Carliss Baldwin & Kim Clark — Design Rules: How IBM Created Ecosystems (and Competitors) - The Innovation Show

Episode Transcript
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(00:00):
today's book is a prerequisite textfor anyone thinking about platforms,

(00:05):
ecosystems, open architecture,or deep structure of disruption.
On the innovation show, we have spentyears interviewing people on how
industries break apart and reform,from Christensen to Osterwalder,
from McGrath to von Hippel.
Today's book is the RosettaStone that connects all of them.
Once you know what a modularoperator is and how it generates

(00:28):
real options, you can reread so manyother thinkers at a deeper level.
Three lenses for us to apply today.
One, for founders or operators,modularity is the engineering
precondition for ecosystem strategy.
You cannot platform aninterdependent product.
Two, investors.

(00:49):
The book formalizes why modular industriesspawn many small, valuable firms, while
integral industries spawn few large ones.
It will help you know what to lookfor and what questions to ask.
And for incumbents, once a competitorsplits your architecture, you face
an irreversible value migration.

(01:12):
The IBM System/360 story is the cautionarytale that we might share today, and
that indeed is the book's tragic irony.
The act of modularizing your productis the very act of inviting your
future competitors into existence.
We know well the innovator's dilemma.
This is the mechanic that underpinsthat concept, and it is e- even

(01:36):
more important in this age of AI.
It's an immense honor to host bothauthors in an innovation show exclusive
of their, in my humble opinion, massivelyunderrated, underappreciated book,
probably because it was too early,and now it is certainly of its time.

(01:56):
First up, welcome back to the show, friendof the show, and a guy I call a friend,
Kim Clark, you're very welcome back.
It's good to be here.
Thank you
Great to have you back always, Kim.
I always enjoy our chats.
And then a lady I have just met and Ihope to have back many more times on
the show if I pass my audition today,Carliss Baldwin, welcome to the show

(02:19):
Thank you so much, Aidan.
It's a great honor to behere and wonderful to see Kim
the honor is all mine.
I thought we'd start because there'san entire vocabulary for the book.
It took me a while to learn it.
I was r- I had written it down inone column when I was reading the
book, and we don't have time to shareall that vocabulary, but I thought
we'd start with the key term itself.

(02:41):
Carliss, maybe ladies first,and then Kim can build on it.
But the term itself,what is a design rule?
A design rule is a formal constraintmade explicit that allows people
are not directly involved in thecreation of the design to create

(03:06):
complementary designs are compatible.
So they, they don't have tobe there at the creation.
They are not integratedinto the original process.
But with the design rules inplace, can build a platform system.

(03:30):
Design rules are, in fact, the platform.
A platform system that can beextensible and creates many, many,
many options develop in different ways
Kim, maybe you'll come in and give usan example of a design rule at play
. Clothes are a great example of, youknow, you can buy, you can buy , shoes

(03:54):
and pants, shirts, jackets, dressesfrom completely different firms that
have no idea the other people areworking on stuff, and it all fits
together when you do it becausethere are a set of design rules.
And if you start, if you start lookingfor them, they turn out to be everywhere.

(04:19):
They are a really importantfeature of modern life.
Without them, we, we would not have whatwe think of as, you know, everyday things.
You think of… I mean, just, justwalk into your kitchen sometime
and look around you and you seeall-- You see modularity in action.

(04:39):
you know, the frying pansare not 18 inches wide.
They're just not.
The burners on your stove, they're allkind of about the same size, and they
all plug into the wall in kind of thesame way, and they use electricity
the same way, and they plug into thegas, and everybody can work together.

(05:00):
You look at, you know, you just walkaround your house and there's modularities
everywhere because we have a set of designrules that allow completely independent
firms who were not involved in designingthe rules to function and operate.
Where it becomes really powerfulis in a technology that where

(05:21):
modularity unlocks incredible value.
And that's what we, that'swhat we discovered really when
we dug in deeply into the IBMstory and the computer industry.
Because inherently in that technology,once you got, once you got away from
analog devices and got to digital, youwere moving into a technology that was…

(05:48):
It's so incredibly powerful thatit's unfolded the way it has over
the last, you know, almost now60 years because of modularity.
I mean, we, we love to say that modularitywas the underpinning of Moore's Law.
I mean, you don't get Moore's Lawwithout modularity, and you don't get,

(06:10):
you don't get everything we see aroundus that's electronic and digital.
all depends on, on modularity.
Maybe we'll build one term in therebecause the, you say in the book,
"Design is the process of inventingobjects or things," like you said,
"that perform specific functions.
But these options, the products ofhuman intelligence and effort, are then

(06:32):
called artifacts." And artifact is a keyterm to understand modularity as well.
Maybe we'll explain that.
you have to go to Carliss to do thatbecause she is, she's the wizard behind
turning anything into an artifact.
And,
Oh, no, no, no, no, no.
No,
my
technologies have of a fundamental nature,and before the digital, before digital

(06:58):
technology almost all advanced technologywas various forms of what do you call it?
Flow processes.
I mean, the idea was you made things go--be bigger if they-- and they went faster,
and as you sought, sought and speedcompanies also get bigger and faster.

(07:22):
And that's a fundamental flow process.
So it, it's A is connected to Bis connected to C, and, and to a
first approximation, everythinghappens in order, and there's a set
of prescriptions for making those,those technologies more efficient.

(07:46):
It's, it's you, you standardizethe steps, you them, you make
each step the same length, youkeep looking for the bottlenecks.
That was that was production as Iwas taught when I was an MBA student.
K-Kim skipped the MBA.

(08:08):
He, he went straight to the PhD. Butthere's a whole, you know, a set of
technologies from railroads to steelto for-- to automobiles to airplanes.
They all, they all s-fundamentallywork the same way, and they do not
really reward modularity, althoughsometimes you can modularize a flow

(08:32):
process and run things in parallel.
But to, to first approximation,modularity is not a goal.
So digital technology comesalong, and it has a very, very
interesting structure in that of itis hardware, and that's circuits.

(08:56):
And circuits basically are nottoo different flow processes.
It's, it's electrons areflowing through the circuit.
But the other half is software,and they are strict complements.
You-- Without one, the other is worthless.
So, S- so you have this immediatedilemma because software then, this

(09:20):
is pre-Claude soft- software thenwas a, was a, it w- it was a writing
process, a handwriting process.
And once it was written, youdidn't wanna rewrite it 'cause
that was very, very arduous.
So here you are, a manager, and you'vegot one thing that has Moore's law

(09:41):
going for it, where you just wanna turnover the designs as fast as you can
and get faster and faster and faster.
as the interface of that and theinstructions is this enormous barrier
where in order to run a different,faster set of circuits, you have to

(10:04):
rewrite the instructions scratch by hand.
And this was something that IBMwas all geared up to come out with
model after model after model, andthey wanted a whole-- Well, the,
in the-- Originally, they didn't.
They just wanted to do upgrades.
They didn't think of a whole product line.

(10:26):
But here they were stuck with thissoftware problem, and their, their
customers did not wanna rewritetheir hard-won software buy the
next bigger, better machine.
So this was like a, a Atremendous problem for sales.

