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External Economies and Economic Progress: The Case of the Microcomputer Industry

Published online by Cambridge University Press:  13 December 2011

Richard N. Langlois
Richard N. Langlois
Affiliation:
Richard N. Langlois is professor of economics at the University of Connecticut, Storrs.
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Abstract

The following article provides a thorough chronicle of the microcomputer industry. That industry is a striking case, in which industrial growth took place through the creation of “external” capabilities—that is, capabilities produced by and residing in a specialized market network rather than in large organizations enjoying internal economies of scale and scope. In the microcomputer industry, the most successful products were those that took the greatest advantage—and allowed users to take the greatest advantage—of the market; and the greatest failures occurred when business enterprises bypassed the external network and attempted to rely significantly on internal capabilities.

Type
Articles
Information
Business History Review , Volume 66 , Issue 1: High-Technology Industries , Spring 1992 , pp. 1 - 50
Copyright
Copyright © The President and Fellows of Harvard College 1992

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References

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9 Although this may be too recent an episode to count in some minds as business history, it is nonetheless a more interesting case for analytical purposes than one lying further removed in time. The microcomputer industry arose after the managerial revolution chronicled by Chandler; moreover, the industry thrives on mass production and high demand. It thus provides a sharper comparison than would a case from earlier history.

10 By external capabilities I mean capabilities created within a network of competing and cooperating firms rather than within the boundaries of large vertically integrated organizations.

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26 Freiberger and Swaine, Fire in the Valley, 62. Liftman, Once Upon a Time, 11, reports the story differently. In his account, Bruce Van Natta phoned MITS and ordered a few kits. But MITS would not accept a 30–day purchase order, and IMSAI (then called IMS Associates) did not have the money to pay up front. Van Natta and Killian then conceived the idea of making a clone.

27 Levering, Katz, and Moskowitz, The Computer Entrepreneurs, 351.

28 Freiberger and Swaine, Fire in the Valley, 51–53.

29 A survey of members of the Homebrew Computer Club in January 1977 found that, of the 181 computers owned, 43 were IMSAIs and 33 were Altairs. Moritz, Michael, The Little Kingdom: The Private Story of Apple Computer (New York, 1984), 191, 123Google Scholar.

30 Slater, Portraits in Silicon, 251–61; Freiberger and Swaine, Fire in the Valley, 136–39; Levering, Katz, and Moskowitz, The Computer Entrepreneurs, 204–12.

31 Freiberger and Swaine, Fire in the Valley, 69.

32 Slater, Portraits in Silicon, 265–68; Freiberger and Swaine, Fire in the Valley, 140–43; Levering, Katz, and Moskowitz, The Computer Entrepreneurs, 154–59.

33 Freiberger and Swaine, Fire in the Valley, 45.

34 Moritz, The Little Kingdom, 160.

35 On the early history of Apple, see ibid., passim; Freiberger and Swaine, Fire in the Valley, 203–28; Slater, Portraits in Silicon, 309–14; Levering, Katz, and Moskowitz, The Computer Entrepreneurs, 54–61.

36 Moritz, The Little Kingdom, 127.

37 Ibid., 126.

38 Ibid., 157.

39 Data from Apple Computer, cited in “John Sculley at Apple Computer (B),” Harvard Business School Case no. 9–486–002, revised May 1987, 26.

40 Osborne, Adam and Dvorak, John, Hypergrowth: The Rise and Fall of Osborne Computer Corporation (Berkeley, Calif., 1984), 11Google Scholar.

41 For Wozniak's own account, see Gregg Williams and Rob Moore, “The Apple Story. Part 2: More History and the Apple III,” Byte, Jan. 1985, 167–80. Peddle quoted in Moritz, The Little Kingdom, 210; see also Levering, Katz, and Moskowitz, The Computer Entrepreneurs, 101.

42 Rifkin and Harrar, The Ultimate Entrepreneur, 194–95. On VisiCalc, see also Slater, Portraits in Silicon, 285–94, and Levering, Katz, and Moskowitz, The Computer Entrepreneurs, 128–33.

