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4/26/2007

Creteing Computer Industry
Daisuke Inoue


I.find the thesis statement and its evidences support the claim. (fact, example, statistics, story)

II.analyze the argument, evaluate the evidences and reasoning,

III.compare the event, subject. Find the similarity and difference.


I.

appleThis book was written in 1987.It was 1984 when Apple computer launched the first personal computer with a graphic user interface. The motivation of the author to write the book might be the insight that the computer will transform not only business, but also the society dramatically. He had made the analogy to the Industrial Revolution, increasing the productivity by applying the mechanical energy to move the machines which processed the natural resource, to asses the impact of the new revolution, increasing the productivity by using the computer which processes the information, on the economy and the society in the beginning of the book.

As being the economist, the author views the development of computer quantitatively and qualitatively. He had observed the development of computer from the birth of electric digital computer up to 1987. Basically, there are three time frameworks in which he collected the set of events from and compiled them; the first steps taken around the globe to commercialize the computer and create the new industry, the emergence of competition from the mid-1950s to the mid-1970, the emergence of international competition. Asking the question “what are factors which led to the development of the computer”, he had analyzed “the web of events that contributed to the development of the computer.” [1]He had traced the key individuals, research groups, corporations, government and other public sectors who are involving in the development of computer. Recognizing the national policy, the specific program and firm’s strategies, he had examined the role played by each agent who actively interacts with other agents and how the roles are changing as the development phase shifted to the next phase. He had also identified the important scientific and technical knowledge which is necessary to evaluate the significance of the event. With the knowledge, he compares the computers of different companies and determines when the innovation of the computer took place. He views that

the history of the computer industry is the history of trained individuals acquiring knowledge then applying the knowledge in a new organizational or institutional setting. [2]
He paid the attention to the national policies that affected the growth of the computer industry and the relationships between the competitive strategies taken by the companies and the outcome of competition in the market.

He made the argument that the government played the two important roles in the development of the computer by being the investor for the research projects of the computer which were conducted at the academic institutions and business institutions and being the large customer of the computer industry. He admitted “Government investment in research and development was critical to the initial development of the technology in the United States and abroad.

Even though the modern electronic computer have been developed without the assistance of government, military interest or the pressure of a world war, the pace of advance would have been far slower without government interest. [3]”“Private commercial interests, in the absence of government support, would not have become as intensely involved in certain long-term basic research and radical new concepts. “[4] “ Government exerts a powerful influence on the development of the technology. “[5]

Those who opposed any government intervention in the marketplace clashed with those who favored public support for the development of industrial technology. He recognized the pattern that government funded research lead to the private commercial benefit. [7] He calls the government investment for the technology the revolution in the national policy.

The government had learned that scientific mobilization for World War II had profound implication for the economy [8]
The government’s contract fostered the expansion of the computer industry until more companies enter the market and the competition became severe.
The U.S. military or defense contractors were the firs and the best customer for the start-up computer firms which entered the market in the early and middle 1950s. [9]

However, the main subject of the book is not national policy but the computer industry. [10] The author’s main thesis statements is“technological differentiation, defining new market niches and selling to them, has been the fundamental strategy for competing in computers. “[11] In order to prove that the statement is true, he had established 3 premises to support the thesis statement by recognizing the patterns from the examples;

“Private firms and their commercial technologies have been closely linked to public investment in computer technology.” “The ever-present climate of radical technological change has shaped the evolution of the varied strategies used by firms in the computer industry.” “The economic imperatives of a high-technology industry have pushed the industry into a single, global market place.” [12]
Even though the academic institutions which were supported by the government funding played the important role of researching to develop the fundamental idea of the computer, it was the business sectors who were interested in gaining the profit from the new emerging technological opportunities and possessed the capability to develop the product for the practical use with the continuous investment in the long term, so the development of computer needs to follow the steps how the business sectors developed the computer. By analyzing the forces acting on the companies and the strategies used to achieve the goal of the companies in the various contexts, it is possible to explain the innovation path of the computer.

The thesis statement indicates that the company develops and commercializes the computer as product after determining the targeting segments of the customers. Developing the new product requires the large amount of investment for research and development, so it is not profitable if there is not sufficient number of customers who purchase the product because the cost of selling the product surpasses the revenues and company cannot gain the profit out of the initial investment. If there are not sufficient numbers of customers available in the market to make the business profitable, then the company will make the decision not to invest to develop the product even if it possess the capability to develop the product. In addition, company faces the cases that profitability of the business is uncertain, but technology has many implications for the use. In such case, government investments or contracts so called “government helping hand” guarantee the profit and reduce the uncertainty, so it leads the company to make the decision developing the product.