(10:47):
Was just gonna stop it in its tracks.
No- nobody wanted to do upgrades.
And so IBM's chief executive gatheredtogether 12 of her 14 engineers
with different but complementary

(11:11):
I used to say they put them ina motel in Cos Cob, Connecticut.
Turns out it wasn't Cos Cob, it wasa, a nearby village in Connecticut.
They did this in late November,and they said, "You can't come out
until you solve this problem." Imean, Christmas is coming, right?
So so they-- everybody understood theproblem, and they solved it creating

(11:35):
design rules, which said that if youfollow these rules that are at the top of
the heap, then your software be performedthe next largest machine the next largest.
So, so, so you never, you neverhave to rewrite the software.
It just gets run on a bigger machine,and that bigger machine can also

(12:00):
run more software, bigger software.
And so it, it ended up beingquite a brilliant suggestion.
And they understood, the, the, theguys who, who were part of this
group, they said it just made sense.
By the end of the… Took them-- gave thereport, I think, on December 27th, but I

(12:24):
think they got to go home for Christmas.
They said, "We became more andmore convinced that it would
work," and indeed it did.
And that was the first real consciousexercise of a modular platform strategy.
We actually have lots of plat-- Thehigh street of a village is a platform.

(12:49):
It's got all these stores, they're alldifferent from each other they, they,
they benefit from the presence of others.
But nobody thought of that as a strategy.
That was just a street.
But with IBM and the 360, theyneeded something formal and

(13:10):
transferable and a set of principles.
it was-- I, I, I claim it is theone of organization design that was
not just A natural extension of whatwas happening, but was invented.
It was an invention.

(13:31):
So, so flow processes, they're just,you know, they go back to the pyramids.
We've always had sort of thesepeople agree that it's a platform
and they use its flexibility.
Job shops are just the way people get workdone if they don't have a lot of work.
You know, if it's a, if it's asmall enterprise and they need

(13:54):
flexibility and variability.
A line staff organization like anarmy or a government or a corporat-
big corporation, that's just sortof you start with job shops and then
you link them together with staff.
Or you have flow processes andyou link them together with staff.
But modularity, you have to actually setout to make it modular by creating the

(14:19):
design rules and having the modules obey.
So Aidan, let me, let me go back tothe idea of an artifact, and I'm gonna
use the one that we used in the book.
See this?
It's a mug, right?
And, it has certain elements to it.

(14:39):
You can see them now.
And this is something thatwe believed in very strongly.
You can see it all through the book,and all through Carliss's subsequent
work, which is, it really pays toknow the details of the design, to
actually understand in, in prettypretty significant detail what is

(15:02):
involved in creating a design, right?
So, you know, you've got a handle, you'vegot a receptacle, you've got a lid.
But if you-- If you've read it, I mean,there's a lot that goes into like, well,
how does the lid fit on this thing?
How does it, you know, how do youkinda make sure that it's right?

(15:22):
And, and you can see immediately asyou design this thing that there are
all sorts of decisions you have to makeabout the structure of this, "artifact,"
which is essentially a collection oflittle design choices that you make
in order to create something thatsomeone can use and use effectively.

(15:45):
So if you think about that idea and goback to the computers before the IBM
360, they had the same exact issue.
And-- But the only thing they knew andunderstood how to do was to, was to,
create the hardware, which required alot of design choices, because you had to

(16:10):
create interfaces just like you do here.
Like, what's the interfacebetween this and the customer?
Well, right now it's a straw, okay?
But you have other kinds.
You could make this like, youknow, like a little flippy thing
that you flip up and, you know.
So you had choices about how todesign the, the, the hardware of

(16:31):
the computer, and then you had tofigure out how to make it do things.
Well, the problem they had was thatthe only way they knew how to make the
computer actually work was to create aset of instructions for the computer.
in the early days, they didn'tknow how to write software.

(16:56):
fact, the idea of softwarewasn't even around.
The only thing they knew how to dowas to write instructions into the the
hardware, and then it's called, it'sactually called the instruction set,
and it gets hard-coded in circuits.
They knew how to do that, and thenthey knew how to tell the, the customer

(17:18):
how to access those instructions.
But it was all… In a sense, it wasjust like this artifact, you know.
You designed it, it all fit together,you figured out how to make it work.
It's fantastic.
Okay?
The problem was that they wantedto create new hardware in this car.
And so that, that all unfolded.

(17:39):
And, and the artifact itself, thehardware in the computer, fundamentally
didn't, change all that much.
It just got faster and bigger,so you could do more with it.
So that meant you could draw-- could,you could make the, you could make the

(18:00):
little circuits smaller, essentially.
And so the electrons didn'thave to travel as far.
And essentially, that's what's been goingon for on, you know, it's Moore's law.
So that artifact, the, the fundamentalissue was that uh, it was as if in order
to, to have a mug, now had to create somekind of instructions that the customer

(18:25):
had to give the mug before it would work.
You know?
It is true
the next thing that happened was that theyfigured out that, oh All these different
things need that customers really like.
Like, for example, they liked tobe able to print out what they were

(18:49):
working on create a document, right?
printers became a thing.
oh, we can actually now, because guysin-invented another piece of hardware,
and I was in the plant in San Jose, andI saw these things, these enormous disks.

(19:09):
These were like-- Theyweren't like little ones.
These were great big, huge disks.
And they figured out how to make a devicewhere you could send a digital signal
to the device, and it would encode it inthe hardware that is in the, in the disk.
And they could put them in this big stack,and you could sell a disk drive, you could

(19:32):
store enormous amounts of information.
And the customer saidit was fantastic, right?
those devices existed beforethe 360, but they were all
linked to that instruction set.
And so only the softwarethey had to change.
All of a sudden, the customer had to buynew printers and new disk drives, and it

(19:54):
was a mess, and they didn't wanna do it.
And, And, so they figured out.
But as you mentioned earlier uh, once IBMsplit up and they figured out how to do
it… By the way, doing it was not easy.
We can talk about it like, "Oh, theyfigured out modularity. they just decided

(20:14):
to make it modular." Well, that was,like, super difficult, really hard to do.
Uh, but they figured out how to do.
it, they pulled the instruction set outof the hardware, and they had to figure
out how, how do you make the machinetalk to the software and so forth, and
they figured out how to do it, right?
So they split it, and now youcould upgrade the machine, and you

(20:37):
didn't have to change the software.
And they figured out, well, if youhave design rules for that, now
you can have design rule for theprinters, rules for the disk drives.
You don't have to buy new disk drives.
By the way, we have new disk drivesif you want them, but you don't have
to buy them because we can upgradeyour computer and give you a whole new
thing, and it's faster and so forth.
Well, that was the beginningof the fundamental change in

(21:01):
the computer industry, right?
Uh, it, and it, it was--You could see it in action.
You could watch it happen because12 engineers that worked in San
Jose, where they made all theirdisk drives, walked out the door.
And they formed, uh, new companies,uh, started with new-- one new
company to build disk drives.

(21:23):
And that spawned this enormous disk driveindustry, and they became really much,
much faster than IBM and much better atbuilding drives, even though IBM had the
world's best scientists working on it.
The guys… It turned out that onceyou figured out, oh, it's like how
to encode in the drive, you can makethem smaller and faster and so forth.

(21:45):
Anyway, and that spawned the diskdrive industry, and the same thing
happened with printers and everyother peripheral that IBM had.
But IBM figured out, "Oh, this isactually really good for us." So they
didn't try to kill these people becausewhat they just realized is, "Oh, this

(22:08):
means we can create an IBM compatible,"essentially, e- no, we had those
language in those days, ecosystem,because the 360 became a platform.
And, uh, somebody once said the,uh, after the 360… This is hard to
imagine today, but the announcement ofthe 360 was, like, an enormous event.

