Wissenschaftszentrums Berlin für Sozialforschung
FS II 93-201
Restructuring in the PC Industry:
New Challenges, New Actors, New Strategies A Study in Labor and Industrial Policy
Helmut Drüke
Berlin, April 1993
ISSN 0724-5084
Wissenschaftszentrum Berlin für Sozialforschung gGmbH (WZB) Reichpietschufer 50, D 1000 Berlin 30,
Telefon (030) 25 49 1-0
Die Studie präsentiert erste Forschungsergebnisse im Zusammenhang mit dem Projekt "Veränderungen der vertikalen Arbeitsteilung. Die Rolle von Informationstechnologien und Arbeitspolitik für Strate
gien zur Verkürzung der Vorlaufzeit für neue Produkte. Ein Bran
chen- und Ländervergleich", das am WZB von H.Drüke, U.Jürgens und I.Lippert durchgeführt wird. Sie konzentriert sich auf die Verän
derungen in einer der in dem Projekt untersuchten Schlüsselbran
chen, nämlich der PC-Industrie. In seiner Analyse der PC-Industrie erklärt der Autor den tiefgreifenden strukturellen Wandel, der gegen Ende der 80er Jahre begonnen hat.
Die neue Wettbewerbssituation ist durch die Tatsache bestimmt, daß das erste Unternehmen, das ein technologisch neues Produkt auf den Markt bringt (Time to Market), die höchsten Gewinne erreichen kann. Unter diesen Umständen wird die Organisation des Prozesses, ein Produkt auf den Markt zu bringen, zu einem Schlüsselfaktor für den Unternehmenserfolg. Das Unternehmen, das gemäß der traditio
nellen tayloristischen Trennung von Planung (Produktentwicklung) und Ausführung (Produktion) vorgeht, läuft Gefahr, die endlosen zeitbedingten Aufgaben der internen und externen Prozeßbeteiligten nicht angemessen koordinieren zu können. Denn das Diktat des Zeit
wettbewerbs erfordert vielmehr ein simultanes Vorgehen der Pro
duktentwicklung und Prozeßplanung.
The study presents initial results of research connected with the project "Changes of the Vertical Integration. The Role of Informationtechnologies and Labor Policy for Stategies to Shorten the Lead Time of New Products. A Comparison of Sectors and Countries", led by H.Drüke, U.Jürgens and I.Lippert at the WZB. It focusses on changes within one of the key sectors examined in the project, Personal Computers. The author presents an analysis of the PC-industry that aims to explain the profound structural changes beginning in the late eighties.
The new competitive situation is determined by the fact that the first company to bring a technologically new product to the market (time to market) will realize the best return-on-investment. Under these circumstances, the organization of the process to bring a product to the market becomes a key factor for the success of the company in the situation of radical change. The company which proceeds using the traditional Taylorist separation of planning (product development) and implementation (production) runs the risk of not being able to properly coordinate the countless time- bound tasks of internal and external actors. The dictate of time competition forces, on the other hand, a simultaneous process of product development and process planning.
This work goes to the question of what the determining factors of the competitiveness of PC manufacturers are and what role the labor policy plays.
1. Introduction 3 1.1 Sector Crisis:
Losers and Winners 4
1.2 Conclusion 9
2. The Impulses of the Change:
Technology and Market 11
2.1 The Microprocessor as the Determining Factor
of Product Innovation 11
2.2 New Market Conditions 15
2.2.1 The Trend Toward "Open Systems" 15
2.2.2 Greater Product Diversity 16
2.3 Shortening of the Product Life Cycle 19
3. The New Industry Structure of the 1990s 23
3.1 New Actors 23
3.1.1 New Manufacturers of Microprocessors 25
3.1.2 The PC Clone-Makers 23
3.2 World Market Leader for Workstations:
Sun Microsystems 29
4. Strategies to Master the Change 31
4.1 Split Product Strategy 31
4.2 New Alliances for New Products 33
4.3 IBM Reform: .Towards A Leaner PC Division 35 5. Differences in the Competitiveness
of the PC-Manufacturers 37
6. Further Research 43
Literature List of Figures
45
47
Figure 1: Market Shares of the PC-Manufacturers 1991/92 6 Figure 2: Market Shares of PC-Manufacturers
for Mobile Computers 6
Figure 3: Market Shares of the Manufacturers of Workstations 7 Figure 4: Balances of Computer Manufacturers 1990 and 1991 8 Figure 5: Productivity Differences
between the Computer Manufacturers 9
Figure 6: "Time to Market" of Main PC Manufacturers. 14 Figure 7: Interaction between the Introduction
of New Microprocessors and the Development of
New PCs (IBM-Compatible PCs): Compaq and IBM 17 Figure 8: Interaction between the Introduction
of New Microprocessors and the Development of New PCs (IBM-Compatible PCs): Toshiba, SNI
and Olivetti 18
Figure 9: Market Shares of 386 and
Other 32-Bit Microprocessors 24
Figure 10: Components of the Retailprice of a High-End-PC,
Average-Level-PC and Low-End-PC 26
Figure 11: The PC product range of Apple 32
Listof Tables
Table 1: Shortening of the Product Life Cycle
for Personal Computers 19
Table 2: The Most Important Strategic Alliances
in the PC-Sector 37
1. Introduction
At the center of the analysis of this study is the thesis that the developments that shake the computer industry at the beginning of the nineties (sales crisis, differentiation between losers and winners) are indicators for a far-reaching transformation of the PC sector. The tendency toward a decline in sales and profit of many PC manufacturers which can be observed since the beginning of the 1990s is more than just a passing weakness of the industry. Certainly, the upward and downward trends of the economy as a whole are also reflected in this area of the investment goods industry. But the internal factors are probably much more relevant.
