuation: Introduction

    The purpose of this series of notes is to define the key "drivers" of the fundamental value of equity and to illustrate how these drivers determine the future cash flows and the "present value pattern" of the underlying common stock. The series includes one technical note for each term defined. The terms defined are as follows: invested capital (IC), capital expenditures (Capex), earnings, return on invested capital (ROIC), free cash flow (FCF), short- and long-term growth rate and the growth horizon, and advantage horizon. This is a short introductory note to the series.

    Keywords: Equity; Cash Flow; Valuation; Investment; Investment Return; Cost; Capital;

    Citation:

    Baldwin, Carliss Y. "Fundamental Enterprise Valuation: Introduction." Harvard Business School Background Note 801-121, August 2000. (Revised July 2002.) View Details
  31. Fundamental Enterprise Valuation: Short- and Long-Term Growth Rates and the Growth Horizon

    A technical note that defines short- and long-term growth rates and the growth horizon.

    Keywords: Cost of Capital; Stocks; Investment Return;

    Citation:

    Baldwin, Carliss Y. "Fundamental Enterprise Valuation: Short- and Long-Term Growth Rates and the Growth Horizon." Harvard Business School Background Note 801-127, August 2000. (Revised July 2002.) View Details
  32. Fundamental Enterprise Valuation: Return on Invested Capital (ROIC)

    A technical note that defines return on invested capital (ROIC).

    Keywords: Valuation; Business Ventures; Capital;

    Citation:

    Baldwin, Carliss Y. "Fundamental Enterprise Valuation: Return on Invested Capital (ROIC)." Harvard Business School Background Note 801-125, August 2000. (Revised July 2002.) View Details
  33. Comdisco, Inc.

    Comdisco, the largest independent dealer and lessor of computers and peripheral equipment, needs financing in order to match its market's growth of 20-30% per year. The company has access to two types of risk capital, but there are substantial costs and risks associated with each. The case focuses on the formulation of a complex financial strategy to meet Comdisco's aggressive growth plans. Once the strategy is identified, the questions "Is it possible?" and "Can it be implemented?" lead naturally to a discussion of the company's appropriate role in its industry.

    Keywords: Business or Company Management; Strategy; Cost vs Benefits; Capital Structure; Financing and Loans; Financial Strategy; Corporate Finance; Growth and Development Strategy; Computer Industry; Distribution Industry;

    Citation:

    Baldwin, Carliss Y., and Rita J. Seymour. "Comdisco, Inc." Harvard Business School Case 285-109, May 1985. (Revised October 2001.) View Details
  34. Technical Note on Consideration: Floors, Caps, and Collars

    As equity-linked consideration has become more popular in acquisition and alliances, so has the use of the "price-protection" mechanisms, known variously as floors, caps, and collars. In general, these are contractual agreements that provide insurance to the shareholders of the selling firm, the buying firm, or both.

    Keywords: Risk and Uncertainty; Price; Acquisition;

    Citation:

    Baldwin, Carliss Y. "Technical Note on Consideration: Floors, Caps, and Collars." Harvard Business School Technical Note 902-056, September 2001. View Details
  35. Technical Note on Expectations

    Reviews the mathematics of expectations embedded in a company's current stock price and the related (whole) enterprise value. Begins by showing how the current stock price can be compounded forward to arrive at an expectation one or more years in the future. Describes the log normal distribution of the current stock price, the consistent updating of expectations, and the resolution of uncertainty through time.

    Keywords: Performance Expectations; Price; Stocks;

    Citation:

    Baldwin, Carliss Y. "Technical Note on Expectations." Harvard Business School Technical Note 902-055, August 2001. View Details
  36. Finnigan Corporation

    Finnigan Corp., headquartered in San Jose, CA, was the world's leading producer of mass spectrometers, holding a 45% market share of instruments used for chemical analysis in pharmaceutical product development, environmental testing, genetic testing, and other sophisticated applications. At the end of 1989, after a year of setbacks and financial disappointments, the board of directors of Finnigan voted to seek a buyer for the company.

    Keywords: Business Exit or Shutdown; Financial Crisis; Machinery and Machining; Technology Industry; San Jose;

    Citation:

    Baldwin, Carliss Y., and Barbara Feinberg. "Finnigan Corporation." Harvard Business School Case 902-045, August 2001. View Details
  37. Eastern Electric Apparatus Repair Company (A)

    As principals engaged in structuring leveraged buyouts for a well-capitalized risk arbitrage firm, Bob Meehan and George Schwartz are preparing to bid for the business and assets of a Westinghouse subsidiary. The case focuses on the value of the opportunity, methods of structuring highly levered opportunities, and the value of the equity claim. Also provides an opportunity to discuss the mechanism of a competitive bid, information asymmetries between buyers and sellers, and bidding strategies.

