Industry Analysis of Personal Computing

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Towson University
Shekhar Mistry
MNGT 481: Business Strategy and Policy
Alina Chernyshova
Dr. Mariana Lebron
Tobore Sefia
March 17, 2014
Jennifer Ojiyi
Diana Ly
Kyle Paul
Analysis of the Personal Computing Industry
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Personal Computing Industry Analysis
The personal computing industry is one driven by innovation and increasing global
necessity. Competition for business, new technology, and resources has created a marketplace
that seems to have the ability to make or break an entire organization almost overnight. In the
year 2010, electronic computer manufacturing, NAICS code 334111, supported nearly 2,150
domestic businesses, provided jobs to approximately 63,300 American workers and generated
US sales revenues of $215.8 billion (Highbeam, 2010).
The first “computers” were mechanical calculating devices developed in 17th century
Europe. Two centuries later, mathematician Charles Babbage would conceptualize the idea of
what would eventually prompt the creation of the first digital computer with his design of the
Analytical Engine (Highbeam, 2010).
The development of the microprocessor in 1971 (Highbeam, 2010) completely changed
the computing industry and allowed not only for more computing power to be applied in a single
device, but also created an avenue to take the processing power of these formerly bulky
machines, previously reserved for university and government use, and make it available to the
general public in the form of relatively small personal computers.
On April Fool’s Day, 1976 Apple, Inc was founded by Steve Jobs and Steve Wozniak.
Two years after the successful introduction of their computer circuit board dubbed Apple I, they
released the Apple II and, “an easy-to-use computer… sparked a computing revolution that drove
the PC industry to $1 billion in annual sales in less than three years,” (Yoffie, Kim, 2010). They
sold approximately 100,000 units by year end 1980. In 2010, Apple’s market capitalization was
valued at nearly $220 billion (Yoffie, Kim, 2010).
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Early success and proven innovation were crucial to Apple, Inc’s front-runner status.
However, in 1981 IBM introduced their own PC using an “open” system that allowed other
producers to easily clone their workflow. The launch of a viable open system for hardware lead
IBM to own a greater share of the market as their version of the PC became the new standard in
the industry. Even with the introduction of the Macintosh in 1984, Apple’s net income fell 62%
from 1981 to 1984 (Yoffie, Kim, 2010).
Today’s versions of IBM and Apple, Inc are vastly larger and more well equipped, with
distinct distribution channels, suppliers, and manufacturing processes that allow them to retain a
strong competitive edge in an industry that is defined by the leaps it takes forward in propelling
knowledge and technological advancements. Apple and IBM, along with Hewlett Packard and
Dell Computers round out the list of the top four PC manufacturers in the nation. However, over
the last decade the definition of personal computing has had to grow in order to accommodate
the new trends in mobile computing.
Increasingly, consumers, businesses, and even government agencies have begun swinging
their attention to the growing arena of smartphone and tablet computing alternatives. In response,
manufacturers have made strides to incorporate more and more functions into a single device,
which has allowed room for companies like Nokia and RIM to gain market share in certain
analyses that account for revenues from these products. Perspective is very important in this
industry and with so many ways to enter, it is no wonder that so many companies seek to carve
out a place for themselves in the market. However, a competitive environment, large price tags
on success, and other major market hurdles render the likelihood of victory for new entrants
questionable.
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Barriers to entry
Capital: significant
The potential entrants in the electronic computer manufacturing industry will generally
be at a disadvantage when it comes to the capital requirement; therefore, this particular barrier is
significant.
The need to invest large financial resources in order to compete creates a capital barrier
to enter the market. Large capital requirements in electronic computer manufacturing industry
limit the pool of likely entrants. Capital is required for equipment, production facilities,
inventory (storage, supply-chain management, and accounting), labor, R&D costs, and customer
credit.
The manufacturing process itself requires a substantial investment. According to IHS
report, “Apple spends at least $191 on components to build a 16 gigabyte iPhone. The cost rises
to $210 for a 64GB unit. The cost of assembly adds another $8 per unit, bringing the range to
between $199 and $218” (Worstall, 2013).
Economies of scale: significant
Since the potential of a new entrant to sustain growth and compete with established
companies in terms of economies of scale is low, the barrier is significant.
A potential entrant in the electronic computer manufacturing industry will face a barrier
created by economies of scale. Economies of scale is characterized by decline in unit costs of a
product with the increase in the absolute production volume (Porter, 1980). Thus, economies of
scale are the cost advantages exploited by expanding the scale of production in the long run.