It also implies that company selects the different strategies and develops the product depend on the customer segments available in the market. Customers are not only the individual customers, but also the group such as government and companies. The types of business in the computer industry discussed in the book are 3 types; B to C (Business-Customer), B to B (Business-Business), and B to G (Business-Government). The needs of each segment are different, so the different types of products are developed for each segment as the result of the differentiation process. To compete with the other firms and sustain the profitable growth in the long-term, the companies are also required to adapt to the market environment including the type of customers and the standard technology available in the market and to keep adjusting the strategies whenever the change of the market environment takes places. Dramatic change occurs when the technological innovation occurs and it replaces the old technology, so the company which cannot adjust to the new technology will fail and the company which establishes the standard will be able to dominate the market.



II.

His thesis statement was “technological differentiation, defining new market niches and selling to them, has been the fundamental strategy for competing in computers. “ He had attempted to prove his statement with 3 premises with the facts, examples and statistic.

First, he attempted to prove his premise “Private firms and their commercial technologies have been closely linked to public investment in computer technology”[12] by showing how the innovation of computer took place from as the development phase moves from birth to commercialization and identified the significance of the government role in developing the computer as the investor and the customer. He explained the technological aspect of computer and presented the overview of the innovation before the computer industry became complex, so the reader can evaluate whether the event is essential in the process of the development or not.

He explained the traits of the competition,

“The essential structural components of a computer system are its central processor, the hierarchy of storage areas that make up its memory, and mechanisms for moving data to and from the input devices. The great improvement in computer hardware that has occurred comes from two sources: improvements in the architecture how the parts of the system are designed, connected, and controlled and advance in the basic physical components with which the system is built. “ [13]
“By the mid-1950s the basic design of a modern computer, the so called von Neumann architecture became the standard form. Four principal areas of improvements are rotating magnetic storage, use of transistors, development of the magnetic core memory, and use of integrated circuits. “ [14]
He claims
“The key concepts in the standard, serial computer architecture were often pioneered in projects that enjoyed government support. “ [14]

The computer called Electronic Numerical Integrator and Computer(ENIAC) was used as the example of government investment for technology. It was the first digital computer in which J. Presper Eckert and John W. Mauchly built during World War II. There were the need of the rapid analytical machinery for crypt analytical applications and analog computers for guidance and fire control in the U.S Navy and the need of the computers which calculate ballistics tables for projectiles fired from weapons, so they supported the research relating to their interest from 1930s. [15]
The system cost $800,000 to build, but army had pushed to make ENIAC because of wartime needs. [16]
The first commercial computers were direct copies or adaptations of machines developed for military users.

Second, he attempted to prove premise “The ever-present climate of radical technological change has shaped the evolution of the varied strategies used by firms in the computer industry” by showing the how business strategy had been changed as the technical innovation occurs in the market. He observed the behavior of the companies,

He explained the traits of the competition,

“The first decades of the computer’s history were a period of trial and error, as companies grouped to understand how to deal with a new kind of competition centered on constant technological revolution.” [17]
“By the mid-1970s, IBM dominates the mainstream of business computing and several smaller firms enter the markets not covered by the umbrella of IBM’s general purpose architecture. Firms continued to enter the industry as advances in technology opened up new markets. In the late 1970s those of IBM’s traditional competitors who lacked a coherent strategy for differentiating their products saw their share of the commercial mainframe market steadily decline. The economic advantages of software compatibility were understood by the computer industry. By the mid-1980s some of the scales of market had been tipped. The uncertainties of rapid technological change became formidable for a company with great resources like IBM and unanticipated shifts can upset the established balance.” [18]
According to him, company had adopted the new business strategies as they experienced and understood the significance of economies of scale and scope for competition.

He recognized the common patterns seen in the computer industry and created the model of the competition;

the continuous investments in technology create a sequence of temporary monopolies on new products, with rents earned on current products financing the investments required by the next round of innovation. [19]
Standardization of the technology and the compatibility to the standardized technology was key strategies to compete in the market.
“When drawing on the same basic technologies, a firm can define standards for product design and component use and interconnection and adhere to them to further reduce the costs of developing a whole family of products. Economics of scope occur when producing several different products within a single firm is cheaper than producing the same output of each product in different firms. [20]
Maintaining standards within a company’s entire product line can greatly reduce a user’s cost in moving to a new computer system and encourage user to purchase computers manufactured by the same company.” [21]
“By banding together and setting industry standards for interfaces between processors and peripherals, and communications between computers and by settling on a standard operating system permitting a software application to run on many different types of computers, other computer vendors would have access to a market with at least approximately the volume of IBM’s scale. “ [22]