(22:33):
It was covered by all the newspapers.
It was covered by TV.
enormous event in New York.
And the 360 got introduced peoplerealized, "Oh, this is completely
different." A few years later, not verymany years, people talking about IBM
as a competitor, and they just said,"IBM is the environment." And, and if

(22:59):
you look at the graphs we'd created,Carliss in her Magic created all these
beautiful graphs about value and stuff.
I think, if I remember right,IBM had something like, I don't
know, 90% of all the value in thecomputer industry was in, in IBM.
And that was with all thisdisk drive and printers and
all the stuff that was around.

(23:20):
Yeah, there you go.
And it was, like, unbelievable, you know?
It was incredibly valuable.
So that was the, uh, thatwas the peak you saw there.
The peak.
It's good
there's so much here.
I, I mentioned it's the Rosetta Stone,and what I mean there is when you

(23:42):
read it, it's, it took me a whilenow, I have to say, and I see the
depth of research that you've done.
And Carliss, now you've gone andreleased Design Rules 2 which
is just a massive body of work.
It's a lifetime of work.
But when you, when you start to getit, you start to go, "Well, now I
understand actually the source ofwhere Clay Christensen, may he rest in

(24:06):
peace, got the idea of The Innovator'sDilemma," because it's the same thing.
It's like, by doing this is a dilemma.
I have to do this becauseI can't continue to grow.
I can't continue to work this way.
I need to start to let go of parts of it.
I need to create anecosystem like IBM did.
But if I do that, I can createcompetitors, and the competitors

(24:27):
can actually be better than at someparts of the thing that I used to do.
And it, and it's a re-it's a huge dilemma.
And, and as you told me before, Kim,that the IBM, they, they did try to sue
some of the guys who walked out the ru-who knew the design rules, 'cause the,
the design rules were almost like theblueprint maybe we'll talk about that
Because I think for, for people, whenthey listen to this or they hear or they

(24:50):
see the book, they'll be f- afraid of it
like I was.
But w- but when you do start tos- understand some of these rules,
you just have these ah moments.
And, and one of those ah momentsfor me was understanding, and I'm
pretty sure Steve Jobs read yourbook and went, "We're gonna do that.

(25:12):
We're gonna understand thedesign rules, except we're gonna
orchestrate the entire ecosystem,
Yeah, you look at that diagram that you've
got on the screen, right?
And, uh, peak years arelate '60s up to about 1970.
And it just was, it just was the
case that some
people figured out, "Oh, you know,can create computers that are not as

(25:40):
big, not as functional, they reallyprovide uh, a, a different service
to people." And that's where, youknow, Digital Equipment Corporation
came from right about this time.
And, , they understood that you could, youcould now start building computers, and

(26:04):
you didn't have to do everything yourself.
And that's, that was an amazing moment.
There is something that's reallyimportant, though, when you talked
about competitors and understandingthings about if I, if I'm a-- if I'm
involved in creating the platform,it's enormous value that's created.

(26:24):
How do I capture it?
And one of the things that we can seein the history of this industry is that
in order to do that have to understandwhat's going on a depth that will
really allow you to make good decisions.
Like I'll, I'll just giveyou two examples at IBM.

(26:48):
One was that IBM owned30% of Intel at one time
and it's because Intel was havingtrouble and was under a lot of pressure
s-switching from being a memorycompany to being a processor company.

(27:09):
IBM is using Intel's processors.
So right away, you are now deep intothe platform, the ecosystem, because
there are companies now makingprocessors that only IBM used to make.
And now IBM stepped in because theywere using Intel's processors, and they

(27:33):
invested and, and own 30% of Intel.
They also, at about the same time,decided-- and this is when they
decided to go into a, to a smallcomputer and personal computer They,
uh, contracted with Microsoft tobuild the operating system, right?

(27:56):
But they didn't, which theycould have easily done, because
Microsoft was a tiny company.
They did not put in the contractwho owns the operating system.
And IBM could have easily ownedthe operating system, easily.
And of course, that-- those two things,the processor and the operating system,

(28:20):
became the only sources of profit in the,in that ecosystem that evolved over time.
The only people who made a lot ofmoney were the people who owned the
processors and the, and the operatingsystem, until, of course, other people
figured out how to do the processors,and other people figured out how to

(28:42):
generate operating systems, right?
Apple being one.
So it, it's-- I have a-- The twoof us have a colleague at HBS
who's um, he's one of my mentors.
His name's Bob Hayes.
And Bob once, wrote a paper,wrote a… It was a case, I think,
about the Swiss watch industry.

(29:05):
it, covers like hundred years.
And he said-- And he taught me this.
He said-- remember, the gameis never incontestably won."
It's never incontestably won.
There's always people who will come in.

(29:27):
So it looks like, at certainpoints in time, it looks like this
company just has, like IBM, hasa clo- total lock, which it did.
But only lasted… Look at your diagram.
It only lasted for a few years because,you know, once they, the technology got…
Now, they could've, they could've,if they'd understood the platform and

(29:51):
understood modularity, they could havefigured out where's the real value
that's gonna be really, really hardto copy, and then owned it, right?
But they didn't do that
- I find that fascinating where there's,uh, many case studies like that
where they had all the ingredients,but they didn't have the lens.
And for me, the book is a lens.

(30:12):
It's a new lens to look at things,and that's why I said about that
intro, if you're an investor oryou're a startup founder, you can
start to see things differently, andparticularly at this moment in time.
Carliss, maybe you'll say aword on this moment in time.
I mentioned that the book's of itstime, and it's, for me, what AI
seems to do is, is modularize , itexplodes things into pieces.

(30:36):
And then if you know what the Legobricks are and you can reconstruct
them, you can create something totallydifferent and totally new value
I'm glad you brought up AI.
It's, it's something thatis, is quite puzzling
in the large language models

(30:57):
one of the things in days with Kim,I kept saying, "How do we know it's
modular? How, how do you…" You know,we-- everybody talks about modularity.
Sun Microsystems was our first case.
How do §you know?
And

(31:17):
the thinking was very fuzzy at the time.
kinda knew because there were littleboxes and you could hook stuff together.
we came across a technology called designstructure matrices, which actually you to

(31:37):
identify the tasks being done by peopleor machines, the transfers of energy
and information those tasks that allowthe task to be done in the right order.
And
I was just entranced.

(31:58):
I'm still on a campaign.
I call them-- They were calledDSMs, I call them TSMs now.
But I'm, I'm on a campaignto get people to look at the
bloody TSMs of their processes.
Kim said, "That's the geekiestthing I've ever seen." And I
said, "Kim, you don't understand.

(32:20):
It unambiguously
tells
you if you have a modular system.
You don't have to believe the, you know,the, the, the necromancers, the, the
wizards saying, 'Oh yeah, it's modular.
We use modularity.' the, thelittle, the little transfer dots
will tell you." and you know

(32:46):
it makes the architecture of the what'sgoing on visible and understandable.
And Kim's first paper on innovationwas with Rebecca Henderson, and it
was about architectural innovationand the failure of established firms.