Every activity of a business can be viewed in terms of economies of scale. This applies to
product development, marketing, distribution, production, R&D and many other activities. In
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electronic computer manufacturing industry production, research, marketing and service
economies of scale are especially important for the new entrants. The quantities in which most
components are produced allow the companies to keep the final price of a product far below the
collective price of the individual components of a gadget.
Besides, most industry incumbents manufacture the components under their brand name,
or have established long-term relationships with suppliers which allow them to control the final
price of their products. Additionally, vertical integration of the industry leaders establishes their
economies of scale in marketing and distribution.
Switching cost: medium to high
Based on the redundant relationship-specific investments, disruption risks, and
contractual penalties risk we identify the switching cost barrier in electronic computer
manufacturing industry as medium to high.
Switching costs are incremental expenditures, inconveniences, and risks incurred when a
customer changes from one supplier to another. Switching costs fall into three broad categories.
Redundant Relationship-Specific Investments
Due to distinct technical requirements of a new supplier, customers who change
manufacturers sometimes have to purchase additional products, such as a comparable software
and hardware. For example, if a customer decides to switch from a Windows PC to Apple’s Mac
computer, he will have to invest in Mac-compatible application software and devote time for
getting familiar with a new interface.
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Data loss
Changing suppliers may involve considerable risk of data loss. For example, switching
from one cloud service to another creates a significant risk for a customer’s records to be lost or
corrupted during the transfer.
Contractual Penalties
Contractual penalties or obligations might prevent a customer from completing purchases
through a new company because of an existing obligation to the current or previous supplier. For
example, cell phone providers usually impose an early termination fee on customers who want to
get out of a multi-year contract associated with a specific mobile device .(Eisenmann, 2011).
Distribution Channels: high
The barrier for new entrants is high based on distribution channel in this industry, because
of the cost disadvantage and the switching cost distributors have to incur when switching from
one industry to the other. In the personal computing industry, direct and indirect distribution
channels are used to make computers available to consumers. The direct distribution channels
used are the company’s online stores and the company’s retail stores. As of December 2010,
apple had 221 Apple stores in the United States (Appleappraisal, 2010).
In addition to physical store locations, personal computing industries also maintain their
online sites, as we see with top computer companies like HP, Apple, Acer and Dell that each has
their online stores. Personal computing companies are beginning to realize that the larger the
distribution channel, the more likely they are to reach different customers. Personal computing
companies have expanded their distribution channels by going through retail suppliers such as
Amazon, Best Buy, Wal-Mart and eBay. Wal-Mart and Best Buy have both online and physical
stores, while eBay and Amazon have just online stores. EBay offers consumer to consumer
ANALYSIS OF PERSONAL COMPUTING INDUSTRY
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services, whereby a consumer offers a product for sale and the purchasing consumer could either
bid or buy the product.
Retail distributors such as Amazon, Best Buy and Wal-Mart would be reluctant to take on
these new products with no assurance of profit rewards. It would be difficult to keep up with the
competition of making these products available in different locations. Companies like Dell,
Apple, HP and IBM have the first mover advantage, which gives them substantial advantage
over new entrants in the personal computing industry.
Product Differentiation: high
The barrier threat for new entrants is high because of customer loyalty established overtime
as a result of product differentiation. In the personal computing industry, Dell, Apple, HP and
IBM are the main manufacturers of computers. These manufacturing companies have established
unique ways that they differentiate their products. Apple’s product differentiation strategy is
innovation while Dell focuses on distribution channels and product customization. Apple’s
innovation is focused on offering a large array of easy to use products, that don’t need any
additional learning.
In 2010, Apple introduced the iPad and new apps such as iWork. Apple’s iPad
immediately dominated the market for tablets (ApplePressInfo, 2010). Apple iPad innovated in
2010 was recognized as the first successful tablets, because the other tablets that were attempted
failed (talklets). The reason for this failure was because they could not be made small enough to
be used. Apple used this idea to formulate a successful strategy of making tablets. Apple realized
that the best way to make a tablet is by making a Smartphone bigger and capable, rather than
make a computer smaller (talklets). Apple also has past innovation of the Macintosh, OS X
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operating system, iLife, iTunes store, different versions of the iPhone and iPod. Apple has used
its innovations to differentiate itself from other competitors in the market such as Dell and HP.