43 Moritz, The Little Kingdom, 200–201.

44 As of 1982, this firm, General Technology Corporation (GTC), remained the principal source of stuffed boards for the Apple II and III. In that year, Apple bought its floppy drives from Shugart and Alps; its hard drives from Seagate; its RAM and ROM chips from Mostek, Synertek, and NEC; and its monitors from Sanyo. The components that Apple made in–house included floppy and hard–drive controllers, the power supply, and fhe case—all legacies of capabilities that the company developed in its earliest years. These components were assembled into finished machines in plants in California, Texas, Ireland, and Singapore. (See Scott Mace, “Assembling Micros: They Will Sell No Apple before Its Time,” Infoworld, 8 March 1982, 16.) Not until the Macintosh did Apple begin automated manufacturing (on which, see below), which essentially means an integration of the board–stuffing and other subcomponent–assembly stages into the final assembly stage. This approach was pioneered by Commodore, which had it in place by 1982. (Scott Mace, “Commodore Gives Assembly Plant Tour: Automatic Insertion Equipment Plays Major Manufacturing Role,” Infoworld, 26 April 1982, 18.) Commodore was, however, an outlier in its adherence to a strategy of vertical integration.

45 Susan Chace and Michael W. Miller, “Calculating Rival: Commodore's Tramiel Sharpens Competition in Small Computers,” The Wall Street Journal, 18 Aug. 1983, 1.

46 See, for example, David Stipp and G. Christian Hill, “Texas Instruments’ Problems Show Pitfalls of Home–Computer Market,” The Wall Street Journal, 17 June 1983, 29.

47 Tandy had approached Millard of IMSAI about the possibility of selling the IMSAI 8080 in Radio Shack stores. About to start ComputerLand, Millard was not interested (Freiberger and Swaine, Fire in the Valley, 74). According to Levering, Katz, and Moskowitz, The Computer Entrepreneurs, 101, the Commodore PET was originally to be designed in cooperation with Radio Shack, but the deal fell through.

48 Freiberger and Swaine, Fire in the Valley, 196–99; quote on 198. L. R. Shannon reports that the Model I sold for $599.95 and that Radio Shack shipped 3,000 by the end of 1977 (“A Decade's Progress,” The New York Times, 6 Sept. 1987, C7).

49 Freiberger and Swaine, Fire in the Valley, 147–48, 152–54.

50 Levering, Katz, and Moskowitz, The Computer Entrepreneurs, 232–33.

51 Freiberger and Swaine, Fire in the Valley, 259–63; Slater, Portraits in Silicon, 323–29; Levering, Katz, and Moskowitz, The Computer Entrepreneurs, 86–96. For Osbornes own account, see Osborne and Dvorak, Hypergrowth, passim.

52 Osborne and Dvorak, Hypergrowth, 11.

53 Levering, Katz, and Moskowitz, The Computer Entrepreneurs, 66, quote on 68.

54 Chposky, James and Leonsis, Ted, Blue Magic: The People, Power and Politics behind the IBM Personal Computer (New York, 1988), quote on 9Google Scholar.

55 “How the PC Project Changed the Way IBM Thinks,” Business Week, 3 Oct. 1983, 86.

56 Chposky and Leonsis, Blue Magic, 34, 71; Freiberger and Swaine, Fire in the Valley, 274.

57 Noyce and Hoff, “A History of Microprocessor Development at Intel,” 15.

58 Chposky and Leonsis, Blue Magic, 24.

59 Cringely, Robert X., Accidental Empires (Reading, Mass., 1992), 131Google Scholar.

60 Chposky and Leonsis, Blue Magic, 43–44; Freiberger and Swaine, Fire in the Valley, 272; Slater, Portraits in Silicon, 258–59; Levering, Katz, and Moskowitz, The Computer Entrepreneurs, 210.

61 Chposky and Leonsis, Blue Magic, 50–53; Freiberger and Swaine, Fire in the Valley, 269–75; Slater, Portraits in Silicon, 268–69; Levering, Katz, and Moskowitz, The Computer Entrepreneurs, 159–60.

62 Littman, Once Upon a Time, 126.

63 Chposky and Leonsis, Blue Magic, 88, 68.

64 “Personal Computers: And the Winner Is IBM, “ Business Week, 3 Oct. 1983, 78.

65 Chposky and Leonsis, Blue Magic, 24; Littman, Once Upon a Time, 156–57.

66 Valigra, Lori, “Hardware Differences Can Make or Break the 50 IBM PC–Compatible Manufacturers,” Mini–Micro Systems 17 (July 1984): 97Google Scholar.

67 “How Compaq's Portable Leaped Ahead of the Pack,” Business Week, 15 Aug. 1983, 89.