(33:10):
a very, very, famous,very influential paper.
And what it boils down to, and hedidn't use TSMs, they had a wonderful
case study of I think photolithography.
When you have architectural innovation,and this speaks to evolution in

(33:31):
the computer and other industries,changing the configuration of the
tasks and transfers inside the module.
And companies oftencan't cross that chasm.
They can't go from one kind of class--Many times, 'cause they don't know really

(33:54):
going on inside their architecture.
And, so when it comes time to,make a change, they have no,
no insight into the new thing.
A, a good example is Amazon.
You know, be- before Amazon, therewas Sears-- there, there was Walmart,

(34:17):
and before Walmart, there was Sears.
Sears couldn't turn into Walmart, andWalmart couldn't turn into Amazon.
if you think about it, what Amazon did wasit has-- it, it had a, a module that sold
things, and it replaced stores a website.

(34:42):
And then it had a module thatfulfilled things, that was logistics.
And what Bezos did within a yearof founding Amazon is he hired a
bunch of the second fromthe top guys from Walmart
and brought them to Amazon to setup a f- a fulfillment process.

(35:04):
And the ful- the architectureof the fulfillment process was a
standard logistics.
I
mean,
they, they are very admirable systems,but it was something that was well
understood in that Sears-Walmart line.
but going from stores to a website,
how would you do that?

(35:25):
If, if,
you
know,
i-i-if-- particularly if, you have a base,
an embedded base
managers and trained employees
and, and,
you know, inventory processes and
you know,
customers who love nothingmore than a bookstore.

(35:46):
you just--
it's, it's
it's like an impossible
dream.
and that was
what Kim and Rebecca
pointed out
in, as I said,
not, not, his
first paper, but his firstpaper on innovation, I Think.
yeah.
It's your, it's
Carliss
stuff.
uh, these, little off X's in adesign structure matrix indicate

(36:13):
inter-- a, a point of interactionwhere you can't do this until you do
this, or this needs to be connectedto this in some way through either
information or material or whatever.
But underneath that, in an arepeople and processes sometimes hidden

(36:33):
rules of thumb and other thingsthat allow that thing to function.
The thing that we did was based, the,the we did, and it, it was Rebecca
Henderson's thesis, um, which was a,remarkable thesis in and of itself.
But it

(36:53):
it was organizations that were small
These were uh, had 20 engineers.
They weren't huge thephotolithography industry.
When I talk about organizations, I'mtalking about those that were in the
photolithography business, 'cause some ofthem were uh, divisions of big companies.

(37:17):
But even within a small group, thisprocess works, where the change to-- in
the architecture becomes very difficult totransition because of the organizational
communication and patterns of work anddesign rules that been in place before.

(37:37):
But I want to comment on Walmartand Amazon because it's a really
great, great example, which is uh,Amazon was introduced in about '94, I
think.
Five.
So we're, we're 20 what?

(37:58):
31, 31 years since then.
Today
Walmart competes really successfullywith Amazon in online delivery and
running a website and so forth.
How-- But Walmart lived to make itbecause they were base-- They were--

(38:20):
They had this huge base business, right?
And it took a long time for thecustomers to kind of figure out,
"Oh, I can get stuff from Walmart."
It took a while.
And even today, online retail is nothuge factor in the retail industry.
It's like 20%, something like that.

(38:44):
People like to go to stores.
They like to shop, right?
Walmart had enough time and, andenough stickiness in the customers
that they could figure out, and ittook them a, it took them a while.
Um, wrote a case about a youngman who, his name's Sam Bernards.

(39:04):
He went after he, he was a uh,undergraduate major in, uh, in
computer, uh… I guess he was a--It was in electrical engineering.
Anyway, he did an MBA.
He went to Walmart because they hired himto help them figure out how to go online.

(39:25):
This would've been 20 years ago.
Okay?
Uh, and maybe less, Anyway, buthe built-- He, he got them online.
He built a team, about 80 people.
They g- they built a website.
They've invented how to takeWalmart… Walmart knew a lot about

(39:46):
logistics, how to do that, build anoperation that could be fulfillment.
And then it became like a $300 millionbusiness, which was tiny in Walmart.
Walmart had the time and theresources to live while they

(40:07):
figured out how to make transition.
The guys in photolithography, theincumbents who faced an architectural
change, and there were about, Rebeccadocumented there were about six of
them that she documented, becausethey happen every couple of years.
The incumbents invariably didn'tjust have trouble transitioning, died

(40:32):
Because customers could switchimmediately to the new technology.
They saw it was better, it was faster,it was cheaper, it was-- had higher
quality, could do finer line widths.
And the old stuff, the guys justhad a hard time, and once they
had a hard time, they were dead.

(40:53):
So the dynamics of the industry alsodepend on the customers and what's
going on in the customers' processes.
And I wrote another paperabout that, actually.
Uh, And you know, and the customer--Sometimes customers get stuck, like the
people who like to go to retail stores.

(41:13):
They like to go to retail stores.
It, it's sort of… It's not justthe m- stuff they want, but they
want the experience of choosingand walking around and doing stuff.
I'm married to a personthat loves to do that.
Me, I like guy shopping, which is I needX, I go into the store, X, and I come out.
Why shouldn't I justgo online, I go I want

(41:34):
"X, send me X," and theysend it to me tomorrow.
I say, "Great."
But I have a spouse who loves to shop.
In fact, I'll tell you a funny story.
You can probably edit thisout, but it's a funny story.
When my twins, I have turned…Let's see, how old were they?
I think they were about 16.
When they turned 16, I took them with,with Sue, my wife, to New York City

(41:56):
for a Broadway show and shopping.
So we got up from-- and went shopping,and the first place was, was The Gap.
It's this huge, beautiful storein, on, on uh, in New York.
And they had a whole lounge area for guys.
So I sat in the lounge area for guys, andmy daughters and my wife went shopping.

(42:18):
And they weren't gone for morethan like a half hour, and
they came back with nothing.
I said, ""What happened?" And they said,"There are no bargains in this store."
And
Oh, jeez.
taught me
that for them, shopping was like hunting.

(42:41):
And it didn't make any sense to themto fa- pay full price for anything.
they were after bargains.
And we spent a whole day walking up anddown stores in New York, and they never
bought a thing till we got to Chinatown.
And in Chinatown.
there were all sorts ofbargains and, you know.

(43:03):
so
some-- if you have customers thatare so wedded to shopping as a thing,
you can live and survive, 'cause ittakes a long time for that to happen.
Customers who are really focused onspeed and line width and, you know,
it, it, it takes, it takes like 30seconds for them to switch because the

(43:26):
equipment
works the same way.
It just works differently,and they figure it out.
easy to do, and the incumbent is dead
So you have, you have, to understandthe dynamics of the technology.
You have to understand whatmodularity really allows you to do.

(43:49):
You have to understand your customersand their processes and how it works
in
order to figure out where's the valuebeing created, how does it work, so forth.
And, you know, a lot of the bookwas-- grew out of our understanding
of, of real options, right?
That a sudden modularitycreates real options.

(44:09):
And then we figured out, oh, people candesign stuff in such a way so as to create
different kinds of modularity, differentkinds of stuff that they can use.
And if you understand that, the valueof that… So you have a certain
amount of value that's just modular.
Like ma-t- making something modularhas a certain kind of value.

