August last year saw one Schmuel Halevi setting the US computer industry alight. Author of an article entitled The Computerless Computer Company, he propounded the theory that the aim of computer companies should not be to build computers. Rather they should concentrate on creating persistent value in computing. The formerly innocuous executive vice-president of The Technology Research Group, a management consulting firm offering advice on business strategy to suppliers of semiconductors, computer systems, software and telecommunications, transformed himself into a highly controversial figure overnight. The article, which was published in the Harvard Business Review, did win a McKinsey award, however, and the computerless computer company has since become something of an industry buzz-word. So, what was all the fuss about? Halevi was in London recently to shed some light on the subject. In a nutshell, his argument is that value derives from scarcity. And to his mind, there is no longer any scarcity of hardware power. Certainly in the past, the industry may have been constrained by the limited capabilities of its hardware.
Strategic inversion
Computers were neither powerful enough nor affordable enough to make effective use of the applications that were dreamed up for them. But, as each new generation of semiconductor technology enabled the development of cheaper, smaller and more powerful computers, an ever-increasing number of applications became available. Customers responded by spending more money on products, so although the average end-user price per MIPS dropped from approximately $250,000 to $25,000 between 1980 and 1985, annual per capita spending in the US grew from $90 to $180. Now however, Halevi asserts that the industry is experiencing a profound strategic inversion driven by the relentless advance of its own technology. The enhancement of microprocessor power, the integration of more functions onto fewer chips, and cheaper and more efficient manufacturing processes no longer directly generate new applications. Again from 1985 to 1990, the average price per MIPS fell from $25,000 to $2,500 – roughly the same rate as before. But per capita computer expediture rose only 4% per annum to about $200. This is attributed to the fact that computers are now simply too powerful for the uses to which they are put. Customers have responded by limiting their spending, and the profitability of the industry has declined. Halevi believes that scarcity in the industry now resides in the gap between power – what computers and their underlying semiconductor technologies are capable of doing – and utility – what human imagination and software engineering are capable of enabling computers to do.
By Catherine Everett
Henceforth, he contends, those companies that define how a computer is used rather than how it is manufactured, will be the real winners. Companies must find new sources of value, which means an external focus on business mission and markets rather than an internal focus on hardware and day-to-day operations. He does acknowledge, however, that this may be a painful concept to many firms, which often find it hard to accept that past achievements may not be profitable in the future, but for a company to continue simply to do what it does best can be hazardous to its health, he suggests. The analogy is one of a man who knows how to dig. He digs himself a deep hole, but on deciding that it’s time to get out, can only keep on digging; he knows nothing else. Unfortunately though, it won’t get him out of that hole. Semiconductor manufacturers are seen as a prime example of this mentality. According to Halevi, over-production, silicon integration, and the fact that semiconductors now provide more power than can be exploited have all led to a situation where traditional models of semiconductor production have become obsolete. Basically, there is no point in designing chips that do not require state-of-the-art manufacturing processes to produce state-of-the-art value. For semiconductor value is now a functio
n of specialisation. And specialisation depends on responsive design, not high-volume, low-cost production. Thus, it is not Japanese competition after all, but dramatic changes in technology and economics, that have pushed the industry into decline. The way ahead, from Halevi’s stand-point, is that companies focus on highly-differentiated chips for niche markets and invest in design tools, systems integration and customer support. The way forward is not to spend millions of dollars on fabrication plants, when production can be done more cheaply elsewhere. Nonetheless, the argument put forward by Halevi is not simply one of hardware versus software. Indeed, his next work is to be based on the concept of codeless software, possibly looking at such niche markets as multimedia data storage and recall, pen-based operating systems, natural language interfaces and the like. No, Halevi’s contention is that industry players will not win the game by business-sustaining activities alone. Rather companies must compete on utility rather than power, with differentiation being the key word. Products must be aimed at a carefully targeted group of users in order to fulfill their needs in a specific way. Firms must analyse and monopolise the sources that give real added value to their products.
New markets
Successful companies don’t compete on (and even give away) the enabling technologies on which their core utility is based. Instead of focussing on the wonders of unadulterated, original technology, they look at those niche areas, above and beyond all that, where real value lies. And finally, companies should look to the benefits of second-tier technologies. Systems built around established hardware not only experience bountiful sources of supply, and, therefore, low cost ratios, but also reduced levels of technology risk. In a nutshell, Halevi considers that investing to regain lost strength in hardware technologies is risky and unrewarding. Rather, the computer companies that prosper into the next century will be those that focus on inventing new markets rather than on building new products. The key is to capitalise on applications strength and to leverage the investments of other countries in enabling technologies, because the people that control the markets will hold power, profit and employment advantages over those that merely control technology.