If the company develop the product targeting the specific segments and establish the standard, it can temporarily monopolize the market. By selling the large quantity to the targeting segments, the economy of the scale works and the company can increase competitive advantage by pricing lower. In order to expand the size of market and lower the cost more, company entered the foreign markets. Establishing the joint venture was increasing phenomena in 1980s. He analyzed that company established the joint company when penetrating the foreign market because firms could share the cost of research and development, could avoid the conflict with the domestic partners. [23]

Third, “The economic imperatives of a high-technology industry have pushed the industry into a single, global market place.” In order to asses the factors determine the success of developing the computer, he had compared the development of the computer in the United State with the development of computer on the different settings such as British, France, Germany and Japan while analyzing how each agents had played the role in the different setting. It was the experimentation in which he tested how the parameters of input such as the amount of government invest on the research project, the size of government contract in which private companies had received and the size of the market affected the output variables such as the speed of the development, the innovation cycles, and the size of the corporation, the market share of the company, the average cost of the production. He could not change the variables and conduct the real experimentation, but he could collect the data about the arrangements of inputs which generated the success of developing the computer.

He explains the different attitudes of the nation toward investment for technology affect the development of the computer and industry and make connection to how U.S. computer manufacturers became to have substantial operations in foreign markets[25]

“European governments provided only limited funds to support the development of both electronic component and computer technology in the 1950s and were reluctant to purchase new and untried technology for use in their military and other system. They concentrated their limited support on defense-oriented engineering and electronics firms. In contrast, American government support military technology projects undertaken by industrial and business equipment firms that were mainly interested in commercial markets. [26]
“The lack of accelerated development program for electronic component technology in Europe hurt the competitiveness of the European Industry. European computer makers did not have the benefit of the military development programs that lowered the costs of transistors, ferrite cores, and integrated circuits found in American machine. In 1960s, most of European firms were forced to seek access to American computer and electronics technology.” [27] “By the mid-1970s, U.S. firms controlled the U.S. market, shipped most of the computers sold in Germany, produced more than half the processors sold in Britain, and sold 30 percent to forty percent of the computers purchased in Japan. “ [28]

III.

When there is no market need, reducing the uncertainty with government’s contract and investment for the technology so called “visible hand” was necessary to persuade the business firms to enter the market. It leads to create the industry and markets emerge gradually, so the government’s role becomes less significant because the firm becomes to be able to afford to invest research and development and develop the new product from the revenue. Continuous investment for R&D allows the firms to expand its size. The firms with more resources had more advantage to win the competition. Government’s role of investing for new technology was less significant in developing the software than the hardware of the computer.

“The first operating systems were developed for machines that were employed mostly on government-sponsored projects, as computer use expanded into more commercial applications, improvements in systems software were often undertaken by computer users and computer manufacturers. By late 1950s, when business computing started to dominate the market, the development of operating systems began shifting toward the commercial marketplace.” [29]

Monopolization of the market often occurs in the high technology industry because it requires the large amount of investment and the barrier of entering the market is high. Government’s role becomes important when the consumers or the small business are needs to be protected from the abuse of power of the giant firms such as IBM and Microsoft. Government regulation would improve the outcome of the market when it allows smaller firms to enter the market and fosters the competitions among the competitors. If there are more competitions in the market, then the consumers were given the more choices and the market mechanism which balances the demand and supply so called “invisible hand” works. The market mechanism does not function if one giant firm controls the market, so the monopolization slows down the innovation cycles. Monopolization of the market is achieved in various ways. There is the similarity between the method IBM had used and Microsoft had used.

IBM expanded the company and dominated the market with government contracts and technological standardization through massive investment on research and development. There are two government funded projects in which IBM involved and benefited; Project SAGE and project Stretch. “Designed as a complete command and control system to defend against a possible Soviet bomber attack, the SAGE system was one of the largest and costliest military systems projects of the 1950s. In 1952, IBM was selected by MIT’s Lincoln Laboratory as the subcontractor responsible for building fifty-six large computers. “[30]

“Not only IBM received the half-billion dollars of income, but it learned the memory technology, the architecture of real time transaction processing systems, and gained thousands of skilled personnel. Learning the engineering and production know-how required to mass-produce magnetic core memories, IBM’s became to be able to produce inexpensive and dependable core memory systems and contributed to the competitiveness of the commercial computer systems it delivered in the late 1950s and 1960s. Moreover, the concepts developed for its operation formed the base of time-sharing and computer network. “ [31]

