Academic journal article The McKinsey Quarterly The Computerless Computer Company Read preview 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 , 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. 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.
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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 U. Anxious U. 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 U.
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 U. The strategic goal of U. 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 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. Today the situation has changed. All the forces that drove the advance of hardware power—more powerful microprocessors, the integration of more functions onto fewer chips, cheaper and more efficient manufacturing—remain in place.
Yet these advances no longer directly enable new applications. Put simply, computers have become too powerful for the uses to which they are being put. As a result, customers have limited their spending.
Not surprisingly, industry profitability has deteriorated. From through , after-tax profits for the 14 largest U. From through , profits averaged only 6.
Value derives from scarcity. In the computer industry, scarcity now resides in the gap between power—what computers and their underlying semiconductor technologies are capable of doing—and utility—what human imagination and software engineering are capable of enabling computers to do. And that is the good news. This lead is neither permanent nor invulnerable, but it does provide the basis for a powerful and productive industry. Implicit in most discussions of U. We disagree. A computer company is the primary source of computing for its customers.
Microsoft is a computer company. In fact, it is more of a true computer company than the hardware manufacturer, Hewlett-Packard, that builds most of the workstations on which Mentor delivers its systems. Mentor, not Hewlett-Packard, defines the computing environment of its customers. Thus Mentor, not Hewlett-Packard, has real influence with customers.
Microsoft, Apple, and Core Competition Consider the rise of Microsoft, which conventional wisdom correctly describes as the most powerful company in the computer industry. Yet Microsoft neither builds nor distributes computers. Rather, it dictates how computers are designed, built, and applied. Its Windows 3. It defines how millions of computer users expect to interact with their software and the coding environment in which thousands of developers write new applications.
Microsoft thrives because it bridges the gap between power and utility, and it does so in a way that both maintains its proprietary position and leverages rather than replicates the massive capital investments made by less influential hardware companies. Now think about Apple Computer. One of the great computer success stories of the s, Apple also represents one of the great missed opportunities.
As a family of personal computers, the Macintosh continues to set the standards by which the industry measures ease of use, graphics power, and software and network integration. But as a company, Apple continues to lose ground to rivals that sell hardware based on the far less elegant Windows and Unix operating systems.
The comparison between Apple and Microsoft is a case study in the changing nature of value in the computer industry and the strategic consequences of failing to recognize the change. Apple beat Microsoft by six years, a lifetime in computers, in developing a graphics-oriented operating environment. So why is Microsoft the most powerful company in the computer industry while Apple wages a battle for long-term survival?
Because Apple defined its business as building computer hardware worse yet, proprietary hardware rather than delivering the utility associated with its pioneering user interface and graphics capabilities. Think back to the early s. Apple was certainly correct to develop a proprietary hardware architecture for the Macintosh. The company was also right to build its own computers. The unique advantages of the Macintosh meant that for most early customers price was less an issue than functionality was.
Within a few years, however, that strategic logic had become obsolete. In this competition, Microsoft had and still has a decisive advantage—despite the technical shortcomings of Windows. There is a Windows product for every niche and a niche for every Windows product. The Macintosh operating environment is available only on the narrow range of computers that Apple has the capacity to develop internally.
How might Apple have embraced the new logic of the computer industry and leveraged its core strengths? Consider one alternative scenario. At that time, it should also have made the following announcements. First, it would authorize other companies to build personal computers based on the Macintosh operating system. Third, it would stop manufacturing low-end hardware leaving competition in these segments, as well as in laptops, to its licensees and build only high-performance computers.
Together, these announcements would have repositioned Apple as the driver of utility in an intensely competitive worldwide Macintosh industry—a company that defines how computers are used, not how they are built. To match its current hardware revenues, the repositioned Apple would have had to supply only one-third of all Macintosh-compatible computers—and at much higher gross margins.
The new Apple could have tapped these larger profits to advance its position as a driver of computing utility, particularly in applications software. It is a shadow of what it could have been had it received the strategic attention and financial and human resources it deserved. Precisely because Apple defined itself as a hardware company, it chose to limit its commitment to developing applications software.
Ironically, its chief rival, Microsoft, is now one of the leading suppliers of applications for Apple—hardly a comforting situation. The missed opportunity was vast. Put simply, Apple could have been Microsoft—a fabulously profitable computer company whose software defines the desktop computing environment. It would still build computers, but only high-performance, high-margin units.
Meanwhile, Microsoft would be a less imposing version of the enterprise it is today. No one would be calling it the most powerful company in the computer industry. Virtually all major changes in the computer industry trace their origins to semiconductors. The rise of the computerless computer company is no exception. As we shall see, this blurring of boundaries represents a serious challenge to computer manufacturers—and increases the pressure to focus on utility rather than on manufacturing.
But the semiconductor industry is important to the computer industry for another reason. It is a window into the future. The wrenching strategic transformation of semiconductor production in the s is a preview of the changes that will sweep the computer industry in the s. As such, it is worth exploring in some detail.
Much of the U. Advanced Micro Devices, once an industry giant, has generated profits in only two of the last six years. National Semiconductor, another pioneer, has turned a profit only once in the last six years. For the United States as a whole, it is fair to conclude that investment in semiconductor manufacturing over the last five years has destroyed more economic value than it has created.
The reality is that dramatically changing technology and economics have made obsolete the traditional model of semiconductor production—a model built around high-volume wafer fabrication and vertical integration.
Most large, established U. They have suffered dearly as a result. These companies have succeeded spectacularly in revenue growth, profits, and technology leadership.
Since the raw power delivered by integrated circuits was limited and expensive, computer companies were eager for cheaper and more powerful chips, which required manufacturing excellence. Semiconductor companies with the best manufacturing processes were able to design and produce chips with ever-smaller electrical components that performed better and cost less than rival chips.
At any given time, relatively few suppliers were able to produce such state-of-the-art chips. In this respect, silicon was the most valuable real estate in the world. Chip designers strove for the smallest possible die sizes.
Fabrication processes isolated flaws to the smallest possible areas. Marketing groups searched for the highest volume business opportunities so fabs could ride down the learning curve as fast as possible—thus generating the highest yields and the lowest costs possible.
What could be designed was governed by what could be built quickly and economically. Today that logic has been overturned. The new power of semiconductor process technology has eliminated the role of fabs as the primary source of advantage.
Computerless Computer Co.
Kikinos Pankratz, associate professor of computer sciencewas replaced by a more communal space, with tables for small groups of students to work together, plug in their devices and display their work compuger large monitors, as well as movable lounge chairs, personal dry-erase boards and — crucially — a healthy supply of candy. Read more by Carl Straumsheim. With a traditional account Check your email for your verification email, or enter your email address in the form below to resend the email. How to write an effective diversity statement essay. Sorry, we could not verify that email address. And Microsoft made a donation, as well, after receiving thousands of requests on Twitter in late February.
The Computerless Computer Company
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