(44:33):
But if you figure out how to dothe operator thing, the value
just goes through the roof.
And whether you claim it or not,or capture it or not uh, someone's
gonna capture it and figure out howto turn it into a, a real business.
And that's, that's where Clay, you know,Clay's work was really about how incumbent

(44:54):
firms have a hard time reallocatingresources into the new stuff, 'cause the
new stuff in his disruption world is sortof not as good as the old stuff, right?
A lot of what we see in modularityand, and its working out is different.
In that case, you have incumbentfirms that are big enough and

(45:20):
see clearly the threat, andthey do allocate the resources.
They do put energy and work intocreating the new stuff, and they
actually create the new stuff,but it doesn't work as well.
They have a hard time making it work aswell because they don't understand all
the nuances and all the, as Carliss said,all the off-diagonal little connections

(45:47):
that, are in the new technology becausethey don't have experience with it.
GM has a hard time making small cars.
Takes them years, years, tomake a really good small car.
They eventually do, so they survived,but it took them probably 20 years
before they made a really good small car.

(46:09):
Took Xerox, never made… They madesmall compu- small pocket copiers, but
they never successfully transitionedout in that world 'cause they were
so encumbered by their, the waythey were organized and stuff.
It was really hard for them to move.
And there are zillions of otherexamples like that where people

(46:31):
actually do t- do try to make it.
This happened in photolithography.
the incumbents made the new equipment.
They all made the new stuffbecause it wasn't that complicated.
It was just, you know, "Oh, wegotta figure out how to make this
work a little bit differently."
And they all did it, but it didn'twork very well because they didn't
understand all the nuances, it wasthe nuances that made a difference.

(46:54):
And their customers could move.
There was noth- they weren't locked in.
There was nothing that ke-kept the customers from moving.
So, whether you exploit the value or notdepends on how well you understand it
uh, that, that technical dynamic as wellas what's happening to your customers
so let me bring this to AI.
And the other amazing thing in theHenderson-Clark paper is a sentence at

(47:20):
the beginning of the conclusion thatsays, " Organizations mirror the structure
of their tasks." More or less that.
Which is saying, you know-- I mean,it's, it's so o-- if, if you skip
a task or you skip a transfer,that's often fatal to the outcome.

(47:41):
But no one had ever said it before.
And in order to mirror,you have to understand the
process at a very micro level.
why, that's why the DSMs were so fabulous,because they pointed out, at that

(48:01):
time in management theory and practice
top managers had abstractedaway from processes.
I, I, I mean, I'm gonnabe what- whatever, uh
Um, disrespectful.

(48:25):
So strategy came along and said, youknow, the, the unit of analysis is
something akin to a, a company in an army.
You know?
The, the top brass doesn't have to knowwhat's going on with the sergeants.
The sergeants do that.

(48:46):
And so we, we, you know, we, we thinklike generals and everybody want--
everybody wants to be a general, andespecially Harvard MBAs wanna be and then
generals and then commanders-in-chief.
Well, if, if it's the fine structurethat is to see, that is the true basis

(49:15):
of performance, then you wanna havean understanding of fine structure.
Today, we're hearing aboutthis in AI The buzzword for
the DSM right now is workflows.
Companies, in order to use AIeffectively, are having to map their

(49:36):
workflows, which they didn't do before.
But now they have to becausethe AIs need to-- need, need
help understanding workflows.
But There's alsodifferentiation across the

(49:58):
across the steps in the AI process.
So what gets all the attention arethe LLMs, the, frontier models,
I think they sometimes call them.
And they are trained
based on, you know, e-everything everwritten by man or woman or child.

(50:21):
But
nobody
sees what goes on inside the frontiermodel to put the sentences together.
We don't-- That's very much a black box.
Anthropic has tried one thing where theycan, they can isolate certain words to
certain sections of the LLM, like peoplecan see what parts of your brain are

(50:43):
activated by certain triggers, thoughts.
But nobody knows how the LLMsare truly wired because they're,
they don't learn that way.
Now we have agents, and with agents,we're-- To, to, to access the power of

(51:07):
agents, you have to think of the agentsas modules, and you hook them together in
an architecture to do different things.
My, my, my daughtertreats her life this way.
She has her recipe agent, she hasher-- she has a whole bunch of agents

(51:29):
doing different things in her life.
And then you have to more formalabout how the agents interact.
And I think, now I've not been part ofany AI deployment at an actual company,
but I think where they're struggling inthe fact that they have never had cause

(51:53):
to actually map the tasks and transfersthat go inside-- go on inside units
that are called divisions, departments,
offices,
teams, because, you know, it hasn'tpaid or they don't think it pays.
But now, because the AI demands it,all struggling to map their workflows

(52:18):
this is a perfect segue for a greatstory that you tell and where there's
a real threat with AI of the black box.
And I, I'll give it, I giveyou… 'Cause you told the story
about the supermarket, Kim.
I had one of these recently whereabout a decade or more ago when I
moved into the house I'm now livingin, actually it's, it's going on

(52:40):
13 years, I planted a hedgerowaround the border of my just garden.
And th- there used to be a roadthat ran through it, so a certain
part of the hedge has literally gotcompacted soil underneath, and I
took out three skips worth, threebig massive bins worth of soil.
I changed that soil.

(53:01):
But this piece just of thehedge struggled to grow.
But we had a landscaper who land, whocomes in and cuts all the hedges and the
gardens in where I live, and he, he knew.
I had told him, was like,"Okay, this, just understand
here, this runs under here.
This piece is struggling to grow.
We need to have patience with it.
I'm feeding it." So he knew about it.

(53:22):
Then the management company who looksafter our grounds changed the landscaper.
A new landscaper comes in.
I come home one day.
T- it was only recently.
Butchered my entire fence, my hedge.
Like years of growth gone, and hetook it down to the lowest common
denominator and thought I, he wasdoing me a favor 'cause it looked neat.

(53:45):
And I thought about your study of theautomobile industry and how institutional
knowledge can be lost and has dramaticeffects, way worse than my hedge,
as you showed with the automobileand the hood, and the oscillation
and the vibrations of the hood.
I'd love you to tell this story becauseit absolutely exemplifies what Carliss

(54:07):
was saying about the threat of theblack box and the threat of losing
knowledge, and actually know-how
this was a, this was a real problem forthe automobile companies in the US who
were moving from big cars to small cars.
And the hood of the vehicle is a, a goodexample of the problems they faced, right?

(54:29):
Because the hood covers theengine compartment, and in a
large vehicle, there's a lot ofroom in the engine compartment.
And so they learned over years,and it really was tacit knowledge.
It wasn't it wasn't formally,you know, written down anywhere.
It wasn't part of a modularization.

(54:51):
It was just guys figured out how todo it, you figured out where to put
stuff and what the dynamics of thevehicle were, its, its noise, vibration,
harshness is the measure they use.
And they had these rulesabout how you do this.
When you do a small car, thehood is much smaller, the engine

(55:11):
compartment is much smaller, andthere's not much room in there.
And so you have to figure out how to,quote, "package" the engine compartment
so that the vibration of the vehicleand the acoustics especially, work
in such a way that it's a pleasantexperience for people who drive, right?
So the first small cars they introducedwere subject to a lot of vibration

(55:38):
that they were not familiar with.
And so literally, when they firsttook these cars out on to test
them, the hoods would vibrate,
Oh, geez.
Oh
and they would, they would,they literally would, would roll
dear
a wave because there wa- there literallywere waves wa- waving through the steel.