    Keywords: Leveraged Buyouts; Bids and Bidding; Opportunities; Business Subsidiaries; Strategy; Valuation; Equity; Electronics Industry;

    Citation:

    Baldwin, Carliss Y., and Harry Gruner. "Eastern Electric Apparatus Repair Company (A)." Harvard Business School Case 287-023, September 1986. (Revised July 2001.) View Details
  38. Technical Note on LBO Valuation (A): LBO Structure and the Target IRR Method of Valuation

    Explains the equity cash flow method of valuation as it applies to leveraged buyouts. Also explains: 1) earnings and cash flow forecasts, 2) debt structure and the cash sweep, 3) the cashing out horizon and terminal valuation, and 4) the target IRR method of valuation.

    Keywords: Valuation; Leveraged Buyouts; Capital Budgeting; Borrowing and Debt; Cash Flow; Equity; Profit; Price; Forecasting and Prediction;

    Citation:

    Baldwin, Carliss Y. "Technical Note on LBO Valuation (A): LBO Structure and the Target IRR Method of Valuation." Harvard Business School Technical Note 902-004, July 2001. View Details
  39. Technical Note on LBO Valuation (B): The Equity Cash Flow Method of Valuation using CAPM

    Explains the equity cash flow method of valuation as it applies to leveraged buyouts. Also explains how to implement the changing cost of equity method using the CAPM.

    Keywords: Leveraged Buyouts; Forecasting and Prediction; Cash Flow; Cost of Capital; Equity; Valuation;

    Citation:

    Baldwin, Carliss Y. "Technical Note on LBO Valuation (B): The Equity Cash Flow Method of Valuation using CAPM." Harvard Business School Technical Note 902-005, July 2001. View Details
  40. Compaq Computer Corporation: The DEC Acquisition

    Compaq's board of directors is faced with responsibility for setting the price range and terms for the proposed acquisition of Digital Equipment Corp. The transaction is described in the context of the rapidly evolving markets and business models of the computer industry. Financial data on Compaq, Dell Computer, and DEC are provided.

    Keywords: Governing and Advisory Boards; Situation or Environment; Negotiation Offer; Acquisition; Computer Industry;

    Citation:

    Baldwin, Carliss Y., and Barbara Feinberg. "Compaq Computer Corporation: The DEC Acquisition." Harvard Business School Case 800-199, November 1999. (Revised June 2001.) View Details
  41. ESL Golf (A)

    Todd Peterson and his colleagues have spent five weeks analyzing CMP Capital Partners' potential leveraged buyout of ESL Golf. They are about to present their analysis and bid proposal to the investment committee, consisting of all CMP partners, which must approve any equity commitment.

    Keywords: Leveraged Buyouts; Private Equity; Auctions; Bids and Bidding; Valuation;

    Citation:

    Baldwin, Carliss Y., and Christopher R Gordon. "ESL Golf (A)." Harvard Business School Case 801-429, June 2001. View Details
  42. Walt Disney Company's Sleeping Beauty Bonds--Duration Analysis

    Walt Disney Co. issues a 100-year bond. This case describes the terms of the bond and immediate capital market reaction.

    Keywords: Capital Markets; Bonds; Valuation; Entertainment and Recreation Industry;

    Citation:

    Baldwin, Carliss Y. "Walt Disney Company's Sleeping Beauty Bonds--Duration Analysis." Harvard Business School Exercise 294-038, January 1994. (Revised July 2000.) View Details
  43. Case of the Colored Post-It Notes

    An example of how policies about budgeting and resource decisions are commonly misallocated is presented.

    Keywords: Budgets and Budgeting; Policy; Resource Allocation;

    Citation:

    Baldwin, Carliss Y., Michael C. Jensen, and Karen Wruck. "Case of the Colored Post-It Notes." Harvard Business School Case 897-069, December 1996. View Details
  44. Trading the Right to Pollute: Developing the Market for Pollution Allowances

    Examines the issues underlying the formation of the market for tradeable pollution allowances, following the requirement of Title IV of the 1990 Amendments to the Clean Air Act. Examines the implications that these trade the allowances hold for the U.S. electric utilities industry and the strategic choices these utilities faced in 1992.

    Keywords: Strategic Planning; Pollution and Pollutants; Trade; Utilities Industry;

    Citation:

    Baldwin, Carliss Y. "Trading the Right to Pollute: Developing the Market for Pollution Allowances." Harvard Business School Background Note 292-120, March 1992. (Revised November 1993.) View Details
  45. Thermo Electron Corp.

    George Hatsopoulos, CEO at Thermo Electron Corp., is considering whether to issue shares in a subsidiary via an initial public offering (IPO). The company has developed an unusual corporate structure in which subsidiaries fund new ventures by raising debt and equity in the capital markets, rather than through the parent company.