From the demand side, the following factors are important:
a certain saturation of the market after the enormous growth rates of up to 50% yearly as well as
the shift to the segments of notebook computers and workstations, which was recognized too late by many producers
Serious changes on the supply side are:
the advance of open systems, thus the tendency to put together equipment and systems from different manufacturers to form one PC-system,
the emergence of low-cost suppliers (clone-makers) who profit from this standardization by offering especially good bargains on PCs which are just as powerful as those of the large manufacturers,
the massive price drop for personal computers which can be traced back on the one hand to the enormous reduction in the price of the main components (microprocessors, me
mory chips, hard disk drives) and on the other hand to the presence of these low-cost suppliers.
The development of the crisis becomes really dramatic in a competitive situation which is de
termined by the fact that the first company to bring a technologically new product to the mar
ket (time to market) will realize the best retum-on-investment With the rapid fall in prices, the amortization time for investments becomes shorter and shorter.
1 This paper is an initial result from the research project: "Changes in the vertical division of labor. The role of information and communication technologies and work policy in strategies for shortening the lead time for new products in a comparison of companies and industries" which is being carried out at the Wissenschaftszentrum Berlin fur Sozialforschung by Helmut Driike, Ulrich Jiirgens and Inge Lippert For further research related to the changes in the PC industry see the book of the author with the German title:
"PCs 'made in Europe' ein Auslaufmodell. Die Krise der europäischen PC-Hersteller im Branchenum
bruch der neunziger Jahre", published by edition sigma, Berlin 1992, and edited by the Wissenschaftszentrum Berlin.
Under these circumstances, the organization of the process to bring a product to the market becomes a key factor for the success of the company in the situation of radical change. The company which proceeds using the traditional Taylorist separation of planning (product de
velopment) and implementation (production) runs the risk of not being able to properly coor
dinate the countless time-bound tasks of internal and external actors. The dictate of time com
petition forces, on the other hand, a simultaneous process of product development and process planning.
Companies do not only have to get their products quickly to the market, but also rapidly re
place their models in order to keep pace with the specific innovation dynamic which is prima
rily influenced by the increase in the performance of the microprocessors.
The current study deals with the topic in three steps. First, after describing the market situation in terms of market shares and productivity these new conditions will be presented from the perspective of technology development and the market structure as new challenges for the PC manufacturers (chapter I). In order to better understand the industry dynamics and in particular the role of microprocessors in this regard I will present my own empirical findings regarding the product policy of the important PC manufacturers in Europe, Japan and the USA. Fol
lowing this in chapter III will briefly introduce the most important new actors in the PC sector and in the semiconductor industry. Included in this is an analysis of the reasons for the success of low-cost suppliers in the PC market. The third chapter deals with the companies' strategies for dealing with the new challenges. The final chapter pursues the question of which compa
nies are best prepared for the industry development of the 1990s. In this chapter we will diffe
rentiate between the PC manufacturers according to the groups "old" Americans and Eu
ropeans as "losers" and Japanese and "new" Americans as winners and analyse their differen
ces. We will then present and discuss our initial findings on the factors which determine com
petitiveness.
1.1 Sector Crisis: Losers and Winners
In the following chapter I will present data concerning the performance of main PC manufac
turers as explainable variable of the study. As performance indicators the market shares in the different segments of the PC-industry and the relation of sales per employee as an approxima
tive indicator for the firm's productivity are discussed^.
Data on another important performance variable in the PC sector, the time to market, will be presented in the chapter 2.1
2
Figure 1: Market shares o f the PC-manufacturers 1991/1992
Source: D er Spiegel 49/1991, p. 149, Dataquestfor 1992.
The IBM hegemony in the PC sector lasted in effect six years. Two years after IBM entered the PC business with its XT in August 1981 Business Week reported: "The winner is IBM"
after Big Blue overtook the previous leader, Apple, in sales. The end of IBM's undisputed do
minance of the PC business can be set in the year 1989, after the Japanese leadership in the ra
pidly growing segments of laptop and notebook computers became apparent and the low-coost suppliers took over considerable market shares.
In 1992 IBM still led the PC sector (measured in shares of the market) with a 12.4 % share (1991: 15,25%). Apple increased its market share which fluctuated between 8 and 10% since the end of the 1980s up to a remarkable 11.9%. Compaq succeeded with its new product line issued in 1992 and came up to the third place. The Japanese defended their position as impor
tant competitors: NEC as number four and Toshiba as number six. European companies still play a subordinate role.
Olivetti and Groupe Bull have market shares of only 3% respectively. The European manufacturers are mostly local players with a minor important position even on the European markets, e.g. SNI achieves 60% of its sales in Germany and 90% in Western Europe. IBM has a larger market share here than SNI, Olivetti, Bull and Philips combined.
For the market of mobile computers we have, at the moment, only the results for 1991. In that year above all IBM and Apple had made up ground in comparison to the previously unchal
lenged leaders, the Japanese companies, above all Toshiba. Added to this is the emergence of
the low-cost suppliers, even in this segment. For both of these reasons we can no longer speak of a Japanese domination in the area of mobile PCs.
Figure 2: Market shares of PC-manufacturers for mobile computers
Source: IDC, estimates fo r 1991, in brackets shares fo r 1990.
In the workstation segment of the microcomputer industry the American manufacturers like Sun Microsystems, Hewlett-Packard, Intergraph or still DEC are in a comfortable lead of the Japanese competitiors, whereas European firms are completely irrelevant in this rapidly growing segment. As one can see IBM was for a long time absent as forerunner in this area.
Figure 3: Market shares of the manufacturers of workstations (in %)
31,6 (29,9)
9,1 7,1 (11,8) (5,5)
Source: Financial Times, April 7,1992
Figure 4 with the company balances for 1990/91 gives a more precise picture of the competi
tive situation of the computer companies, whereas this does not only take the PC sales into account. The European companies were especially hard hit in the general crisis situation of the years 1990 and 1991, which found its expression in sales declines for all major manufacturers.