Dell has used product customization, whereby it allows customers to tailor their laptops
to differentiate them and add personal value. Dell also has a direct selling business model,
whereby they sell directly to customers and enterprises. This direct distribution enables them to
eliminate middlemen and deal directly with customers, which in turn results to dealing with
customer problems efficiently and quickly. These differentiation strategies that the personal
computing industry has adopted make the threat of new entrants low. This is because it is hard
and expensive to copy these differentiation strategies. In addition to that, the current companies
have gained a mass market share of customers that are loyal to these brands, because of the value
they create for customers.
Government Policies: high
The barrier for new entrants is high in this industry based on government policy. The
personal computing industries have been outsourcing manufacturing to other countries because
of the minimum wage law that was set in the United States. An example would be Apple
outsourcing its manufacturing operations to Foxconn Zhengzhou in China because of cheaper
labor. As a result of this the personal computing industry would be unattractive to new firms
wanting to enter the industry in the United States.
Substitute Products: medium to high
Substitute products for PC’s are widely available but none have been able to fully match
product capability and functionality so the threat is listed as medium to high. While products
listed in this category are quickly gaining ground, there is not a significant item that can
currently fully replace personal computers. Along with smartphones and tablets, users have the
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option to accomplish computing tasks via gaming consoles, MP3 players, and notebooks.
Nevertheless, smartphones and tablets are chief among the possible avenues for future substitute
products, especially as Moore’s Law plays a more significant role in placing added computing
power into the palms of consumers.
We are a mobile society. As such, the term all-in-one device has taken on an almost
entirely new definition since Apple introduced its first all-in-one PC, the iMac in 1998 (Yoffie,
Kim, 2010). Today, people have the ability to make calls, surf the internet, connect to social
media, and listen to music all at the same time using their smartphone’s. This advancement in
technology falls directly in line with Steve Jobs’ “Digital Hub” strategy which was introduced in
2001 to the world as a way for Apple consumers to control the reigns of their digital life from
one central device or “hub” (Yoffie, Kim, 2010).
The idea that the enormously popular iPhone might one day grow in capability to replace
the everyday PC must have crossed Steve jobs’ mind as he was envisioning his plan for the
future and paring down Apple’s formerly 15 product lines into just 4 categories designed to
satisfy the desktop and portable Mac needs for consumers and professionals. The natural
evolution of the processor is to allow more processing power in less space. The idea that
smartphones might evolve over time into a product that could actually replace the PC as the
primary computing device for average consumers is actually not surprising.
Bargaining Power of Suppliers: 1) low to medium & 2) Significant
The suppliers of the personal computing industry can be broken down into 2 categories:
1) products with many sources (memory chips, disk drive, keyboards, etc), and 2) products with
few sources (microprocessors, operating systems, etc). The power of suppliers for the former
was low to medium. This is because there were so many sources for these items. The companies
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that were supplying these products include Intel, who held about 80% of the market share, and a
couple of others, including Advanced Micro Device, and VIA Technologies. These suppliers
lacked any true power; while it was clear that Intel had the majority of the market share, strong
competition among these companies actually led to continuous decreases in pricing. Therefore, if
a company within in the personal computing industry felt that they were being overcharged, they
were easily able to leave their supplier for one of the others.
The second type of suppliers, those who supplied products with few sources were in a better
position as far as having power over those within the industry to which they supplied. Because
there are just a few suppliers in this category, bargaining power is relatively high as only a few
companies can afford to provide or have the capability to provide the necessary product
requirements.
Companies that fell into this category, particularly Microsoft who held about 90% of the
market share (Yoffie, Kim, 2010), had minimal competition-- meaning that companies could
either take their software or leave it. This led Steve Jobs and Apple to create their own operating
system, so they would not be held hostage by Microsoft. In 2001, Apple introduced their first
fully overhauled OS--OS X--which cost roughly $1 billion to develop with an 81% “very
satisfied” rating from consumers (Yoffie, Kim, 2010). In 2006, Apple introduced the first Mac to
run on Intel processor, and by January 2010, their newest operating system at the time, Leopard,
ran on more than half of all Mac computers (Yoffie, Kim, 2010).
Bargaining Power of Buyers: low to medium
There was moderate power of buyers in the computer manufacturing industry.
Buyers had more and more option to the personal computers, smartphones, tablet computers, and
other handheld devices like ipods, bluetooth, and etc (Porter’s five forces).
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The power of buyer in the computer manufacturing industry would be low to medium due
to following reasons: First, the retailers have a wide range of consumers to whom they can sell
their products which also diminishes the bargaining power of buyers, so in this case the power
would be low. Second, computer manufacturers sell their products directly through the retailers
and their websites. Customers include different types of entities such as large enterprises and
small businesses, government agencies, educational institutions, exporter, and consumers
(Thormahlen, 2010).
