Strategy & Architectural Knowledge

This paper describes how entrepreneurial firms can use superior architectural knowledge of a technical system to gain strategic advantage. Architectural knowledge is knowledge about the components of a complex system and how they are related. Architectural knowledge includes knowledge about how the system performs its functions; how the components are linked together; and the behaviour of the system, both planned and unplanned, in different environments. Technical systems that are susceptible to remodularisation around bottlenecks are strategic targets of opportunity for entrepreneurial firms. The strategy involves, first, identifying “bottlenecks” in the existing system, and then creating a new architecture that isolates the bottlenecks in modules.

An entrepreneurial firm with limited financial resources can then focus on supplying superior bottleneck components, and while outsourcing 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 design. Over time, the focal firm can drive the ROIC of competitors below their cost of capital, causing them to shrink and possibly exit the market. Entrepreneurial firms rich in knowledge but poor in other resources can use superior architectural knowledge of a technical system to gain strategic advantage over larger and better endowed rivals.