They registered in part substantial losses.
This is only an approximative indication for an analisis differentiating between weak and strong companies in the PC sector. The data for the Japanese companies include the results of the semiconductor, that means of a flourishing segment of the electronics industry, and Hewlett-Packards result represent also the high sales of its famous printers in these years.
This was also the first period of losses for IBM, whereas it marked a further stage of decline for Unisys. Besides the Japanese manufacturers only Hewlett Packard showed a positive balance.
Figure 4: Balances o f computer manufacturers, 1990 and 1991
How leading players fared in 1991 R e v e n u e « ^ Pre-tax profit ■ toeel~t
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An indication of the productivity of PC manufacturers is given by the relation of employees to sales, as it is presented in figure 5.
Sales per employee (in 1000$)
Figure 5: Productivity differences between the computer manufacturers
Source: Fortune, April 20,1992; graphic according to an idea from the Financial Times
Here we must qualify this comparison in two respects. On the one hand, for some companies these figures do not only include sales from the computer industry (as indicated) and on the other hand, these data can only be used as superficial indicators due to the very different degrees of vertical integration (60% at IBM compared to 25% at Apple). Further research must examine this more closely. Especially this figure justifies the classification into four different groups of PC manufacturers according to their competitiveness as presented in the following conclusions.
1.2 Conclusion
As a result of these figures concerning the performance it is useful for the further analysis of the differences in the competitiveness between the companies to form three categories of firms: the Japanese, the Europeans and two groups of American companies, i.e. the traditional computer manufacturers and the "new Americans".
Particularly this last result gives an important clue as to where the analyse of differences in productivity and competitiveness in the computer area should start. A sweeping comparison of regions and countries, as is seen frequently in the literature (Clausing et al. 1990; Seitz 1991), cannot grasp the differentiation between companies within the regions or companies not included. Thus the thesis of the Japanese companies' lead over the competition in all areas of the electronics industry must already be revised at least for the PC-sector. Different classes of microcomputers have different leaders: IBM in the desktop segment, Toshiba in the sector of portables, and Sun in the workstations area. Obviously, these different segments within the PC-sector require different strategies. Apparently there is a group of very competitive Ameri
can companies like Compaq, Apple, Sun Microsystems or Dell.
2. The Impulses of the Change: Technology and Market
In the area of technological development the account concentrates on the microprocessor as the primary factor determining product innovation. This does not underestimate the influence of technology development - continually expanded integration (scale integration) - and the parallel fall in price from generation to generation of memory chips. Of course, the increased performance and capacity of hard disks with a simultaneous miniaturization also played an important role. But experts agree that the development of the microprocessor is the determi
ning factor for the development of the PC-sector as a whole.
2.1 The Microprocessor as the Determining Factor of Product Innovation
The development of each new generation of microprocessors determined the rate of product innovation for PCs. The development of the microprocessors did not only come from an auto
nomous logic of technological development, but also reflected the new relationship between customer needs and changes in supply. After the personal computer had gained entrance to the offices and noticeably changed the work structures, the need to use computers expanded endu- ringly and goes beyond the comfortable word processing. Complex calculations and finance analyses, desktop publishing, graphics and CAD work shifted to the forefront of user interests, which in turn gave impulses to the microprocessor development.
As Table 1 shows, this microprocessor development was not so closely coupled in time with PC development for the first processor types as with the 386 processor since 1985. Since then it has almost become a question of survival for PC manufacturers to get PCs with the new microprocessors on the market as soon as possible. A manager formulated it succintly:
"The time to market of PCs is defined as the time between the announcement and deli
very of the new microprocessors and the delivery of the new PC with the new micro
processor as its core component."
I will look at this connection more closely with my own empirical findings.
The introduction of successive generations of microprocessors formed the basis for the deve
lopment of personal computers which were increasingly powerful and thus had an increased breadth of applications:
The 286 processor for PCs and workstations, which was developed in 1982, allowed par
allel work with different programs (multitasking).
The 32-Bit 386 processor, which made complex finance analyses, scientific applications and desktop publishing possible, was developed only three years later (1985).
In 1989 Intel presented the 486 processor with 1.2 billion transistors enabling the user to do software engineering, to use databanks, to apply multiusing, to carry out complex finance analisis, and to work more comfortably with Cad.
In April 1991 Intel introduced with the 386SL a processor especially for the use in note
book computers. It is itself in principle a computer.
In March 1993 Intel presented its new microprocessor called "pentium" (because they could not obtain a copyright for the number "586") which has three million transistors and a clock rate of 100 MHz. This MPU will handle 100 million instructions per second (MIPS), thus twice as many as the fastest 486 version.
The micro2000 processor has been announced for the end of the 1990s which will con
tain 100 million transistors on a chip surface of 6.45 cm2 with a clock rate of 250 MHz, which carries out two billion instructions per second.
The first microprocessor which was installed in IBM compatible PCs, the Intel 8086, was not originally intended for use in personal computers. When looking for suitable processors for its first PCs IBM selected the 8-Bit processor from Intel and developed a corresponding system architecture. This explains why the introduction of personal computers on the basis of the 8088 or 8086 microprocessor from Intel took place long after the introduction of the pro
cessors. In the case of the 286 processor chip, which Intel presented in 1982, the PC was also built to match the configuration of the microprocessor. The companies reacted more rapidly to the introduction of the 286 processor with the presentation of the respective PC models.