(56:00):
The steel's very thin in ahood, if you ever go look at it.
It's very thin, and it was, it waswaving because of the acoustics and
the vibration that they created.
And it was very difficult forthem to figure out how to make
a small engine compartment anda hood that didn't vibrate.

(56:22):
They had to kind of create a whole new setof, quote, "design rules" that you put…
And 'cause essentially the enginecompartment was very modular, It's,
it's got certain things that have tobe in there, and where you put them
and how they hook together is you know,these are all modules and so forth.
it, it goes down to things like, youknow, how, how you build an engine

(56:45):
what the engine looks like, and howyou build, you know, the battery.
Where do you put the battery?
And, you know, you've got a, you'vegot a coolant system, and where do
you put that, and how do you putthe-- where do you put the pipes
and the tubes and all that stuff?
Anyway
the, the best example, worst exampleof of the problems that this created

(57:06):
was the a, a vehicle called the, theVega, and it was created by Chevrolet.
And I happen to own one, unfortunately.
But when the Vega was first puton the test track to drive around,
it liter- literally fell apart

(57:29):
which meant that the vibration in thevehicle so severe that it actually tore
some of the, the, know, the fastenersand the bolts and stuff, they sheared
off and the whole thing-- Literally,the thing fell apart on the test track.
Oh my
And they realized they hada whole different animal

(57:51):
that they were dealing with.
And-- there was-- It was very hard.
It was really, really hardto figure out how to build a
really, really good small car.
And one that not just wouldn'tfall apart, but it would be really
smooth and, you know, low costand no harshness in when you drive

(58:17):
it and, you know, all that stuff.
You know, it was a, you know… it'sexactly what we've been talking about.
They got, they got hit by thelittle off diagonal X's that they
hadn't, they hadn't-- they didn'teven know existed, you know?
And they had-- And it justtook them a long, long time.

(58:37):
And they tried, and they, they gotbetter, and they got better and better.
And today, the American companies haveactually abandoned small cars pretty
much because they don't make money.
And in fact, I think Ford doesn'tmake sedans anymore at all.
They just make SUVs andtrucks and and so forth.

(58:58):
So fascinating
there's a really important lessonin there that you could easily miss.
So, so many people in organizations,people who have great ideas,
w- may articulate those ideas,and they don't go anywhere, and
they get very, very frustrated.
You give an example of a kidcalled Jake and my son's name's
Jake, so it resonated with me.

(59:19):
But you have an idea, l- let's go with themug or the, the hood, and I'm like going,
"Why don't we use a lighter material?"like goes and spends ages trying to design
this, maybe create a prototype, presentit to the company, and it totally bombs.
But as you say, and, and thehuge thesis in the book is you

(59:39):
can't just change one module.
It affects the entire thing.
And I, I think that I'd love you to sharethat as a concept that our audience can
really grasp, because you can see wherefrustration comes from if you don't
understand how the modules stick together
Um, well, the optionality comes fromthe fact that there's some things you

(01:00:06):
don't have to track and that's thetrick of reducing the interactions
from the mess that is the naturalstate of a complex process to a bunch
of pinch points coordinated by designrules and by system integration.

(01:00:29):
That's a big learning process.
And to do it consciously, tr-truly it,it was an invention, not an evolution.
was not where the organizationsnaturally wanted to go.
Divisional corporations are a naturalevolution out of smaller corporations.

(01:00:56):
You hook them together, you createa staff that understands or, is
socialized to provide the glue, andyou have kind of a, a dirty modular
structure with blocks then connectionsbetween the blocks, and a lot of the
connections are provided by the staff.

(01:01:20):
But when you have that mindset
there are places you can't go.
Like GE tried to do computers, and GEwas a behemoth in the '50s and '60s.
I mean, they were-- they,they did everything.

(01:01:42):
General Electric, Thomas Edison's company.
that used electricity that was inthe purview of General Electric.
And but they tried to do computers, and itnever worked for them because .. it's very

(01:02:04):
natural for a big company to be modular.
The danger is that the modules fly offand, you know, you need to think very hard
about where the points of control are thatthe value doesn't all flow to the modules.
They have to remain beholdento the platform in some way.

(01:02:26):
But,
If you start out as a line staffcompany and you wanna become modular,
there's nothing in your DNA, inyour corporate DNA, that would
suggest to you what IBM did.

(01:02:46):
I mean, it, it took IBM-- had to set up
many new centers be very strict to preventthe modules from depending on one another.
And they were es-- almost the entire restof the industry was de novo computers.

(01:03:12):
They didn't have a past like IBM.
They… and so as with Amazon and online
they weren't mired or constrainedby a past set of practices.

(01:03:33):
If you look at, youknow, all the generations
after IBM, Kim wasmentioning Intel, Microsoft.
I mean, these are modular nativecompanies that started small and got big.

(01:03:55):
So, so that there really is,
Hi- history constrains you.
Your history constrains you a lot.
Just as I'm hopeless at AI.
I-- So not AI native.
I'm trying, I really am.
but I'm not AI native.

(01:04:17):
And I just wanted to put in one thingabout design rules before there were
des- instructions before the d- therewere design rules, were in the form of
switches in a large array of circuits.
A array bigger-- Or thearray was as big as a room.

(01:04:41):
And you had women, usually youngwomen, who went and flipped the
switches to make the instructions,to make the circuitry correct.
And there came to be a term, called akilogirl, and it was what you needed to do

(01:05:07):
1,000 instructions per hour, a kilogirl.
Only I think it was a day.
But, it became a standard.
A standard was a kilogirl.
So that, standard went away,but it was there for a while.

(01:05:29):
And those were the days when a bigcompany would have rooms full of
women on calculators putting in thef- transactions for the company.
The processing speed of one of thosewomen would be the measure of a kilogirl

(01:05:52):
So,
you know, let me, let me just say a wordabout what Carliss has introduced there.
Not about the Kilo girls, but about,
about the difficulty of, of, as you said,of a module coming into being that might
o- it actually might obey the designrules, but it also has other interactions
that have not been anticipated, right?

(01:06:14):
So imagine the following.
Imagine an organization thatis consciously modular itself.
This is another thing that we, wewrote a paper in 1997 or published

(01:06:34):
in 1997 in Harvard Business Review.
And if you go back and read thatpaper, the last two paragraphs,
I think, lay out the possibility.
This is, this is a apropos of what Carlisscalled the mirroring hypothesis we set
out and we said, "It's possible thatmodularity could become a feature of the

(01:07:00):
organization itself, as the organizationcould be consciously, explicitly
modular." So imagine a situation whereyou have that, and, there are a couple
of things, there are a couple of thingsthat have to be in place for modularity

(01:07:22):
to work at all, and are part of the--Design rules are part of it, but you
also have to have an architecturefigures out, well, what are the modules?
And s- and thirdly, you have to havea way to test a module that it will
actually function well in the systembefore… So you don't have to design and

(01:07:45):
put, put in operation the whole system.
You can test the module independently.
So imagine you've got that and you'vedecided, "Well, we're gonna try to create
an organization that's sort of modular."And so we've written about this in this
book we published a couple years ago.
And what we decided as we worked onthat was that, and we've-- and even

(01:08:10):
subsequent work that we've done, isthat it turns out that leadership
is actually the operatingsystem the organization.
And it's, it's the way decisions getmade, it's the way information moves
around, it's the way people interactwith one another and so forth.