68 After several years of growth rates for PCs and related products (like peripherals and software) averaging 62 percent per year, growth slowed to 15 percent in 1985 and to 18 percent in 1986. Brenton R. Schendler, “Bouncing Back: Personal Computers Lead Strong Rebound from Industry Slump,” The Wall Street Journal, 24 April 1987, 1.

69 IBM's share, in unit terms, of all MS–DOS computers shipped worldwide by vendors based in the United States fell to 48 percent in 1986 from 65 percent in 1985. Standard and Poor's Industry Surveys, 1 Oct. 1987, C91.

70 Dataquest, cited in William M. Bulkeley, “Clone Computer Business Is Booming,” The Wall Street Journal, 7 Oct. 1988, B1.

71 In 1984, Estridge made a controversial decision to focus IBM's attention exclusively on technology built around the Intel 80286 chip. The IBM PC AT, the IBM 286 machine, came out in August of that year. Chposky and Leonsis, Blue Magic, 171–72.

72 Geoff Lewis et al., “The PC Wars: IBM Versus the Clones,” Business Week, 28 July 1986, 64.

73 Zenith has since been acquired by Groupe Bull of France, though its operations continue to be based in Illinois.

74 Roberta Faletra, “NEC, Epson Seen Vying for Second–Tier Spot,” PC Week, 26 Dec. 1988, 60.

75 Richard March, “Daewoo Signs Deal to Tak Over Leading Edge's PC Distribution,” PC Week, 8 May 1989, 69.

76 Richard L. Hudson and Laura Colby, “AT&T, Olivetti End Partnership Dating Since 1983,” The Wall Street Journal, 17 July 1989, A3. On Intel, see Lawrence M. Fisher, “Intel: Supplier Rising As a Big Competitor,” The New York Times, 14 Feb. 1990, D1.

77 Lewis et al., “The PC Wars,” 64.

78 Geoff Lewis, “The Hottest Little Computer Maker in Texas,” Business Week, 2 Feb. 1987, 71.

79 Faletra, “NEC, Epson Seen Vying.”

80 “High–Tech Entrepreneurs Create a Silicon Valley in Taiwan,” Business Week, 1 Aug. 1983, 34; Daniel Burstein, “The Asian Micro Pirates,” Datamation, 15 May 1984, 123.

81 Lam, Danny K. K. and Lee, Ian, “Guerilla Capitalism and the Limits of Statist Theory: Comparing the Chinese NICs,” in The Evolving Pacific Basin in the Global Political Economy, ed. Clark, Cal and Chan, Steve (Boulder, Colo., 1992), 107–124Google Scholar.

82 David E. Sanger, “PC Powerhouse (Made in Taiwan),” The New York Times, 28 Sept. 1989, D1.

83 Langlois et al., Microelectronics, 45.

84 Richard March, “Hyundai, Samsung Stalk Retail Market, Wielding 8088, ‘286 PCs, DRAM Chips,” PC Week, 5 Dec. 1988, 55. This ignores Tandy's Korean subsidiary, which was the largest Korean exporter of PCs to the United States in 1985. Quote from Minora Inabu, “Korea to Supply IBM–Like 16–Bit PCs to U.S. OEMs,” Electronic News, 15 April 1985. On the differences between Taiwan and Korea, see also Brian Levy and Wen–Jeng Kuo, “The Strategic Orientations of Firms and the Performance of Korea and Taiwan in Frontier Industries: Lessons from Comparative Studies of Key–board and Personal Computer Assembly,” World Development 19 (April 1991): 363–74.

85 Bro Uttal and Christopher Knowlton, “Compaq Bids for PC Leadership,” Fortune, 29 Sept. 1986, 30; Peter H. Lewis, “Compaq Redefines the High End,” The New York Times, 7 Nov. 1989, C14; Andy Zipser, “Compaq Rolls Out Personal Computers, Claims They Challenge Minicomputers,” The Wall Street Journal, 7 Nov. 1989, B4. IBM did offer a 486 add–on board for its PS/2 Model 70 a few months earlier.

86 The successes were the PC XT in 1983 and the PC AT in 1984. The failures include the infamous PC Jr., an attempt at the home computer market; the PC portable in 1984; a work station called the RT PC in 1986; and the PC convertible, a laptop, also in 1986. For a chronology of IBM product introductions, see Chposky and Leonsis, Blue Magic, 220–22. Some have described this move as resulting from the pull of IBM's mainframe legacy, which outweighed the lessons learned in the development of the original PC. (William Zachmann, “IBM Is Pulling the PC Back to Mainframe Legacy,” PC Week, 19 Dec. 1988, 9.)