This development dynamic changed starting in 1985. From this point on Intel, as the micro
processor producer, coordinated its respective product innovations more closely with the pri
mary PC manufacturers. Intel polled the technological leaders in the industry as to their wishes for the next processor generation and the PC manufacturers, for their part, acquired enough material from these network contacts to develop a new PC model on the basis of the new microprocessor.
For the PC manufacturers and software developers involved - these were 20 companies accor
ding to information supplied by Intel to the author - these network relations provided a deci
sive advantage. They now had the possibility to shorten the development times for new PC models, as they knew the power and functions of the new microprocessor in advance. Thus some companies had a head start on the competition in respect to the development of PCs for complex financial analyses, scientific applications and desktop publishing. Companies which were not tied into these information relationships thus had a structural disadvantage. For a long time European manufacturers were far less involved in this information network between
Intel and the PC industry. To some extent, Intel changed its attitude towards European PC manufacturers at the beginning of the nineties. To my opinion this is a direct consequence of the threatening of the quasi-monopol in the field of the 386 and 486 MPU. Europe is now considered as a strategic market, so that SNI and Olivetti are informed earlier and broader than in the past. But as before they are excluded from the close relationship that Intel has establis
hed with the technologically leading PC manufacturers as IBM, Compaq, Toshiba, and others.
With each succeeding generation, the time between the development of the microprocessor and the PC innovation became shorter. In this regard we can see, as figure 6 shows, consi
derable differences between the PC manufacturers. Compaq was the first company which could present a PC with the 386 processor, in fact only eleven months after the introduction of the processor. IBM presented its 386 PCs only seven months after Compaq.
Figure 6 shows the time distance between the introduction of a new PC after a new microprocessor has been presented by Intel. This period of time is defined as the time to market for PC manufacturers.
In the case of the 386SX and 486SX processors, Compaq and IBM presented a PC model with this processor type in the same month as the introduction of the processor. The time span bet
ween the 386SL processor developed by Intel especially for notebook computers and the first notebooks from Toshiba^ which used this processor was exactly one year. This delay was primarily due to the complicated tasks of miniaturizing the components for notebook com
puters and developing more powerful batteries.
SNI, as an example of a European manufacturer, generally presented its new PC model with a significant delay compared to its direct competitors at IBM and Compaq.
In terms of its "time to market" Olivetti generally is an "also-runner", but with two extremes.
In the case of the 386 DX 33 MHz the Italian manufacturer was the first to present a respective PC whereas in the case of the 486 DX PCs Olivetti were in comparison with the market leaders rather late.
The data of Toshibas product introduction cannot be strictly compared to the data of the other firms. Tos
hiba is mainly a manufacturer of mobile computers that require on the average a longer development time when it comes to miniaturization of other components like the hard disk drive or the power supply or the development of new display technologies.
Figure 6: "Time to Market" o f Main PC Manufacturers. (Introduction o f PCs in months after the introduction ofM PU types)
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As in the case of the 386SL, the microprocessor itself has increasingly become a computer in the computer. For the PC manufacturers this means a limitation to their possibilities for improving the performance of their own PCs and further strengthens the trend toward a hard
ware similarity between the PC manufacturers. The PC becomes a commodity product. The more functions and capacities which are integrated into the processor chip, the less possibili
ties for the PC developers to locate functions on logic chips (e.g the chip set)4 and thus deve
lop a special configuration on the basis of the standard processor. Possibilities for develop
ment for individual PC manufacturers actually only exist in the area of display technology, the user interface or in secondary functions as in securing against unauthorized access realised e.g.
in the company specific Bios^ set up as a modification of the source code provided by the market leaders of firmware.
2.2 New Market Conditions
The patterns of usage have changed noticeably in the few years that PCs have existed at all. If at the beginning of the history of the PC, dabbling with computer programs, then later the beginnings of word processing or work with spreadsheets were at the forefront, the develop
ment of hard- and software has now opened up a broad range of applications for the users.
This is a primary motivating force behind the differentiation of the products according to per
formance, comfort and, finally, price.
2.2.1 The Trend Toward '' Open Systems''
Up until the beginning of the 1980s the computer industry was characterized by the fact that each manufacturer had its own operating system for its products. In addition, these operating systems were often limited to only one product category which made compatibility, even bet
ween the products of one manufacturer, next to impossible. The computer makers saw this as a primary means for stabilizing customer loyalty and protecting the product segment from com
petition, even within the company itself. If the customers did not want to lose immense inve
stments from earlier acquisitions, they had to purchase each of the newest product generations put out by the manufacturer which they had chosen years before.
With the appearance of internal company network architectures in the 1970s, the need emer
ged on the part of the customers of being able to combine hardware from different manufac- 4
5 These are chips which support the microprocessor.
BIOS = Basic Input/Output-System.
turers. First of all IBM attempted to achieve a compatibility, at least between its products, with the establishment of SNA (System Network Architecture). But the development ignored such firm-specific standardizations. In the International Standard Organization (OSI) a seven layer communications protocol was developed which was not compatible with IBM's SNA.
Through the tremendous sales of equipment which was compatible to the IBM products, this standard spread to the extent that about 80% of all PCs sold worldwide were built according to this configuration. IBM long profited from this development which was set off in 1981 by Big Blue itself. But near the end of the 1980s this competitive advantage turned into a trend which tended to undermine the IBM dominance. The customers' brand loyalty recedes to the extent that other PC producers can sell equipment with nearly the same or better performance, but at considerably lower prices. If they are also the first to bring a PC with a more powerful micro
processor to the market, then these companies can achieve clear competitive advantages. To the extent that the competition concentrates on the factors time and price, established manufacturers like IBM and Compaq lose market shares to these new companies. The way in which these newcomers to the PC sector achieved their competitive position is the topic of chapter 3.1.2.