(01:08:33):
And if you design a company-- Youcould design a company that is
actually modular itself around teams.
And if you create a setup where theleadership becomes the operating
system for a modular system, okay?
So it's gotta have that character.

(01:08:54):
Then you can actually do it,and there are some examples.
So one example you may befamiliar with is Haier.
Mm-hmm.
It's a Chinese appliance company.
I don't know if you're familiarwith what happens-- has happened at
Haier in the last 10 years or so.
But Haier went from having a classicfully integrated organization with

(01:09:19):
12 different layers of management.
It was a f- it was like a, at the time,it was probably like a $30 billion
global organization headquartered inChina, but operating all over the world.
Haier, by the way, apropos of whatCarla said, bought GE Appliances.

(01:09:40):
And but a few years ago, Haier decidedthat they were on-- that they were in
a death spiral They couldn't move fastenough with their big, clunky organization
to respond to technology changes andcompetitive moves and global dynamics.
They needed a much, muchdifferent organization.

(01:10:01):
And, and bless their hearts,they completely created a
complete different organization.
It took them a while to do it.
And what they did is they,they created, at the bottom,
their modules, which are teams.
And there are-- in hire today,there are 4,000 of them.

(01:10:24):
And above them is one layer, andit's called, it's called ecosystems,
These are… So the teams are allin different things like, I mean,
one team is actually a factory.
So the GE appliance factory in Kentuckyis, in Louisville is, is a team.
Anyway, they got all these teams and,and they have designed it so that

(01:10:49):
the staff is where the resources are,but the action is all in the teams.
And the senior executives nolonger instructions or commands.
There's noth- it doesn't work that way.
These senior executives noware investors and architects.

(01:11:15):
That's what they do.
They architect and they invest.
then the middle layer,there's only three layers.
middle layer are people whowatch over the ecosystems.
And then you have an ecos-ecosystemleader, and then you've got… And
ecosystem leaders basically are--it's a very modular structure, meaning

(01:11:37):
that the teams can, they can kindacome up with whatever they want to.
They can get resources internally.
They have to contract with thestaff for resources, or they can
go outside if it's a better deal.
And so they become very entrepreneurial.
But in order to function thatway, there has to be information

(01:12:01):
for-- about the architecture.
And the architecture for that kindof organization includes: what's
our strategy What are our values?
What are the principles that wewant our company to operate under?
What are our objectives specifically?
And everybody, all those 4,000teams and the, you know, the

(01:12:24):
teams are like 10 to 15 people.
So you've got thousands of people and,you know, they have a big organization.
Say they're like… I think they'realmost $70 billion in revenue.
Anyway, here's an example of a team.
There was a team whose responsibilitywas rural washing machines, or washing

(01:12:49):
machines sold in rural areas of China.
Okay, so this is-- it's in, it'sin China, and they're selling
washing machines to rural customers.
That's the team, right?
There's like 10 or 15.
They design the products.
figure out where they're gonna be made.
They contract with the, youknow, the operations about how
to distribute it and market.
So they get it, theybuild all that, right?

(01:13:09):
They're the team.
They discovered something, and thatis that their customers were using
washing machines to wash vegetables
And they'd put the vegetablesin the washing machine.
They wouldn't put soap in, they'd justturn it on and, and wa- go through
the wash cycle and, and it turnedout it worked really well, right?

(01:13:32):
So the guys thought, " Well, whydon't we do that and make that
a feature of the machine so wecan do it a whole lot better?
'Cause we can create better baskets,we can create a s- an actual cycle that
does that." And they designed it, theyworked with engineering to get it done.
They figured out how to make it, getthe products made, and they s- it became

(01:13:53):
like, I think it was like $100 millionbusiness, because it was a really
valuable thing for their customers.
old Haier would neverhave figured that out.
They couldn't possiblyhave figured it out.
So the idea is you put this teamreally close to customers, you

(01:14:13):
give them flexibility, they havea framework they operate under,

which is (01:14:19):
what's our strategy?
are our values?
What principles do we use?
What are our objectives?
So that kind of very visibleinformation goes way down.
So somebody like, you know, operatingin whatever country knows as much about
the strategy of Haier as the CEO, andthen they can make good decisions, and

(01:14:40):
the decision work together, and theyfigure out how to make… And, you know,
the staff is a support group, not…
They don't tell people what to do.
So it's possible to do this.
It's possible to create.
And they're coming up withmodules in these teams that nobody
ever thought of before, right?
But because the organization is explicitlymodular, anticipate that that will happen.

(01:15:05):
It will happen, and it's a goodthing, because now we figure out,
"Oh, how do we make this work?"
And that says, "Okay, what are…"And Carliss is, she loves DSMs.
What are the Xs, right?
No
this gonna work?
What are the Xs?
How do we build it?
How do we connect it?
And they work with thestaff and, you know.
But it's happening 4,000teams across the whole world.

(01:15:26):
Haier has grown much faster.
It's much more nimble.
It's much lower cost than everbefore, and it's like a dynamo
because they've unleashed the powerof modularity in the organization
Di- did you write aboutthat in Leading Through?
'Cause I, uh, that's where I read it from.
I, I love telling the
Oh, did we?
No, did we?
Yeah, we, I think we hadone little example in there.

(01:15:47):
certainly,
we certainly have done it, wecertainly have done it in the
work we've done subsequently.
Yeah, they, well, it explains to me howyou understand how you've got to your
level of thinking now, and like Carlisssaid earlier on, IBM was the environment.
And to me, it's like where you'reworking now with the Leading Through
Institute, it's like leadership isthe environment to enable this now.

(01:16:10):
It's the same, it's the same thing,and if you understand the le- the lens
of modularity, you can arch- architectthe organization to be modular.
The final… I we need to finish upnow, but I, the thing I really got
out of the book was this as well.
I mean, so many aha moments, and I,I love going back and really getting
my hands dirty with this content.

(01:16:31):
But 1968 Conway, Conway's Law thatthe, the product is, is imprinted in
the organization structure, and thenyour paper, Kim, with Rebecca in 1990,
that actually, that, that's the mirror.
It works both ways.
It actually gets back, imprintedback into the product as well.

(01:16:52):
And then both you and Carliss, CarlissClark that, or Kim, your, your content
together lets you understand this.
And then we go, "Well, actually we cando something about it." And that's,
that was kind of my, one of the many,many moments of, of joy of understanding
this content that came to me as well.

(01:17:12):
So it's it's, it's a brilliant book.
And you know what?
We didn't even get near, near anyof the things like substitution
and all the different kind of ideasthat are splitting that are in the
book, all these great concepts.
Maybe we'll do a part two and sh-share those six, the, the six real key

(01:17:32):
ideas that you can actually ar- artif-ar- architect a modular organization
if you understand these things.
Kim, I'll come to you first and, andmaybe share your, your final thoughts,
but also the work you're doingtoday and where people can find you.
well, first of all, thankyou for putting us together.

(01:17:53):
Carliss and I started workingtogether about 1985 or '6,
I think, somewhere in there.
Yeah
And we worked togetherfor, you know, 20 years.
Yeah
and this is exactly what it waslike, back and forth, trying…

(01:18:14):
We had a lot of fun together.
So the thank you for putting us together.
I will just say that, It's a littlebit like the little boy with a hammer.
Everything looks like a nail.
And once you understandmodularity, it's, everywhere.
And it's really, really powerful.

