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  • 2017
  • Working Paper
  • HBS Working Paper Series

Explaining the Vertical-to-Horizontal Transition in the Computer Industry

By: Carliss Y. Baldwin
  • Format:Print
  • | Language:English
  • | Pages:58
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Abstract

This paper seeks to explain the technological forces that led to the rise of vertically integrated corporations in the late 19th century and the opposing forces that led to a vertical-to-horizontal transition in the computer industry 100 years later. I first model the technology of step processes with bottlenecks and show how this technology rewards vertical integration, a hierarchical organization, and the use of direct authority. These properties in turn became the organizational hallmarks of so-called "modern" corporations. I then model platform systems, showing that, in contrast to step processes, this technology rewards the multiplication of options, increasing risk, and modularity. Moreover, given a modular architecture, a platform system can be open, with different components supplied by separate firms with no loss of interoperability or efficiency. Openness multiplies options and expands diversity, thus increasing the platform system’s value. The last two decades of the 20th century saw the rise of three distinct types of open platforms in the computer industry: (1) "forward open" platforms with downstream complementors, (2) "backward open" modular supply networks, and (3) "open exchange" platforms designed to facilitate transactions and other forms of social interaction. Whereas in 1980, vertically integrated firms dominated the industry, by 2000, the "verticals" had essentially disappeared. The largest firms in the industry in 2000 were sponsors and participants in open platform systems. I argue that the vertical-to-horizontal transition in the computer industry was an organizational response to a fundamental change in economic rewards to the technologies of rationalized step processes vs. open platform systems.

Keywords

Organizational Design; Business History; Vertical Integration; Horizontal Integration; Technology Platform; Computer Industry

Citation

Baldwin, Carliss Y. "Explaining the Vertical-to-Horizontal Transition in the Computer Industry." Harvard Business School Working Paper, No. 17-084, March 2017.
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About The Author

Carliss Y. Baldwin

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    • 2021
    • Faculty Research

    Computer-Implemented Methods and Systems for Measuring, Estimating, and Managing Economic Outcomes and Technical Debt in Software Systems and Projects: US Patent 11,126,427 B2

    By: Daniel J. Sturtevant, Carliss Baldwin, Alan MacCormack, Sunny Ahn and Sean Gilliland
    • 2020
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    Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 7 The Value Structure of Technologies, Part 2: Strategy without Numbers

    By: Carliss Y. Baldwin
    • 2020
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    Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 6 The Value Structure of Technologies, Part 1: Mapping Functional Relationships

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More from the Author
  • Computer-Implemented Methods and Systems for Measuring, Estimating, and Managing Economic Outcomes and Technical Debt in Software Systems and Projects: US Patent 11,126,427 B2 By: Daniel J. Sturtevant, Carliss Baldwin, Alan MacCormack, Sunny Ahn and Sean Gilliland
  • Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 7 The Value Structure of Technologies, Part 2: Strategy without Numbers By: Carliss Y. Baldwin
  • Design Rules, Volume 2: How Technology Shapes Organizations: Chapter 6 The Value Structure of Technologies, Part 1: Mapping Functional Relationships By: Carliss Y. Baldwin
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