«Timothy Bresnahan* and Franco Malerba** * Stanford University, USA ** University of Brescia and CESPRI, Bocconi University, Italy April 1997 We would ...»
INDUSTRIAL DYNAMICS AND THE EVOLUTION
OF FIRMS= AND NATIONS= COMPETITIVE CAPABILITIES
IN THE WORLD COMPUTER INDUSTRY
Timothy Bresnahan* and Franco Malerba**
* Stanford University, USA
** University of Brescia and CESPRI, Bocconi University, Italy
We would like to thank Salvatore Torrisi for sharing with us his knowledge about the U.K. industry; Simona Heidemperger, Lu-Leng Chua, and Victoria Danilchouk for much assistance, and David Mowery, Richard Nelson, Richard Rosenbloom, Giovanni Dosi, Martin Fransman, Steve Klepper, Sidney Winter, Peter Murmann and the participants of the CCC project for useful comments and suggestions. We thank the Italian CNR and the Sloan Foundation for research support.
1. The major issues The evolution of the computer industry over the long term illustrates many of the broad themes addressed by this book. In particular, it highlights the coevolution of technology, market structure, and institutions, and addresses the sources of international competitive advantage. Since its inception in the early 1950s, the computer industry has been characterized by rapid and sustained technical change, continuous product innovation punctuated by a few major breakthroughs, creation of new uses for computers and new markets and coexistence between established actors and new entrepreneurial firms. And since the beginning of the industry, one country -- the United States -- has been the world technological and competitive leader.
From these remarks drawn from the history of the world computer industry, some questions emerge. A first set of questions refer to the relationship between radical change and competition among incumbents and new firms. How is it that old and new firms coexisted during the history of the computer industry? Is there a link between radical innovations opening up new markets and the competition between old and new actors? A second set of questions relate to the specific relationship between technological change, market structure, and institutions during the history of the industry.
Was there a unique type of coevolutionary process during the whole history of the industry? Or was there more than one coevolutionary process? In either case, why? A final set of questions relate to the persistence of international technological and competitive advantages of one country during the whole history of the industry. Why was the United States, and not other countries, able to profit from the opportunities to become world technological and competitive leader? How was the United States able to persist in that role? This chapter is going to try to answer these questions using a historical and analytical perspective.
A first look at the major features of the computer industry identifies some aspects that are going to be relevant for the analysis presented in this paper. First,computer hardware has advanced very rapidly in price/performance measures, fueled by rapid advances in the underlying electronic components as well as in computers themselves.1 A wide variety of hardware categories has emerged: large and powerful computers such as mainframes, intermediate classes such as minicomputers and workstations, and classes with less expensive products such as personal 1 For an extensive review of measurement studies of computer price/performance ratios, including extensive discussion of alternative definitions of Aperformance,@ see Gordon (1989). On any definition of price/performance, 20improvements have been sustained over four decades. For a key class of electronic components, semiconductors, see the chapter in this volume by Langlois and Steinmueller, and Malerba (1985).
2 computers. Technical progress has made the largest computers much more powerful, the smallest more affordable, and increased choice and variety in between. Computer hardware was once supplied by a few pioneering firms; now there are hundreds of suppliers. The impact of performance increases and price decreases, together with dramatic improvements in complementary technologies such as software, storage devices, and telecommunications, and with considerable innovations and learningby-using by customers, has been to build a multi billion dollar worldwide industry.
Second, widespread adoption of computers in business and among consumers has contributed to this ongoing growth. Three very different kinds of demand are important here. First are the buyers of large computers for business data processing. These demanders are professionalized computer specialists in large organizations.2 These sites have absorbed dramatic increases in computer power.
Thus, while mainframe computing sites number only in the tens of thousands, their total market size is very large. A second kind of demand is that for Aindividual productivity applications@ on PCs. This is a newer body of applications, first reaching measurable commercial importance about fifteen years ago. Most use depends on mass-market software, such as word processing or spreadsheet programs.3 This market has seen much growth in two ways: by replacement and upgrading, and by diffusion, as more and more (especially) white-collar workers have seen their work at least partially computerized.
In this segment, individual customers tend to buy hardware and software from a wide variety of vendors in arms-length, market relationships. Unit sales of successful products run to the millions.
Individual demanders are small, however, so that through the late 1980s the market sizes for the first two types of computing were roughly equal. The third demand is composed by scientific, engineering, and other technical computation. Served by supercomputers, by minicomputers and later by workstations, factories, laboratories, and design centers do a tremendous volume of arithmetic.4 In total, technical computing market size is roughly as large as each of the two kinds of commercial computing described above.
This variety in demand has permitted the emergence of different suppliers and markets. Market segmentation has meant, for much of the history of the industry, that mainframes, minicomputers, and PCs have served distinct kinds of demands. More importantly, demand variety has permitted the emergence of new, entrepreneurial firms in parallel to established ones. Even as the oldest segment, 2 They have close bilateral working relationships with the most important vendors. The computer business systems are complex pieces of computer software, entailing an equally complex innovation process. In the industrialized countries, most of the sites doing this kind of computing have been in operation for decades. A process of learning by using, plus ever cheaper large computers, has led to considerable replacement and upgrading of facilities 3 See Mowery in this volume for a detailed treatment of software.