The major part of revenues comes from the large and small businesses and also from the
government agencies and schools (see Exhibit 1). Buyers that generated revenue for computer
manufacturing industry are big enterprises, small business and government who occupied more
than 50% sales of computers. The industry is mainly dependent on those buyers who purchase
computers in bulk quantity which generate a significant portion of sales revenue, so in this case
the buyer power would be medium to high (Thormahlen, 2010).
Consumers are always looking for lower price and high quality products with their
supplier. If they don’t get it with then they will go with another. There are many major players
are in the market of computer manufacture industry such as Apple, Dell, Samsung, HP, Nokia,
Acer, and many more. So, buyers have a many choices here for buying computers, laptops,
tablets, cell phones and etc.
Rivalry within the personal computing industry: high
The rivalry in the electronic manufacturing industry can be characterized as high.
Companies are under pressure to increase their budgets for on R&D, public relations, marketing
and sales promotions in order to stay competitive in the industry.
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Rivalry between existing competitors in the electronic manufacturing industry involves
price competition, advertising battles, product introductions and increased customer service or
warranties. The competition among electronic manufacturing industry companies is very high.
Due to rapid technological change companies are under the pressure to constantly release new
products. This is especially true considering Moore’s Law. Gordon Moore, the co-founder of
Intel, made an observation in 1965 that still controls the dynamics of the electronic
manufacturing industry. Moore stated that “the number of transistors per square inch on
integrated circuits had doubled every year since the integrated circuit was invented” (Webopedia,
2014). Later Moore adjusted his law for data density to double every 18 months. This is the
current definition of Moore's Law, which, according to the experts, will remain valid for at least
another two decades. For that reason, the innovation and investment in R&D are the primary
competitive strategies in the current market. A company that cannot keep up with the innovation
is in disadvantage.
Apple’s success can be attributed to the company’s effective use of innovations (see
Exhibit 2). During the economic global recession of 2010 the technological innovation created
cost competitiveness which led to the higher profits of the industry leaders.
Other competitive strategies include:
Advertising
Companies spend large amount of money on their marketing campaigns. For example,
according to Apple's 2010 10-K annual report, the company's sales, general and administrative
expenses reached $5.5 billion. As Apple explained in the report: “SG&A expense increased $1.4
billion or 33% to $5.5 billion in 2010 compared to 2009. This increase was due primarily to the
ANALYSIS OF PERSONAL COMPUTING INDUSTRY
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Company's continued expansion of its Retail segment, and higher spending on marketing and
advertising programs” (CBC news).
Public relations
In 2010 Nokia challenged its customers to raise money for single homeless people for
Christmas and in return, Nokia awarded the top fundraisers with a pair of tickets to see Coldplay
in their only live performance of 2010 (Arnold, 2010).
Sales promotion
Sales promotion is marketing communication activities, other than personal selling, and
public relations, in which a short-term incentive motivates consumers or members of the
distribution channel to purchase a good or service immediately, either by lowering the price or
by adding value. For example, Hewlett- Packard offers many coupons like online coupons, free
shipping and discounts. It’s a good way to stimulate trial, to add value and bring customer
loyalty.
Strategic Leadership
Steve Jobs is widely known for his creativity, innovation and ability to work with others.
Managing people as well as working in teams has been one of the most successful factors to
Steve Jobs and Apple. After his passing, there were concerns with how well the new CEO, Tim
Cook would lead the company. Steve Jobs’ leadership strategy positively impacted the company
during his time with Apple. The new CEO of Apple, Tim Cook, has been able live up to Steve
Jobs’ standards and take responsibility to leading and managing the company successfully.
In several interviews available on YouTube, Steve Jobs explains his strategy of keeping to
Apple’s core values which is the belief that people with a passion can change the world for the
better. He explains, “The theme is to think different, it’s honoring the people that think different
ANALYSIS OF PERSONAL COMPUTING INDUSTRY
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and who move this world forward.” When Steve Jobs began at Apple, his main concern was to
understand who Apple was and what they stood for. According to Steve Jobs, changing the
world for the better and moving forward is what Apple stands for. (Jobs)
Managing people is the greatest leadership skill that has helped Steve Jobs as an effective
strategic leader. In his interview he speaks about organization, teamwork, and collaboration.