    Keywords: Financial Management; Business Subsidiaries; Resource Allocation; Valuation; Organizational Structure; Business Headquarters; Initial Public Offering; Capital Structure; Capital Markets; Financial Strategy; Corporate Finance; Semiconductor Industry; Technology Industry;

    Citation:

    Baldwin, Carliss Y. "Thermo Electron Corp." Harvard Business School Case 292-104, March 1992. (Revised June 1992.) View Details
  46. Sun Microsystems, Inc.--1987 (A)

    An integrated sequence of three cases on the financing of a technical workstation manufacturer. This case focuses on Sun's competitive strategy which requires an inordinately high rate of growth (over 20% per quarter) and commensurate amounts of working capital. Students are asked to evaluate the importance of access to capital for the company and decide whether Sun should rely on the public equity markets or seek funding from a corporate partner.

    Keywords: Cash Flow; Competitive Strategy; Financing and Loans; Capital; Financial Strategy; Public Equity; Corporate Finance; Information Technology Industry;

    Citation:

    Baldwin, Carliss Y. "Sun Microsystems, Inc.--1987 (A)." Harvard Business School Case 290-051, June 1990. (Revised August 1990.) View Details
  47. Sun Microsystems, Inc.--1987 (B)

    Describes a specific opportunity to seek financing from AT&T as part of a proposed technological joint venture. Students must consider the price paid and control rights attached to a large block of shares and outline a negotiating position for each side.

    Keywords: Joint Ventures; Stock Shares; Financing and Loans; Price; Governance Controls; Rights; Negotiation; Opportunities; Computer Industry;

    Citation:

    Baldwin, Carliss Y. "Sun Microsystems, Inc.--1987 (B)." Harvard Business School Supplement 290-052, June 1990. (Revised August 1990.) View Details
  48. Massey-Ferguson Ltd.—1980

    Massey Ferguson began fiscal year 1981 in default on $2.5 billion of outstanding debt. The company's future depends on the ability of lenders, the governments of Canada and Ontario, and management, to agree on a refinancing plan. The case reviews Massey's performance and position in the industry and raises questions about the company's ability to compete in the long run. Provides information on the firm's claimants in order to focus students on the issues of a refinancing.

    Keywords: Financial Condition; Financial Markets; Financing and Loans; Insolvency and Bankruptcy; Financial Strategy; Borrowing and Debt; Corporate Finance; Canada;

    Citation:

    Baldwin, Carliss Y., and Scott P. Mason. "Massey-Ferguson Ltd.—1980." Harvard Business School Case 282-043, February 1982. (Revised June 1990.) View Details

Presentations

  1. From the Structure of the Value Chain to the Strategic Dynamics of Industry Sectors

    Keywords: Strategy; Customer Value and Value Chain;

    Citation:

    Baldwin, Carliss Y., Michael Jacobides, and Reza Dizaji. "From the Structure of the Value Chain to the Strategic Dynamics of Industry Sectors." Paper presented at the Academy of Management Annual Meeting, Philadelphia, PA, August 07, 2007. View Details

    Research Summary

  1. Distributed Innovation in Open Systems——The Role of Modularity

    Distributed innovation in open systems is an important trend in the modern global economy. As education levels rise and communication costs fall, more people have the means and motivation to innovate. Supply chains now stretch around the world as firms outsource production to innovative suppliers, and many firms have structured their products as open systems in which users and complementors are invited to innovate.

    In general, distributed innovation in open systems is made possible by the modularity of the underlying product or process. Modularity reduces the risk that small changes in the environment will cause the whole system to fail, and makes it easier for the entire system to evolve towards higher levels of performance. This is true for complex products and processes and for networks of firms loosely linked in so-called business ecosystems.

    My research is aimed at understanding how modularity is achieved in technical systems as well as the impact of modularity on firm value and industry structure. Currently I am working on projects focused on (1) impact of modularity on intellectual property, (2) the hidden structure of complex systems (especially software), and (3) how design rights may be shared across modular boundaries.
    1. Best Twenty Articles from First Twenty Years of Publication, 1992-2011: In 2012, "Where Do Transactions Come From? Modularity, Transactions, and the Boundaries of Firms" (2008) was selected as one of the Best Twenty Articles from First Twenty Years of Publication, Industrial and Corporate Change, 1992-2011.

    2. INFORMS Distinguished Speaker Award: Received the 2008 Distinguished Speaker Award from the Technology Management Section of INFORMS.

    3. University of Vienna Best Paper Award: Winner of the 2007 University of Vienna Best Paper Award for "How User Innovations Become Commercial Products: A Theoretical Investigation and a Case Study" with Christoph Hienerth and Eric von Hippel (Research Policy, 2006).

    4. Newcomen-Harvard Award: Winner of the Newcomen-Harvard Award for Best Paper Published in the Business History Review in 1994 for "Capital Budgeting Systems and Capabilities Investments in U.S. Companies after World War II" (with Kim B. Clark, spring 1994).

    24 Jul 2012
    Boston Public Radio
    10 Feb 2011
    New York Times