3 4 Here the users are technically sophisticated, and the applications have crisp technical goals. Buyer-seller relationships are more like arms-length markets than close bilateral links.
mainframe computers, was consolidating around a dominant firm (IBM) and dominant design in the early 1960s, other firms (notably DEC) were creating the minicomputer segment. Later, other segments such as personal computers, workstations, and superminicomputers would offer yet more entry opportunities. This observation leads us to our first analytical distinction. We first treat the industry dynamic surrounding the creation and persistence of IBM=s leadership in mainframe computing from the late 1940s to the late 1980s. We treat the industry dynamic which created new markets by new entry separately, as its coevolutionary processes are fundamentally different.
Industry Dynamic 1: Creation and Persistence of IBM=s Leadership in Mainframes (late 1940s - late 1980s) For our purposes, mainframe computers are systems used for large departmental or companywide applications.5 We shall cover mainframes from the very early period, the time before a clear definition of a business computer or a computer company emerged, up to the late 1980s. IBM emerged from an early competitive struggle to dominate supply, in the process determining the technologies needed for computing, the marketing capabilities needed to make computers commercially useful, and the management structures that could link technology and its use.
Competitors, customers, and even national governments have defined their computer strategies in relationship to IBM. IBM was the manager of both the cumulative and the disruptive/radical parts of technical change. Customers= learning by using and IBM engineers= learning by doing were focused on the same IBM computer architectures. When an established technology aged, IBM was not only its owner but also the innovator of the new.
Industry Dynamic 2: Creation of New Market Segments and Entry (late 1950s-late 1980s).
The second industry dynamic saw the founding and evolution of new computer segments and markets. Minicomputers are machines intended for scientific and engineering use; when used in commerce they fall into support roles such as communications controllers. Microcomputers (personal computers) are low price, small systems for individual applications, both in business sites and at home. Workstations are used by individual engineers in graphics and computation-intensive applications such as design. In this dynamic, a series of new markets were opened up by entrepreneurial startup firms. While there was some sharing of fundamental technical advance, each new segment=s founding was characterized by considerable innovation and entry. As a result, the 5 The boundaries of the mainframe segment are not clear. Commercial minicomputers eventually became much like mainframes. We do not treat the development of the commercial minicomputer segment. For our (international 4 comparison) purposes, the commercial minicomputer segment can be thought of as an extension of the mainframe segment.
Atechnologies,@ as engineers use that term, of different segments were distinct. Those new segment foundings that led to viable markets brought computing to new kinds of demanders. Successful firms tended to be specialized. Buyers were departments of firms or individuals. Each of these segments saw some maturation toward a dominant computer design, and toward a dominant model of the appropriate supplying firm for the segment.
Industry Dynamic 3: Entry into the mainframe market by networks of small computers and rentdestroying challenge to IBM=s leadership (1990s) The 1990s have seen a third industry dynamic. Reversing the longstanding trends of Industry Dynamics 1 and 2, this era saw competitive convergence of computers of all sizes in the 1990s.
Existing types of small computers were networked together and offered to IBM=s traditional customers.6 The new technical and competitive importance of networks of small computers has eroded the earlier market segmentation between mainframes, mini, and micro. After a decade of stable segmentation, the distinct kinds of computers that had evolved in Industry Dynamics 1 and 2 came into direct competition with one another. AClient/server@ platforms use computer networking to link together user-friendly clients (such as PCs) with powerful servers (bigger PCs, workstations, minicomputers or mainframes). The computer network consists of clients and servers, quite likely sold by different hardware and software companies, and networking infrastructure, likely sold by yet others. The networked computer became the platform on which large applications can be built. The buyers in this area are a complex mix of individuals, departments, and enterprises. As we write, neither the dominant design for a network of computers nor for a computer company in this environment is clear.
6 See Bresnahan and Greenstein (1995) for an explanation of this reversal.
5 The three industry dynamics have been characterized by coevolution of firms= capabilities, strategies and organizations, technologies, and market structures, and (often) by a changing relationship between the industry, public policy, and national institutions. As we will show more in detail later in this paper, at the initial stage of each industry dynamic the coevolutionary process was caused by the introduction of a new technology developed by an inventor or a firm. The new technology spurred entry of new or established firms which added modifications and changes to the original technology. In our three industry dynamics, the new technology addressed a new demand and new types of users, or old types of users in a radically new way. This created specific types of user-producer relationships, which led firms to develop new competencies and organizations. Over time, firms developed appropriate competencies, strategies, and organizations more suitable for the new technology. These firms made new innovations and fostered the rate of technical change in specific directions. Relatedly, public policy and institutions were relevant at various stages of the evolution of the computer industry: some policies and institutions remained unchanged over time, while others evolved in tune with the specific industry dynamic and changed in various degrees and forms in different countries. As we will show later on, however, this coevolution of technology, firms= capabilities, strategies and organizations, industry structure and public policy and institutions proceeded differently in each industry dynamic, with congruence between firms= strategies, industry characteristics, and countries= performance.7 A first look at the three industry dynamics shows that the United States has been persistently the innovative and commercial world leader in the computer industry. In Industry Dynamic 1, IBM emerged as the world leader. IBM, and therefore the U.S., persisted in its leadership despite competitive attacks from individual companies, strategic alliances, and even whole national computer industries such as Japan=s. In Industry Dynamic 2, new successful American firms entered emerging market segments while IBM continued to maintain its dominance in mainframes. Finally, in Industry Dynamic 3, the challenge to IBM=s leadership came mainly from American firms, as a result of the convergence between mainframes and networks of smaller computers. We examine the different reasons behind American success in each of the three periods.