(01:18:34):
And Carliss' explication of agents,AI agents and workflows and stuff
is a, is really a wonderful exampleof how this concept can help you
understand things that otherwiseyou have no idea what's going on.
So it's a really powerful idea, andpeople have understood that now, and it's,

(01:18:55):
it's a commonplace, but it was a realjoy to work on, on this stuff together
and to discover these things and to seethem in action is is really wonderful.
And I think what we're doing now, wepublished this book a couple of years

ago called "Leading Through (01:19:12):
Activating the Soul-Heart-Mind of Leadership."
And what we've learned since then isto think of leadership as the operating
system of the organization, analogousto an operating system in a computer
where leadership really doescarry that weight organization.

(01:19:36):
And every organization-- in, inevery organization, leadership
is the operating system.
And some operating systems workreally well, and some are horrible,
and they, they chew people up.
They they fail their moral responsibility.
They actually hamper potentialin the organization and so forth.

(01:19:59):
Others are much more, powerfulbecause they become… The closer
they get to becoming truly modular.
So that's why we call it themodular leadership system, is
that leadership is not just…Is, is it is definitely personal.
It's a really important part ofit, but it's also organizational.
So that's an importantthing we're working on.

(01:20:20):
We've created this thing called theLeading Through Institute, and we've
now, we've now come to understand adeeper thing, which is that the, the
leadership, the way we defined it,coupled with AI, because we've now
created a learning platform we callPermios, which is allows people to

(01:20:41):
learn the principles of leadership andthe operating system really deeply.
So it's not just what they know.
They re- they understand its value,they feel it, they do things,
they become different people.
And in that context the combinationof modularity coupled with this AI
system means that what you create isyou create a, the infrastructure for

(01:21:09):
any business system That you wantto implement in order to operate.
and it becomes the, the,the structure that you use.
It's sort of this underlyingstructure, but it's inherently modular.
So you design it that way.
design the AI platform that way.
So the platform itself is modular,and it's, it, and it's, I mean,

(01:21:34):
Aidan, it's just like incredibly
powerful
Unbelievably powerful.
And I'll link to yourwebsite as well, Kim.
The, it's leadingthrough.co.
But I'll link to that and I'lllink to the episode we recorded
with your brilliant daughter andyour son, John and Erin as well.
I'll share that in the show notes as well.
But Carliss, coming to you, Ilearned so, so much from you.

(01:21:55):
I wanted to ask you because on the, yoursecond volume Design Rules Part Two, the
cover, the cover has a, a signification,and I wanted to, I wondered what it was
yes.
Let me
Kim has a copy there, Carliss.
Look.
Ki- Kim has it there, Carliss

(01:22:16):
Yes.
So that is a picture I took of theinside of St. Mark's in Venice.
I own the copyright to the picture.
There is a famous essay StephenJay Gould and Richard Lewontin

(01:22:38):
"The Spandrels of San Marco."
and the ar- the, the, the spandrelsare the, you know, the arch goes
up and then the, the space between
bones of the arch, are the spandrels.
So you can see a couple of spandrelsin this picture the, in, in the middle.

(01:23:05):
Gould and Lewontin's argumentwas one I found compelling.
It was that
They, they were undergoing some kindof debate with their colleagues about
evolution, and they said, "You know,some things exist because the physics

(01:23:29):
requires it." So the spandrels do not--The spandrels exist because if you want
an arch of that kind, you need that space.
You need those quasi-triangular areas.
It was not that somebody said, "Iwanna create art in quasi-triangular

(01:23:50):
areas," although all the spandrelsare filled in with beautiful art.
it's the, the architecture demandedthat the space be there, and then
creative people made use of that space.
And thing-- people are morerespectful of technology now.

(01:24:13):
Kim was, Kim was a huge influenceon management and, and on all of us
about the importance of technology.
But there's a, there's a wholeschool scholars that don't think
technology matters, you know?

(01:24:34):
You can, you can have anythingyou want, in, in an organization.
It's, it's all sociallyconstructed anyway.
And I always felt, you know,that, that since… since…
recruited me after I got tenure.
I was in the finance group, and I didn'thave any idea what I was gonna do next.

(01:24:58):
And he said, "Come and learn abouttechnology. Not about production, but
about technology." And it was, it was--say it was eye-opening, it was, it
was a, a, an amazing world unfolded.
But one of, one of the things that,

(01:25:21):
that became a conviction, wasthat the world will be what it is,
whether you like it that way or not.
And you just can't arguephysics or chemistry or bi-
you know, you, you just can't.
And so technol- that, that made me feelthat technology is the foundation of

(01:25:44):
management, because that's, that's,that's where the rubber meets the
road, and just gotta deal with it.
You can't wave your hand and, andsay, "Oh, I'd like an organization to
be this way," without comprehendingthat there's some rules.
A- anyway, so, so the book's cover,I was looking for a cover and I

(01:26:10):
said, "You know what ex-" And I--there's nothing in the book that even
mentions the spandrels of San Marco.
this is the backstory to thatcover, which I like very much
Beautiful.
Well, you two are the spandrels of
Right
this n- of this content,and it's been a, an absolute

(01:26:31):
pleasure having you on the show.
I'll link also, Carliss, to wherepeople can buy the book as well, and
part one as well of the the book.
See this, but the headline,the tagline is, is the key, how
technology shapes organizations
Yeah.
And, and, and that's, you know, it'snot how organizations shape technology.

(01:26:52):
It's about, you know, you deal withthe technology and your organization
follows, which is probably notexactly… Well, so, so K- Kim is

(01:27:18):
the leadership expert.
I've never purported to be an expert,although I have to say Kim's leadership
is a lesson in itself, and whathe did at the school was amazing.
What he's doing with hisinstitute is amazing.
Taught, me a whole lot.
Taught me everything I know.
But I never,

(01:27:41):
It was never my ambition to be a leader.
I, I never thought it wassomething I could aspire to.
So anyway, that's, that's neither here nor
there.
This book nails this topic.
absolutely nails it.
really, really hard toargue with this book.

(01:28:02):
And that has, that has a profoundinfluence because so much of today's
society is based on something completelydifferent, which is there isn't,
there is-- are no spandrel effects.
That is that everything is…There's no such thing as truth.
You create your own.

(01:28:23):
no, there are no absolute laws.
There's nothing that, you know,you just kind of create your own.
And everything's relative, andthat turns out not to be true.
Amen.
Amen.
The guys, it's been, it's been a hugeprivilege, and I have to say to you,
Carliss, y- you said earlier on that youdidn't know anything about AI AI, or now

(01:28:45):
you're saying about leadership as well.
You sound a little bit like IBMwhen they had Intel in their grasp.
You have the ingredients,and you've proven it.
It's been an absolute pleasure.
Authors of Design Rules, Kim Clark andCarliss Baldwin, thank you for joining us
Thank you
Thank you.

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Carliss Baldwin & Kim Clark — Design Rules: How IBM Created Ecosystems (and Competitors)

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.css-14f5ked{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:2;overflow:hidden;}Carliss Baldwin & Kim Clark — Design Rules: How IBM Created Ecosystems (and Competitors)