2.2.2 Greater Product Diversity
To demonstrate the product diversity which has developed over the years an evaluation of the product policy of central PC manufacturers is presented in the figures 7 and 8: IBM, Compaq and Toshiba as market leaders and SNI and Olivetti as the remaining European companies. To have a survey of comparable companies only the manufacturers of IBM-compatible PCs are included.
The period from 1987 to 1992 is characterized by an enormous expansion of the supply of PCs. As the figures 7 and 8 show, the number of basic models and versions offered by the leading computer companies has clearly increased. This development holds true for all processor types. Different versions of the basic models with 8086, 8088 and 286 processors were offered over time and a large variety of versions of the 386 personal computers have come out in rapid sequence since its introduction in 1987.6
The variety increases considerably when the different configurations in regard to hard disk capacity, RAM size and video board are included.
6
Figure 7: Interaction between the microprocessor introduction and the development of PCs (IBM compatible): Compaq and IBM
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The five companies considered here differed widely in the variety of PCs under the aspect of the microprocessor versions used.
Compaq was not only the pioneer with 386 personal computers, but also the company with the largest number of variations of this model. The company produced three times as many 386 PC versions as Toshiba and IBM between 1986 and 1990.
Toshiba distinguished itself as the supplier of an enormous variety of versions of the 386SX PC. In 1990 alone six laptops with this processor type were offered with four hard disk versions and three different displays (back- and side-lit LCD, gas plasma, and LCD active matrix). The 486 PC played more of a subordinate role for Toshiba as the com
pany offers on western markets primarily laptops and notebook computers which are not necessarily desirable with the 486 processor.
IBM presented a broad spectrum of models in the PS/2 series in April 1987 with diffe
ring processor types, which were supplemented over the years by models of this series based on processors with higher clock rates. In April 1992 IBM introduced two additio
nal models in the PS/2 series, also versions with 386SX processors which had been improved considerably over the Intel original with the same clock rate.
SNI only entered the PC business in 1985. Up to now the company has presented a limi
ted assortment of PC models compared to the other four competitors.
Olivetti has a broader product range than its European competitor SNI but lacks the variety that the market leader IBM and Compaq have.
For the product variety of Apple see figure 11 in chapter 4.1.
2.3 Shortening of the Product Life Cycle
In the pioneer days of the PC no one would have dared to predict that products could almost be technologically obsolete as soon as they got out the door. The PC itself was considered to be a complicated and innovative system that first had to achieve a breakthrough on the market.
At that time no one thought about a rapid replacement of equipment which had gone through a costly and lengthy development process. But the competition had also changed in this point.
For all five companies studied, the personal computers introduced before 1988 had a much longer product life cycle than those which were introduced later. Whereby the personal com
puters at the beginning of the 1980s were in part produced for four years or longer, the average product life cycle is only 20-25 months in the meantime - with a decreasing tendency.
Table 1: Shortening o f the Product Life Cycles for Personal Computers Product Life Cycle (in months)
(average of the variants) PC model
Toshiba
Manufacturer
Compaq IBM SNI
8086 27.5 37.6 46 38
8088 27 45.5 48 -
286 27.8 35.1 34.2* 45
386 21 26.1 (44.2) 35*
386SX (24.5) (30.8) 22 29*
486 (1) 15.3* 20* 18
486SX (10) (10) (14) (10)
Source: own research Legend:
( ) = A ll products were still being sold as o f June 1992.
* = More than 75% o f the product variants were still being sold.
But significant differences between the five companies can also be seen here. Compaq and IBM form the two extremes. Compaq had already removed all computers introduced in 1989 from the market as of the middle of 1992, the qualifying date for this study. IBM, in contrast, had not taken any of its 1989 products and only one of its 1988 products out of circulation.
SNTs products have an extremely long product life cycle for all the PC models. Toshiba's products produced since 1989 have run continuously, the production of only one product from the year 1990 has been discontinued.
So, the thesis of a reduction in the product life cycles is thus supported by the data of five major competitors among them market leaders as IBM, Compaq and Toshiba. Additional information about the dynamics of this trend can be obtained by differentiating according to basic models, and thus the microprocessors, of personal computers.
Up until the middle of 1992, personal computers were built with seven microprocessors, namely the 8086, the 8088, the 286, the 386, the 386SX, the 486 and the 486SX. The 386SL is used exclusively for notebook computers.
The product life cycles of these models differ considerably.
Personal computers with 8086 or 8088 processors (starting in 1981) were built on the average up to three years. According to prognoses by industry experts, PCs with these processors will no longer be produced after 1993.
286 personal computers (starting in 1983) have a product life cycle of about two and one half to three years. But they are only still being made by some Far Eastern producers at the moment.
In the case of 386 PCs (starting in 1985) the product life cycle looks different. Hardly a model is produced longer than two years here. IBM, which has not stopped production (which started in 1988) of any of its 386 models, and SNI are exceptions here. Toshiba and Compaq have replaced a large share of their 286 personal computer with basic models on the basis of the 386SX processor, a simplified (16-Bit bus) version of the 386 processor. A long life cycle is predicted for the 386 PCs due to the supply of 386 proces
sors from manufacturers like AMD and Chips & Technologies. The break-up of Inters quasi-monopoly led to the fact that PCs can now be equipped with 386 processors which are even less expensive than Intel's but more powerful than these. This benefits the cu
stomer, who can obtain powerful PCs for increasingly sinking prices.
Only a few 486 personal computers, whose production did not even begin until 1989, have been removed from the market.
The shortening of the product life cycles and the increase in the product variety confront the manufacturers with enormous challenges, as they have to deal with the financial and personnel efforts of continuous product innovation. As we have seen, continual successful product inno
vation is essential for the survival of the companies. The companies only have a very brief time for their investments in new products to pay for themselves on the market. The prices for PCs are falling sharply due to the continually increasing supply and thus little time remains to realize the costs for research and development.