87 Paul B. Carroll and Michael W. Miller, “High–Tech War: Nine Firms That Make Personal Computers Gang Up Against IBM, “ The Wall Street Journal, 14 Sept. 1988, 1. The “gang of nine” are Compaq, AST, Epson, Hewlett–Packard, NEC, Olivetti, Tandy, Wyse, and Zenith. EISA is compatible with existing AT add–on cards, but the Micro Channel is not.

88 “Dell Aims for the Big Leagues,” The New York Times, 21 July 1991, F5; Paul M. Eng, “Businesses Are Buying More Clones,” Business Week, 29 July 1991, 68D; Neal Templin, “PC Price Dive Drags Down Big Players,” The Wall Street Journal, 8 Nov. 1991, B1; “Cut to the Quick,” The Economist, 27 March 1992, 76; Michael Allen, "Low–Cost PC Makers Have Come on Strong But Difficulties Loom,” The Wall Street Journal, 11 May 1992, A1.

89 Peter H. Lewis, “Personal Computers: Behind the Price Cuts,” The New York Times, 28 May 1991, C9.

90 Laurence Hooper, “IBM Plans Revamps, Hints at Price Cuts,” The Wall Street Journal, 19 April 1991, B1; John Markoff, “IBM. Will Change in Effort to Keep Market Dominance,” The New York Times, 27 Nov. 1991, A1; Evelyn Richards, “Turning IBM Around,” The Washington Post, 24 Nov. 1991.

91 Peter H. Lewis, “Why Compaq Is Getting Down in the Trenches, “ The New York Times, 17 Nov. 1991, sec. 3, 8.

92 Michael Allen, “Developing New Line of Low–Priced PCs Shakes Up Compaq,” The Wall Street Journal, 15 June 1991, 1.

93 “Apple and Dell Cut Prices of Computers,” The New York Times, 5 Feb. 1992, D4.

94 Moritz, The Little Kingdom, 289–301.

95 Brenton R. Schendler, “Calculated Move: Apple Computer Tries to Achieve Stability but Remain Creative,” The Wall Street Journal, 16 July 1987, 1.

96 Andrew Pollack, “A Quirky Loner Goes Mainstream,” The New York Times, 14 July 1991, sec. 3, 1. In 1988, Apple held a 12.9 percent share of the market, edging IBM's 12.5 share. (Dataquest, cited in “Who Sells the Most PCs in the U.S.? Not Whom You Think,” Business Week, 5 June 1989, 118E.) These are U.S. shares, not worldwide shares, and are thus not directly comparable to the data in Table 1.

97 The original IBM PC ran at 4.77 MHz. Clock speed does not translate directly into the functional speed of a machine for particular tasks, but it is a good proxy.

98 John Markoff, “In an Age When Tiny Is All, Big Computers Are Hurting,” The New York Times, 4 April 1989, 1; Allan R. Gold, “Computer Changes Jolt Route 128,” The New York Times, 11 Aug. 1989, D1.

99 Andrew Pollack, “I.B.M. Now Apple's Main Ally,” The New York Times, 13 Oct. 1991, sec. 3, 8.

100 Peter H. Lewis, “The Brave New World of I.B.M. and Apple,” The New York Times, 13 Oct. 1991, sec. 3, 8.

101 John Markoff, “An Unlikely Underdog,” The New York Times, 31 March 1992, D1.

102 “New Alliances Promise to Reshape Desktop,” Electronic Business, 8 July 1991, 28; Robert D. Hof, “Why ACE May Be in the Hole: The Attempt at a Computer Standard Has Grown Unwieldy,” Business Week, 17 Feb. 1992, 132; Glenn Rifkin, “Digital's Chip of the Next Century,” The New York Times, 25 Feb. 1992; Craig Stedman, “DEC, Microsoft Ink PC Software Deal,” Electronic News, 27 April 1992, 6; Cate Corcoran, “Intel's P5 Erodes Support for RISC: Key ACE Members Abandon MIPS Platform in the Face of Intel Challenge,” infoWorld, 11 May 1992, 23.

103 This is contrary to what Chandler implies in “Organizational Capabilities and the Economic History of the Industrial Enterprise,” Journal of Economic Perspectives 6 (Summer 1992): 97.

