Tuesday, April 16, 2013

MBA Case Study - History of PC Industry

From the time of its invention in the 1940s until the early 1980s, the computer industry was dominated by IBM, which controlled nearly half the world market for computers. This era, sometimes referred to as the systems-centric era, was marked by a few large vertically-integrated companies that produced many of their own components, developed their own software, and sold their computers through their own sales force. They concentrated on locking their users in to the companies' proprietary architectures thereby giving them single vendor (monopoly) status with their consumers. The introduction of the personal computer in the 1970s changed the monopoly. The mainstream computer companies scoffed at the PC as an underpowered toy for people who couldn't afford a real computer. However, when Apple Computer began selling PCs by the hundreds of thousands, IBM responded quickly by developing its own PC, giving the PC credibility as a business tool. Rather than build its PC entirely in-house, IBM followed the lead of Apple, Commodore and others by assembling components from outside suppliers. The de facto standards which allowed standardization of components were set when IBM introduced its PC in 1981 with an open architecture, and essentially set the stage for PCs.

In 1985, IBM allowed Microsoft and Intel to license their technologies to other companies when it contracted them to develop the OS and microprocessors for the IBM PC. Thus IBM soon faced hundreds of competitors making IBM clones and selling them at cut-rate prices, while Microsoft and Intel garnered the huge profit margins that IBM had been accustomed to in the mainframe business. While IBM had inadvertently given away control of its own creation, the open standards of the IBM PC architecture also lowered barriers to entry, allowing literally thousands of new companies to get into the computer business, making everything from chips to systems to software. By 1997, the 4- firm and 8-firm concentration ratios in the US had fallen to just 45% and 69% respectively clearly showing that early monopolies had turned oligopolistic.

A new, decentralized industry structure based on network economies was created in the PC industry, as companies specialized in market niches throughout the production chain. The computer industry in the mainframe era had been dominated by ten giants who controlled 65% of the market in 1975, with another 40 companies controlling 32%. The category "all others" accounted for just three percent of the market. By the 1990s, the industry was populated by thousands of firms, and many of the former market leaders had either gone bankrupt, been acquired, or were a shadow of their former selves.

The personal computer revolution of the nineties led to a dramatic change in the structure of the computer industry. Whereas the mainframe computer industry consisted of a few large, vertically-integrated firms such as IBM, NCR, Fujitsu and Hitachi, the PC industry was a horizontally segmented industry with thousands of firms competing at the different levels of the value chain. Most companies specialize in one market segment, such as disk drives, PCs or software, and even the smallest companies could find niches producing anything from cables and connectors to software and services. Some segments of the industry, such as disk drives and monitors, eventually consolidated to the point that a few firms controlled most of the market. And of course the microprocessor and operating systems markets became near monopolies for Intel and Microsoft. But other market segments remain wide open even today. For instance, the top ten PC makers still control only about 40% of the global market.

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