More from these Authors

• Working Paper | HBS Working Paper Series | 2019

  Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 16 Capturing Value by Controlling Bottlenecks in Open Platform Systems

  Carliss Y. Baldwin

  The purpose of this chapter is to investigate the means by which firms capture value in open platform systems. I begin by arguing that the surplus value created by complementarities within a technical system will be split among the owners of the unique and essential components—the strategic bottlenecks in the system. However, most platforms must also execute a series of steps which are subject to “flow production” bottlenecks. Finding and fixing these flow bottlenecks is another way to capture value. In addition, two types of platform improvements provide further opportunities for value capture. “Accelerators” speed up the processing of options, while “subsidiary” platforms increase the range of options available to users. Finally, members of a platform system or new entrants may seek to supplant the owner of a strategic bottleneck by “disintermediating” platform components. I describe four generic methods of disintermediation: substitution; reverse engineering; platform independent complements; and platform envelopment.

  Citation:

  Baldwin, Carliss Y. "Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 16 Capturing Value by Controlling Bottlenecks in Open Platform Systems." Harvard Business School Working Paper, No. 20-054, November 2019.  View Details

  CiteView DetailsSSRN Read Now

  Related

• Working Paper | HBS Working Paper Series | 2019

  Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 17 The Wintel Standards-based Platform

  Carliss Y. Baldwin

  The purpose of this chapter is to use the theory of bottlenecks laid out in previous chapters to better understand the dynamics of an open standards-based platform. I describe how the Wintel platform evolved from 1990 through 2000 under joint sponsorship of Intel and Microsoft. I first describe a series of technical bottlenecks that arose in the early 1990s concerning the “bus architecture” of IBM-compatible PCs. Intel’s management of buses demonstrates how, under conditions of distributed supermodular complementarity, a platform sponsor can reconfigure the modular structure of a technical system, property rights within the system, and its own zone of authority to increase system-wide throughput, while protecting its own strategic bottleneck from disintermediation. I go on to describe how Microsoft used platform envelopment to establish a second strategic bottleneck in productivity software and later to respond to the threat of disintermediation from platform-independent Internet browsers. I end the chapter by discussing the conditions under which shared platform sponsorship can be a long-term dynamic equilibrium.

  Citation:

  Baldwin, Carliss Y. "Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 17 The Wintel Standards-based Platform." Harvard Business School Working Paper, No. 20-055, November 2019.  View Details

  CiteView DetailsSSRN Read Now

  Related

• Case | HBS Case Collection | August 2019 (Revised October 2019)

  Systems Design West

  Richard Ruback and Royce Yudkoff

  Jenn Braus (HBS 2013) was halfway through the 90-day exclusivity period for her proposed acquisition of Systems Design West (SDW). She had completed her business and accounting due diligence. Just as she was about to ask her lawyer to begin drafting the purchase agreement, she received a call from the seller that the company had reached agreement with a large new client that would increase revenue by roughly 20%. The seller asked that the success be reflected in an increased offer price, although he had not specified the amount of the increase.
  
  Braus needed to decide on an appropriate response. Should she stand fast? In her mind, she had already agreed to pay a premium price for SDW, with a higher than typical multiple of EBITDA. Part of her rationale for the high multiple was that she believed the company had significant growth potential. Paying a higher price in response to the new customer seemed like paying twice for the growth. However, because the new customer was so large, Braus imagined that it would nudge the run rate EBITDA for SDW to about $1 million, eliminating a concern she had about the small size of the business. If she decided to negotiate a higher price, how much of an increase was appropriate? Simply applying historical margins would imply that a 20% increase in revenue would correspond to a 20% increase in price. Alternatively, it could be more as margins improved with operating leverage, or it could be less if significant fixed costs were required to on-board the new customer. Additionally, Braus was concerned that a new customer was inherently riskier than SDW’s typical customer that had a history of recurring revenue.

  Keywords: Acquisition; Price; Negotiation Offer; Decision Making;

  Citation:

  Ruback, Richard, and Royce Yudkoff. "Systems Design West." Harvard Business School Case 220-004, August 2019. (Revised October 2019.)  View Details

  CiteView DetailsEducatorsPurchase

  Related