Everyone plays a major role in the company; they have meetings every week to talk about what
they’ve done, what they can improve on and how improvement can be accomplished. He states
that there is, “tremendous teamwork on the top of the company which filters downward to
tremendous teamwork throughout the company.” He believes that working in teams brings ideas
and problems together and he is open to criticism. He explains that he allows his employees to
make decisions and let their ideas win otherwise his greatest employees will leave. (Jobs)
Steve Jobs has transformed Apple which could only have been done through outstanding
leadership. Walter Isaacson, the writer of “The Real Leadership Lessons of Steve Jobs,” writes,
“Along the way he helped to transform seven industries: personal computing, animated movies,
music, phones, tablet computing, retail stores, and digital publishing. He thus belongs in the
pantheon of America’s great innovators, along with Thomas Edison, Henry Ford, and Walt
Disney (Isaacson, 2012).” Sarah McInerney, writes in the article, “Steve Jobs: An
Unconventional Leader”, “it was his sheer genius combined with his ability to articulate his
vision and bring staff, investors, and customers along on the journey (McInerney, 2011).” During
his time at Apple, Steve Jobs transformed the company through his incredible strategic
leadership.
There is some skepticism on the current leadership of Apple but others are more optimistic.
Tim Cook, the new CEO of Apple has been described by Sydney Finkelstein, the writer of
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“Steve Jobs and Tim Cook: Does Apple Still Have the Leadership It Needs?,” as a great leader
for Apple. He writes, “Tim Cook is focused on building incredible products that customers
love...He shoots for superior customer experience...He understands how important the Apple
management team, and rank and file, are to the continued success of Apple and is spending lots
of time motivating them (Finkelstein, 2013).” The new CEO of Apple seems to be continuing to
motivate the company as Steve Jobs did. Finkelstein also states, “In his short tenure as CEO, he
has presided over some of the most successful results any technology company, make that any
company, has ever reported (Finkelstein, 2013)!” Carolina Milanesi, The research vice president
of consumer technologies and markets also spoke of Tim Cook’s outstanding leadership
throughout the company. She states, “Tim has done well during Steve's leaves of absence… Tim
has the support of the board and the trust of the employees (Cox, 2011)." Despite the skepticism
coming from others, the new CEO continues to work on Apple’s management system and
remains optimistic.
Conclusion
The computing industry has grown by gigantic leaps and bounds since the advent of the
first general-purpose electronic computer, ENAIC, in 1946 (Highbeam, 2010). Over the decades,
manufacturers have migrated from big to small devices, from analog to digital processes, and
with each new iteration, the level of innovation is that much greater. Currently, the world’s
fastest computer has nearly four times the processing power of the human brain (Fischetti, 2011).
One can only imagine what new advancements will take place during the next 18 months of
Moore’s Law.
Employing leading knowledge providers, solidifying capitalization, and securing reliable
suppliers will be crucial in realizing the innovation that is so fundamental to commercial
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viability. At the same time, retaining an existing customer base, increasing product visibility, and
finding ways to differentiate products to consumers will be important to developing brand
awareness and customer loyalty, both of which are needed for long-term achievement.
Companies that are unable to adapt will quickly fall victim to their rivals in this highly
competitive market. Keeping costs relatively low while providing a comparably desirable
product will also go a long way to ensuring success.
Should companies within the personal computing industry continue along current trend
lines, then mobile technology will soon become a major substitute for the typical PC. The
“Digital Hub” strategy that Steve Jobs instituted at Apple over a decade ago has paid dividends
already. The long-term sustainability of Apple was greatly enhanced mainly due to this idea of
providing a one-stop, central location for a consumer’s daily needs. The plan made sense in 2001
and makes even more sense today as the genius and vision behind that philosophy has become
apparent in our daily life. The continued success of Apple has a lot to do with the organization’s
ability to continue to apply the vision and wisdom behind Steve Jobs’ innovation towards future
products and projects.
If the employees at Apple can find ways to keep “thinking different” and find new ways
to apply their strategy of offering highly innovative products at a premium price, then there is no
reason that Apple should lose either its fan base or market share. However, it can be easy for the
current and future leaders of Apple to go the way of some of their predecessors by attempting to
stray from this most successful approach to business. Apple customers are fiercely loyal and as
such must be consistently rewarded for their loyalty with superior product offerings and clear
differentiation. It is in this manner that Apple will remain a leader in the manufacturing industry
for decades to come.
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ANALYSIS OF PERSONAL COMPUTING INDUSTRY
Exhibit 1- Buyer’s revenue generating figures (www.ISBIWORLD.com, 2010)
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ANALYSIS OF PERSONAL COMPUTING INDUSTRY
Exhibit 2: the largest computer makers in the world according to 2010 data (Ahonen, 2011).
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