The computer industry is one of the fastest growing industries in the world. Over the past ten quarters, the global demand has increased by more than ten percent per quarter (Standard & Poor's). The staggering rate of demand and growth in the computer industry has created a highly competitive business environment in which innovation and supply chain evolutions are crucial for survival.
In the late 1970's and early 1980's, the computer hardware and software industry was in its nascence. The industry was comprised of four main firms: Microsoft, Apple, Intel, and IBM. With far less competition than in today's burgeoning global market, these firms were able to slowly develop their supply chains from private garages into transnational operations (Yost 166-178). With no inter-industry models to imitate, the early PC pioneers developed their supply chains based on those of well-established leaders in the appliance and automotive industries, such as Ford and General Electric (Yost 178). Following these models, IBM used vertical integration in order to structure its supply chain operations. (Yost 178).
IBM set the standard as a “box maker” by mass-assembling the hardware and using software provided by Microsoft or Intel to complete their PCs (Yost 194). IBM's supply chain philosophy encouraged mass production and a reliance on brick and mortar sales outlets (Taylor). The disadvantages to this system were that IBM amassed a vast amount of inventory and was unable to offer its customers an array of options in order to personalize their PCs (Taylor).
In 1983, Michael Dell proved to be the catalyst that would forever change the computer industry and redefine the way supply chains are viewed. Dell's innovations were spurred by the tremendous value-added activities in the industry. The average IBM PC was selling for $2,880; whereas its total hardware and software costs averaged a mere $600 (Yost 194). Thus, IBM averaged $2,280 in value-added activities per PC. Dell revolutionized the supply chain in order to produce competitively priced PCs while still reaping high industry profits. Dell was able to compete with the already well established firms because it effectively used a direct sales strategy, adopted just-in-time production, and mastered the process of mass-customization (Taylor).
In short, Dell's corporate strategy focused on a buyer-driven industry. Dell's success hinged on its ability to bypass warehouses and stores in order to sell its PCs and have them delivered to customers in a timely manner. Thus, Dell became the first firm to sell computers to customers by direct mail (Yost 194). In order to achieve its long term goals, Dell established a quasi-corporate campus for its assembly facility and the production facilities of its suppliers (Taylor). The result was Dell's ability to minimize its inventory and risk by utilizing just-in-time production. In all, Dell's revolutionary steps in clustering its production processes and bypassing traditional retail outlets (as seen in Appendix A) established its comparative advantage over other pre-existing and well-established PC firms.
Even though Dell's act was hard to follow, other firms soon attempted to streamline and consolidate their operations in similar fashion. In 1997, Apple Computer was losing more than a billion dollars annually due mostly to supply chain inefficiencies (Taylor). In order to ameliorate its supply chain and transform its losses into profits, Apple reduced its product line from nineteen to four products (Taylor); thereby simplifying the production and, in turn, the supply chain. Within two fiscal years, Apple's simplified and consolidated supply chain reduced inventory by 94% and increased gross margins by 40% (Taylor). Thus, Apple was successful in imitating the Dell model's consolidated just-in-time production.
A new millennium also means new challenges for the PC industry. Even though firms have been continually refining their supply chains, they must also react to the inherent “demand-driven innovation” of the industry (O'Marah). The new information age means that firms have access to more information than ever as to what potential consumers want and how much they are willing to pay for specific products and services (O'Marah).
The new name of the game is not simply who can produce the cheapest goods, but which firms are flexible enough to produce customized products the fastest. In the last decade, there has been an increased demand for faster and smaller computers and electronics. Thus, the supply chains must be flexible and ever evolving in order to answer these demands. Since the computer industry is constantly in flux, there is the opportunity for new firms to specialize and further hone the supply chain. However, there is little room to compete with the already established production firms on the global level due to the tremendous capital barriers to entry.
Although American firms still control a vast amount of the global market share in PC sales, other nations are making great headway in challenging American dominance. The top three PC vendors are all American: Dell (18%), HP (16%), and IBM/Lenovo (7.7%) (Standard & Poor's).