"Because a lot of money is spent on research and development these costs have to be paid for through the product price in the first year. We do not know how long the pro
duct can keep its share on the market" (Sculley 1988, p. 252)
The manufacturer which is first on the market profits from this advantage - in view of the price fall, the second supplier already has problems to cover his costs. Due to these constraints many companies have serious problems realizing profits in a time which is characterized by a hard displacement competition. I will be dealing with this in the following chapter.
3. The New Industry Structure of the 1990s
Up until now I have described the new challenges posed by the technological development as well as the market shifts. It could be shown that the established companies reacted in comple
tely different manner to the dynamics of the development of the microprocessors. As a con
sequence of these new conditions the suppliers and their strategies became quite differentiated at the beginning of the 1990s. This is the subject of the following chapter.
3.1 New Actors
The triad made up of IBM, Microsoft and Intel did not prove to be so stable that the compa
nies continued the coordinated development of new products. New alliances have been ente
red, which bring about rivalries between former allies and, on the other hand, bring together former rivals like IBM and Apple.
There is no longer a single hegemonic company in the new structure which sets the industry standard and develops it further. The emergence of low-cost suppliers in the course of the establishment of open systems led to a considerable loss in market shares for the established PC manufacturers. Japanese manufacturers like Toshiba, NEC or Sharp pulled away in the new segment of laptop and notebook computers. Other companies have difficulty keeping up here.
In the following chapter I will be introducing the most important new companies in the PC industry and the related component industry, respectively.
3.1.1 New Manufacturers of Microprocessors
New processor manufacturers have appeared, offering products with in part higher perfor
mance, but at lower prices than Intel. These products are increasingly being used by PC manufacturers instead of the Intel products. According to industry experts, another advantage is that, unlike Intel, these manufacturers can offer processors more specialized for differing PC needs.
Figure 9: Market Shares o f386 and other 32-Bit Microprocessors
Source: Business Week, June 1,1992, p. 49
New suppliers in the semiconductor industry which are appearing on the market are becoming increasingly important for the PC industry:
Thus, for example, the company Advanced Micro Devices (AMD) (sales in 1991: $1.2 billion) has brought out a 386 processor which runs at 3.3 volts instead of the usual 5.5 volts, which means an immense increase in operating time for battery-run PCs like laptops and notebooks (from approx, three to a maximum of nine hours)7. The presenta
tion of these powerful, energy saving processors led to a decline in sales of Intel's 486 processor, which was supposed to gradually replace the 386 generation. But AMD suf
fers from a relapse being forced by a sentence to write its own source code for the 386 microprocessor. According to company executives this will take at about nine months what is a long time in such a dynamic sector as the semiconductor.
LSI Logic, founded in 1983, soon became a leader in the area of gate arrays, or customer specific chips. In addition, the company developed Rise microprocessors for MIPS Com
putersystems and Sun Microsystems as well as chip sets for PCs and chips for computer graphics, image compression and the new chip technology DSP (Digital Signal Proces-
AMD is not only making a name for itself on the microprocessor market The company belongs to the avant-garde in regard to the development of "flash memory", these are erasable electrical memory cards which could, in the interim perspective, replace the hard disk as a storage medium.
7
sing). The sales increased from $200 million in 1986 to almost $700 million in 1990 (figures from Rappaport/Halevi 1991, p. 74). LSI Logic leaves the production up to Tos
hiba.
Since it was founded in 1983, Cyprus Semiconductor has recorded considerable profit rates of about 16% (compared to the industry average of 14%). Cyprus' field is fast me
mory chips (static RAMs and, increasingly, high-speed microprocessors and memory chips for supercomputers).
The new chips from AMD and other competitors have regenerated the market for the 386 pro
cessors. This is expressed, for example, in massive price reductions for the PCs equipped with them.
Intel reacted to these new competitors in its traditional area of microprocessors with increased development efforts. This addresses two types of customers. On the one hand, the possibly disloyal PC manufacturers, who expect a greater variability of processors from the products of the competition, and, on the other hand, the producers of high-end PCs or workstations, who tend to use Rise processors (more on this later). According to Business Week (June 1, 1992), Intel wants to have about 30 new variants of the 486 processor on the market by the end of
1992.
Intel's second strategy for meeting the loss in hegemony involved the rapid development of each new processor generation. The interval from one generation to the next was previously four years. Now Intel strove to present each new processor generation in two-year intervals.
The team which is developing the pentium (586) processor, which is to come on the market in the summer of 1993, began - according to our source - the work on its successor product, the 686 processor, only one year after the begin of the design work for the 586 processor. Work on the 786 processor was begun in 1992.
3.1.2 The PC Clone-Makers
The clone-makers - like Dell or Packard Bell in the USA, Vobis or Schmitt in Europe and some Taiwanese manufacturers - can be considered as the big winners in the upheaval in the PC sector, at least at the beginning of the 1990s. The background of their climb from a less important phenomenon in 1985 to be the winners in the upheaval starting in 1990 will be described in more detail in the following.
RAM (1MB) ROM Other IC's
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As figure 10 (level June 1992) shows, the clearly lower prices of the clone-makers (category C in the figure) compared with the suppliers with average prices like Tandon or Schneider (category B in the figure) or expensive PCs from IBM, Compaq, Hewlett Packard, or SNI (category A), have primarily three causes:
The lower costs for components, which in turn result from the possibility of realizing inexpensive cost prices through mass purchases - often on spot-markets - on the one hand, the use of low-quality components on the other hand.
The lower costs for R&D, as they are merely assemblers of prefabricated components.
