Date: 01-Feb-91

An ability to move swiftly with the trends is of utmost importance in a changing industry. Monica Horten reports.

 

 

You can read this article on the Management Today website  (only they have cut it off about one third of the way through!)

In the computer industry today's success story can be tomorrow's has-been. Unlike more traditional industries such as automotive, fashion or food retailing, management cannot be sure of the parameters along which its business runs. It is faced with a turbulent market in which the pattern of the playing field changes completely every few years.

Small entrepreneurial companies can grow with amazing speed and move the goalposts, catching the larger players by surprise. Technical breakthroughs change the cost equations dramatically over a five-year period, and the customer, now less frequently blinded by science, is demanding more and more. It is those who do not move swiftly with the trends who lose out.

In the past year alone we have seen Britain's two leading manufacturers of business computers taken over by Japanese companies: Fujitsu bought ICL and Apricot's manufacturing business became part of Mitsubishi. Elsewhere, Siemens has purchased fellow German company Nixdorf; Hewlett-Packard, the third biggest American company after IBM and Digital Equipment, has bought workstation manufacturer Apollo; and France's Groupe Bull has incorporated personal computer company Zenith.

We have also seen some spectacular falls among the industry leaders. Wang, Unisys, Bull and the computer division at the Dutch electronics company Philips have all reported losses. Profits at Digital Equipment dropped $1 billion in the latest financial year, and even IBM, on $62 billion revenues and with an unquestioned worldwide market domination, has experienced lower profitability, and has been taking measures internally to restructure.

At the same time, up and coming companies such as Sun Microsystems and Compaq have been able to continue their steep rise in both revenues and profits. Both companies began in the early 1980s, and in less than 10 years have grown to close on $3 billion in annual revenues. Notably, Sun has reset the rule book for the larger players with its successful marketing of high-powered desktop computers based on cheap technology and industry standards, and now the bigger players are being forced to follow.

According to Glen Cutherbertson, an analyst with Gartner Group: "The smaller companies will end up not being independent. The ones most at risk are those with many product lines to support and large overheads in terms of staff and systems. They must rationalise or face the prospect of looking for someone to take them over."

Sun's success has been due to good positioning and to setting out from the start to be flexible, so it was not caught out by rapid changes in the market and the technology. According to UK vice-president Bill Passmore, the company foresaw in its early days one of the key changes to hit the industry in the 1980s. This was open systems - essentially a set of standards for constructing computer equipment so that hardware and software from different manufacturers can work together.

Sun started to build computers to open standards, and that strategy has paid off in recent years, as customer demand is increasingly moving that way. It also chose to concentrate on a single line of hardware: high-powered desktop workstations for which it could develop specialist, value-added software for vertical markets. At the same time the company took a decision to source components from external suppliers. This was a radical departure from the industry norm, as most computer manufacturers built their own components as they considered it a competitive issue.

External sourcing means lower overheads. "In those days a typical $2.5 billion company would use 60,000 people and have large numbers of factories," says Passmore. "We are now turning over $2.5 billion; we have 12,500 employees and 12 factories. That means we can move much quicker."

The company was able to take advantage of new advances in semi-conductor component technology much faster than many of its rivals, because it could buy them in as they appeared. This is significant when one considers that the computer that today will sit on a desk was 10 years ago the size of a very large fridge.

Prices have plummeted in tandem with the size, according to Phil Jones, an analyst with Yankee Group Europe: "The price of computer power is going down, so today you get much more power for less money."

A mip (million instructions per second) is one of the measurements that is typically used to describe the power of the computer. "When we came to the UK in 1984", says Passmore of Sun Microsystems, "we were selling a machine that had 0.3 mip for £26,000. Today a 12.5 mip machine costs £4,000."

Sun's flexible structure means that it can work on lower margins and market its products more aggressively. It has completely changed the profit and loss model, says Passmore. "In the early 1980s manufacturers would typically charge a bigger price and offer the customers more support. They needed to make bigger profits to do all their R and D. Because we've always had an aggressive price/performance edge we've never had to rely on margin to make our profit. We are leaner and tougher."

 

(the remainder of the article is not available online.)