In the project Stretch, IBM had developed high performance computer for NSA which needed to process and manipulate large volumes of character data quickly and Atomic Energy Commission needed the ability to do numerical computations at very high speeds. 90 Key features of the IBM System 360 architecture were first devised for Stretch to allow it to meet the varied demands of business and scientific computing experimental operating systems run on Stretch provided experience with concepts refined and developed in the operating systems shipped with the System 360.[32]
360 family had the compatibility with software running on earlier IBM machines. Various 360 models could be reprogrammed to emulate the instruction sets of the older IBM machines they replace. The concept of a compatible family of computers created a unified market that greatly stimulated the commercial use of computers. [33]

With the government contract and the standardization of the technology, IBM had dominated the computer industry since the mid-1950s. A healthy infusion of research resources from the federal government during the 1950s greatly helped IBM’s shift to a technology-intensive business strategy. IBM was one of the first companies to analyze correctly the nature of high technology, research-intensive business in an area of continuous rapid technological progress. IBM’s a strengthened research organization was an important first step toward dominance of the computer industry. [34]

Microsoft expanded the company and dominated the market by the controlling the operation system. When IBM developed the personal computer, it bought the licenses to use the operation system of Microsoft called MS-DOS and sold the personal computer. Seeking for compatibility with IBM’s computer, other computer manufacturers had adopted the same operating system, and it became standard in the industry. James Gleik explains how the control of the operation system led to the control of the computer software industry.

“Microsoft had no leading product in any important category but operating systems. The vast majority of the world's personal computers?estimates range from 80 percent to more than 90 percent?run on Microsoft software from the instant they are turned on. By 1990, Microsoft had become the world's richest software company” [35]
He analyzed the revenue structure of the company and the strategy. “Nearly half of the world's total P.C. software revenue goes directly to Microsoft. The most blatant was an arrangement in which P.C. manufacturers paid Microsoft the same royalty for shipping a computer without DOS as with DOS?meaning that, if you were one of the few people who bought a non-Microsoft operating system, you paid its manufacturer and then you paid Microsoft on top of that, a huge disincentive. Microsoft was "locking up the market with practices which every computer manufacturer despised and which the competitors despised,"[35]

Microsoft had dominated the market through the standardization of the fundamental technology.

“The point of view of the essential underlying structure of modern computing?the operating system Microsoft owns has become something else altogether: a collection of standards.”[35]
“Microsoft does not control a manufacturing industry (as I.B.M. did), a natural resource (as Standard Oil did) or a regulated public utility (as A.T.&T. did). Microsoft's strategic monopolies?for it does possess and covet monopolies, despite vehement denials from its lawyers?are in a peculiarly subtle and abstract commodity: the standards and architectures that control the design of modern software.”[35]
“If they are linking together pieces of the hardware-software-network chain, they are doing it in a way that has lowered prices, added value and made life easier for consumers. It is not their fault if the economics of scale in the software business, combined with tactics that press antitrust law to its limits, brings them huge benefits.”[35]

Footnote

  1. Kenneth Flamm, Creating the Computer(The Brookings Institution. Washington, D.C., 1988), 255.
  2. lbid., 3.
  3. lbid., 265.
  4. lbid., 3.
  5. lbid., 253.
  6. lbid., 78.
  7. lbid., 7.
  8. lbid., 2.
  9. bid., 79.
  10. lbid., 3.
  11. lbid., 6.
  12. lbid., 6.
  13. lbid., 12.
  14. lbid., 13.
  15. lbid., 36.
  16. lbid., 48.
  17. lbid., 235.
  18. lbid., 236.
  19. lbid., 5.
  20. lbid., 4.
  21. lbid., 5.
  22. lbid., 243.
  23. lbid., 245.
  24. lbid., 135.
  25. lbid., 134.
  26. lbid., 136.
  27. lbid., 17.
  28. lbid., 135.
  29. lbid., 25.
  30. lbid., 88.
  31. lbid., 89.
  32. lbid., 93.
  33. lbid., 99.
  34. lbid., 85.
  35. James Gleik."Making Microsoft Safe for Capitalism", http://www.around.com/microsoft.html


Bibliography

  • Flamm, Kenneth .Creating the Computer. The Brookings Institution. Washington, D.C., 1988.
  • James, Gleik.?Making Microsoft Safe for Capitalism, http://www.around.com/microsoft.html.

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