The less expensive sales organization. 8
We will first examine the first point, the advantages of clone-makers when purchasing com
ponents. Manufacturers which develop their PCs themselves have to buy the components which they will install in their computers early in their product planning. Their make-or-buy decision comes very early - around six months before the begin of the series production. Their buyers purchase the components at fixed prices, although their price often falls rapidly in the six months between the order and the begin of series production. With the large quantities which the self-developers purchase, this adds up to a considerable profit reduction.
The clone-makers proceed differently in this point:
As the delivery period for a PC is only a few days, and clone-makers do not have to take the long span of product development of about eight to ten months from the concept to the begin of series production into account, their price calculation by purchasing is much more favor
able. In their case, the price fall between the ordering of components and the delivery of PCs is only a fraction of what the self-developers have to carry. If sales and production are so clo
sely connected that the assembly of PCs only takes place after a certain number of orders have been placed, then storage costs are also avoided, a factor which self-developers always have to reckon with.
Clone-makers often buy components on the spot markets at a very low price, advertise PCs which are to include these components, and begin the assembly only after a certain number of orders have come in.
We will now look at the third point, the low sales costs. Whereas the manufacturers of expen
sive PCs spend about 23% of the price for sales, the sales costs amount to only 7.4% for the clone-makers (see figure 10). And while the sales mark-up for expensive PCs makes up 17.5%
of the sales price, this share is only 8.5% for the clone-makers. They save enormous amounts
8 A point of respectively higher importance is the cancellation of 10.000-15.000 DM contrail costs.
in sales by not offering their equipment in specialist stores, where technically trained per
sonnel aims at customer service. The computers are offered rather in supermarkets and department store chains. But, increasingly, other sales channels are being opened up which contribute to enormous sales advantages for the clone-makers. Prominent in this regard is the ordering of computers using the telephone or through the mail. This alone explains the savings of over 20% of the sales surcharge for clone-makers.
This strategy is successful when the components have been standardized to the extent that their assembly is no great problem and when the time factor, as we have seen, becomes a cen
tral factor of the competitive situation. A manufacturer which only assembles components to produce a computer can react much more rapidly to changing market needs than a company which must calculate eight to ten months development time.
The ca. 400 Taiwanese PC manufacturers play an important role as sources for the European and American clone-makers. As OEM suppliers, they frequently deliver complete PCs, often also with the label of the end retailer. In 1991, Taiwanese manufacturers produced 49% of their 2.5 million computers for others (it was 33% in 1990)9. The Taiwan manufacturers work with a profit margin of 10%, which is being continually decreased in the ongoing price war for PCs.
These companies have considerable cost advantages due to the possibility of shifting labor- intensive production sequences, like producing and mounting motherboards and extension boards, as well as producing plastic parts, to China. The final assembly is frequently also shifted to the neighboring countries.
Up to now, however, the suppliers from these countries have been users of basic technologies for personal computers which were developed in the USA or Japan. Furthermore, Taiwan, e.g., also remains dependent on the two leading PC nations for the technologies of the equip
ment (like the monitors, processors, hard disks and other components for example). For more simple equipment, like keyboards and mice, Taiwanese manufacturers have 35% and 72%
shares of the world market (in CHIP, October '91, p. 298), whereas their world market share of personal computers is about 10%. The low technological potentials of the clone-makers and the limitation of competitive advantages primarily to effective organization of sales and stock support the conjecture of many experts that the clone-makers will not have a great importance for the future of the industry.
9 Business Week, May 18,1992, p. 80.
3.2 World Market Leader for Workstations: Sun Microsystems
Sun Microsystems (Stanford University Network) was founded in 1982. In the case of Sun, the success story of the pioneer companies in the PC area was repeated, this time in the rapidly growing workstation segment. The company now has sales of $1.7 billion and dominated the world market for workstations in 1992 with a share of 31.6% (see figure 3).
Sun laid the basis for this success with two strategic decisions. The first decision was, together with AT&T, to develop the Unix base system to attain a more open version, Unix System V.4.
The second decision was in 1989 to end its cooperation with the previous microprocessor sup
pliers, Motorola and Intel. Instead, Sun began in cooperation with Cyprus Semiconductor the development of its own very fast architecture on the basis of the Rise processor. Sun called this microprocessor Sparc (scalable processor architecture). The decision to publish the com
patibility requirements for hardware and software contributed to the rapid spread of the Sun configuration. Imitators and software developers soon came to market with adapted products, which, on their part, furthered the sales of Sun products.
In its business strategy Sun Microsystems aims consciously at surviving the competition through a quick replacement of products. "Time to market" thus explicitly becomes a primary guideline of the strategy.
According to industry experts (see Saxenian 1990, p. 190) organizing a supplier network of highly developed producers of central components for workstations is central for this strategy.
"Relying on external suppliers allowed Sun to introduce four major new product gene
rations in its first five years of operation, doubling the price-performance ratio each successive year. Sun eludes clone-makers by the sheer pace of new product introduc
tion" (Saxenian 1991, p. 425).
In the concrete cooperation, end manufacturers and suppliers often can hardly be strictly diffe
rentiated:
"When Sun involves its contract manufacturer Solectron in the process of designing as well as producing the central processing units and peripherals for its workstations, or when a team of Sun and Cypress engineers collaborate in a shared facility to develop a high-performance version of Sun's Rise microprocessor, the boundaries of these firms begin to blur" (Saxenian 1990, p. 103).
In the last two chapters, we showed the reasons for and the dynamics of the upheaval in the PC sector at the beginning of the 1990s as well as the restructuring of the actor structure which ensued from these changes. Two different phenomena could be observed for quite some time.
Not only has the actor structure become more differentiated, PC suppliers like Nokia and Nix- dorf have disappeared from the market, and new suppliers have emerged, but also the establi
shed PC manufacturers have changed their structures and strategies in order to take into
account the developments outlined above and to stabilize their market situation. This is dealt with in the next chapter.
