Academic journal article The McKinsey Quarterly

The Computerless Computer Company

Academic journal article The McKinsey Quarterly

The Computerless Computer Company

Article excerpt

When the nature of an industry changes, managers must learn to understand -- and adapt to -- the new realities of competition. By the year 2000, the most successful computer companies will be those that buy computers rather than build them. The leaders will leverage fabulously cheap and powerful hardware to create and deliver new applications, pioneer and control new computing paradigms, and assemble distribution and integration expertise that creates enduring influence with customers. So long as companies have reliable supplies of adequate hardware -- and this seldom means the most advanced hardware -- there are fewer advantages and a growing number of disadvantages to building it. The future belongs to the computerless computer company.

WITHIN THE AMERICAN high-technology community, the erosion of US market share in global semiconductor and computer production has inspired a sense of dread. Anxious US executives point to Japan's 43 percent share of the US market for laptop computers, the fastest-growing segment of the computer hardware industry. They despair over Japan's dominance of worldwide DRAM production -- and over the fact that Taiwanese and Korean manufacturers pose the one modest challenge to Japanese hegemony in semiconductor memories. They anguish over advances by companies such as NEC and Fujitsu in manufacturing supercomputers whose speed approximates that of supercomputers built by Cray Research and Thinking Machines, the US performance leaders in this "strategic" technology.

This competitive erosion is unsettling -- but the dread is misplaced. In fact, computer executives should encourage the trend. It is good news for the leading US computer companies -- provided they escape the past and redirect their technology, manufacturing, and marketing strategies to embrace the new realities.

The strategic goal of US companies should not be to build computers. It should be to create persistent value in computing. Increasingly, computers themselves are marginal to the creation of value in computing. Defining how computers are used, not how they are manufactured, will create real value -- and thus market power, employment, and wealth -- in the decades ahead.

The new environment

The computer industry is experiencing a profound strategic inversion driven by the relentless advance of its own technology. For most of its history, the industry has been constrained by the limited capabilities of its hardware. Computers were neither powerful nor affordable enough to deliver effectively the applications envisioned for them.

As each new generation of semiconductor technology made possible cheaper, smaller, and more powerful computers, these computers opened up more and more applications. Customers responded by spending more and more money on the industry's products. Between 1980 and 1985, for example, the average end-user price per MIPS (millions of instructions per second), the standard measure of computer performance, declined from about $250,000 to $25,000. Over this same period, annual per capita computer spending in the United States rose from $90 to $180.

Today the situation has changed. All the forces that drove the advance of hardware power -- more powerful microprocessors, the integration of more functions on to fewer chips, cheaper and more efficient manufacturing -- remain in place. From 1985 through 1990, the average price per MIPS fell at roughly the same rate as during the previous five years, from $25,000 to less than $2,500. Yet these advances no longer directly enable new applications.

Sources of value

Put simply, computers have become to powerful for the uses to which they are being put. As a result, customers have limited their spending. Over the last five years, per capita consumption in the United States rose only 4 percent a year, to roughly $200. Not surprisingly, industry profitability has deteriorated. From 1980 through 1985, after-tax profits for the 14 largest US computer manufacturers averaged 11. …

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