How has the PC industry evolved over time?

Question

What will be an ideal response?

Answer 1

The instructor can run this part of the discussion in two ways. The first approach is to break up the evolution of the market into four phases.
Phase 1: 1977 to 1981
In the first phase, the PC market was characterized by hobbyists/early adopters who saw PCs more as a game. The vendors at this time had proprietary standards and the goal of a new entrant was to provide more functionality and power. The market was small and price was not a major issue. Retailers were small, fragmented, and operated with high margins. In a way, the market structure was concentrated in the high cost-to-serve/high price quadrant.
The first major change was in technology (microprocessors, operating systems, disk drives, and lower memory costs) that allowed for standardization for the first time. The first company to successfully grow the market was Apple, which took the above factors and created an easy-to-use product that went beyond hackers and reached out to the average user. Apple stayed in the high price, high cost-to-serve market and had a proprietary architecture that could not be copied by others.
Phase 2: 1982 to 1990
The PC market grew rapidly and began to be adopted by individuals in the workplace (the traditional market for mainframe and minicomputer manufacturers). IBM and others responded to defend their markets; IBM by entering the PC market with an “open architecture.” It focused on the large businesses as a primary market and medium/small businesses as a secondary market. IBM, too, operated in the high value-added, high price quadrant. The market grew faster than it could serve and this provided an opportunity for companies like Compaq to get in. Compaq was different from IBM in that it went through retailers/VARs exclusively. As customers got more sophisticated, they did not see the need for the value-added services provided by the direct salesforce, VARs, and retailers. They were interested in getting a high quality product at a lower price with a cost-effective service option. This need was addressed by companies like Dell and Gateway.
Phase 3: 1991 to 1995
By the early 1990s, there were hundreds of manufacturers who were marketing undifferentiated products. Also, the home market started to grow dramatically. This led to an explosion in a new market segment. These buyers were relatively unsophisticated and required a lot more hand-holding and support than the corporate buyers.
Phase 4: The Future
Starting in the mid-1990s, the power of laptop machines became comparable to that of desktop machines and this led to laptops being considered as a valid alternative to desktops. Further, the role of LANs grew enough to make
servers a big business. The design, manufacture, and usage of laptops and servers are different enough to make them different product markets. Thus, desktop manufacturers are now faced with the question of whether they want to operate in all three markets or not.
In summary, the evolution of the PC industry is characterized by the following changes:
• Customers.?The market was initially made up of hobbyists. The next segment to grow was the large corporate/government customers, along with the education market. More recently, growth has been in the medium- and small-sized businesses and the home market. As far as the sophistication level of buyers is concerned, one could argue that customers have become more comfortable with the product technology and need less hand-holding. (A few students will argue otherwise by pointing out that the availability of alternatives can also overwhelm buyers and force them to seek help and support during the purchase process.)
• Product.?A look at case Exhibit 8 and Exhibit TN–8 shows that the desktop market is expected to grow much slower than the laptop and server markets. As the case suggests, there is little or no differentiation in the various brands of PCs available in the marketplace. Also, desktops accounted for about 80 percent of the market in 1990 and this is expected to decline to less than 50 percent by 1998. Further, there is a downward trend in price/performance over time.
• Competitors.?Exhibit 2 (last line—others had 27.8 percent market share in 1980, 61.9 percent in 1989, and 35.9 percent in 1994) shows that the industry had few players to start with and then got fragmented in the late 1980s. This trend has now reversed and there is consolidation taking place, with leaders increasing their share at the expense of marginal players. Another point that usually comes up in a discussion is that there has been a different market leader in each stage. First it was Apple, then it was IBM, and more recently it has been Compaq in the overall market and Packard Bell in the retail market. The business model, customer needs addressed, and distribution strategy are different for each stage.
• Channels.?Retail margins have been going down over time from 30 percent to 3/5 percent. At the same time, the size of the typical retail outlet has gone up from $500,000 annual sales to over $100 million. Further, the level of service has dropped dramatically over time. New retail formats are high volume, low service, low margin superstores. Case Exhibit 3 shows that traditional high service channels of direct salesforce and dealers have been losing share to these large retail chains.
• Technology.?Price/Performance has been going down and this is pushing the rate of technology change all the time.
Some of these trends suggest that the market is commoditizing (refer HBS Note 9-594-122—“The Art of Beating the Commodity Magnet” by Professor V. Kasturi Rangan for a description of the evolution and commoditizing of markets and different strategies available to firms to respond to the same.)