4. Strategies to Master the Change
The primary elements of the new strategies of the established companies are the topic of the following chapter. First of all we will describe the change in competitive strategy, that means above all supplementing the product range with PCs which can compete with the clone- makers. After this we will describe the most important alliances between PC manufacturers and primary suppliers, above all in the area of microprocessors and operating systems as a means to define a non-proprietary industry standard for the long-term future of the industry. In the last section we will show how the market leader IBM is attempting to improve its flexibi
lity through organizational reforms in order to survive the competition from the clone-makers.
4.1 Split Product Strategy
Companies like IBM, Compaq and Apple which are known as suppliers of high-performance, but expensive, PCs are confronting the clone-makers in their main segment, the inexpensive PCs.
To this end the established PC manufacturers are selecting the same sales strategies as the clone-makers. They do not hesitate any more to sell the renowned brand name products in supermarkets or discount stores, telephone sales are to be made possible and the service offe
rings noticeably reduced, as they are especially cost-intensive (see figure 10).
In addition to the reduction of sales costs the established PC manufacturers are also planning on a massive reduction of production costs through their own production lines or separate companies for inexpensive PCs.
A good part of Apple's 60% increase in sales and 14% increase in turnover in 1991 is due to the success of the low-cost version of the Macintosh Classic.
In June 1992 Compaq presented two dozen desktop and laptop PCs with prices around the $1000 mark — for the cheapest PCs of them —, which is still about 20% higher than the prices of the clone-makers, though. With this Compaq wants to depart from its pre
vious practice and meet the clone-makers direct in the segment of inexpensive PCs. Also new for Compaq are sales in supermarkets and department stores.
In September 1992 IBM reorganized its product line in order to do justice to various customer needs. In the same month the PC division attained a large degree of indepen
dence as a separate company within the corporation as a whole (see chapter 4.3).
Figure 11: The PC Product Range o f Apple
The change in the competitive strategy seen on the example of IBM, Compaq and Apple signalizes the extent to which these companies are threatened by the advance of the clone- makers. The insight has prevailed that in a short-term perspective the only way to produce profits is by following the pattern of the clone-makers. This means low production costs, short through-put times, matching the production to operational control and a low degree of vertical integration.
An expansion of the product range could be observed at Apple at the end of the 1980s and the beginning of the 1990s in all three product segments, the compact computers, the entry level family, and the high performance computers (high-end PCs). The product range was clearly expanded, in particular with new products in October 1990 and October 1991 (see figure 11).
In the fall of 1991 Apple presented PCs which, first, would be able to compete with the low- price suppliers, e.g. Classic H, the low-priced version of the Macintosh Classic line, and, second, would enter profitable segments of notebook market (the Powerbook line) and with two high-end computers, the Quadra line, which were designed for networks. Apple thus reacted to the decline in sales and profits at the end of the 1980s and drastically changed its business policy, as it now also offered low-priced versions.
4.2 New Alliances for New Products
In a short-term perspective the established computer companies want to meet the challenge of the clone-makers with low-cost quality products. But in a long-term perspective the medium- range layout and customer specifications of the personal computer is at stake.
We must differentiate two groups of alliances. First, the group of alliances which is aimed at sharing the costs for the development and production of the next generation of memory chips and uniting the know-how of differing manufacturers. These alliances as the joint develop
ment of the 256 MBit D-Ram memory chip by IBM, Toshiba and Siemens are not directed at the PC sector in its narrow sense, although the development of memory chips was and is one of the driving forces for innovation in PCs.
These should be differentiated from the alliances which aim directly at the development of the PC industry. The further account concentrates on this type of alliances.
The explicit goal of all five alliances is to influence the further development of the PC sector.
In the age of open systems they are trying to shape and establish a binding standard for the entire sector, as was the case with MS-DOS in the history of the PC up to now.
Table 2: The most important strategic alliances in the PC sector
Group Founded Members Objective
ACE (Advanced Computing Environment
April 1991
Almost 100 (including«
Microsoft, Compaq, Digital Equipment)
Standardized computers with components from Intel and Mips (pro
cessors) as well as Microsoft and Santa Cruz Operation (operating systems); alliance against IBM and Sun
IBM/Apple June 1991 Exclusive club con
sisting of the two leading PC manufac
turers
One standardized computer for the 1990s with compo- components from IBM and Apple
Competitor: Ace OSF (Open Soft
Foundation)
May 1988 Over 100 (including IBM, Digital Equipment, Hewlett Packard, NCR)
An OSF variant of the operating systen Unix made a standard for all classes of computers
UI (Unix Inter
national)
December 1988
Over 100 (including AT&T NCR, Sun, Fujitsu)
Like OSF, but with an AT&T version of Unix PRO (Precision
Organization)
March 1992
9 initiators "(HP, Convex, Hitachi, Mitsubishi, e.g.)
Hewlett-Packard's Rise architecture should be come standard
Source: Top Business, November 1991, p. 160 and additions from the author (level: June 1992).
Table 2 shows the major alliances, their leaders and their respective objectives.
The alliance ACE led by Microsoft, Compaq and DEC as well as the alliance between IBM and Apple are directly aimed at establishing new standards for the PC.
In contrast to this, the alliances OSF and UI are also attempting to set standards for the PC sector, but in this case by means of a version of the Unix operating system for PCs and workstations. They reckon that the operating system Unix will establish itself for PCs in this performance category anyway. The OSF group developed a specification called DCE (distributed computing environment). This specification set rules for the functioning of software in distributed computer networks on the basis of the Unix opera
ting system.
Nine American and Japanese electronics firms have formed a consortium under the lea
dership of the computer company Hewlett Packard which has the goal of making Hewlett Packard's "precision architecture" Rise technology the general industry standard for Rise