104 On the concept of economies of scope in software development, see Cusumano, Michael A., Japan's Software Factories: A Challenge to U.S. Management (New York, 1991), esp. 8Google Scholar.

105 Langlois and Robertson, “Exploring Vertical Integration.”

106 Langlois, “Transaction Costs”; Silver, Morris, Enterprise and the Scope of the Firm (London, 1984)Google Scholar.

107 Moritz, The Little Kingdom, 228.

108 On Xerox and HP, see Freiberger and Swaine, Fire in the Valley, 264–68.

109 Rifkin and Harrar, The Ultimate Entrepreneur, 194ff. My account follows this source.

110 Olsen quote, ibid., 203; “Digital Equipment Decides to Let the Rainbow Fade,” The Wall Street Journal, 22 April 1987, 4. DEC discontinued the Rainbow in 1987. By then the firm was selling the VAXmate, an expensive IBM–compatible with the ability to hook easily to a DEC minicomputer network. DEC later contracted to buy OEM clones from Tandy, but has recently announced plans to manufacture its own PCs in Taiwan. William M. Bulkeley, “Digital to Buy and Resell under Its Label Personal Computers Produced by Tandy,” The Wall Street Journal, 7 Oct. 1988, B4; “Digital Plans to Make PCs,” The New York Times, 11 Feb. 1992, D15. DEC has also begun emulating the marketing tactics of the successful mail–order clones. Peter H. Lewis, “Digital Returns to PC Wars,” The New York Times, 2 Feb. 1992, sec. 3, 8; Rifkin and Harrar, The Ultimate Entrepreneur, 238.

111 Rifkin and Harrar, The Ultimate Entrepreneur, 208.

112 Moritz, The Little Kingdom, 291–97; Williams and Moore, “The Apple Story,” 177–80; Freiberger and Swaine, Fire in the Valley, 231–35.

113 Despite this, the Apple III took longer to develop than the IBM PC and was priced higher. Moritz, The Little Kingdom, 309.

114 Moritz, The Little Kingdom, 297; Freiberger and Swaine, Fire in the Valley, 234. Apple sold 78,000 Us in the 1980 fiscal year.

115 This is Wozniak's estimate. Williams and Moore, “The Apple Story,” 180.

116 The drive was used on the Lisa, but it would have been cheaper to use an outside drive. In 1983, John Sculley, the new Apple president, killed the internal drive and bought more compact units from Sony. Moritz, The Little Kingdom, 323; Sander quote, 302.

117 Williams and Moore, “The Apple Story,” 178.

118 Butcher, Lee, Accidental Millionaire: The Rise and Fall of Steve Jobs at Apple Computer (New York, 1988), 142Google Scholar.

119 Moritz, The Little Kingdom, 130. Raskin was the progenitor of the Macintosh, the first prototypes of which appeared in December 1979. Significantly, Raskin's original vision was essentially similar to that of Osborne—a cheap bundled portable built around existing 8–bit technology. Jobs became “intrigued by the concept of an appliance computer that was as easy to use as a toaster,” and began meddling in the project, which he eventually took over. Young, Jeffrey S., Steve Jobs: The Journey Is the Reward (Glenview, Ill., 1988), 201Google Scholar. It was at Jobs's insistence that the Macintosh used the 16–bit Motorola 6800 chip and incorporated the mouse, icons, and other features developed at the Xerox Palo Alto Research Center.

120 Moritz, The Little Kingdom, 326. A memorandum from Mike Murray, the Macintosh marketing manager, put it this way:

Think of Mac as an appliance. A thing applied as a means to an end. Like a Cuisinart in the kitchen, one could live without a Macintosh on the desk. Yet the increased personal productivity combined with the opportunity for personal and creative expression will hit hard at our customers’ psychic drives. Perhaps only 15–20 percent of a person's working time will be spent using a Mac, but as with the Cuisinart, it will make all the difference in the world. Our customers will find it difficult to return to the “old way’ of doing things. Macintosh will become an integral part of life at a desk. In fact, we would like to see the day when a freshly hired product manager for a Fortune 500 company walks up to his new desk and finds a telephone, a couple of pens, a tablet of paper, a company magazine, and a Mac.

Butcher, Accidental Millionaire, 145–46.

121 Quoted in John Sculley with Byrne, John A, Odyssey: Pepsi to Apple … the Journey of a Marketing Impresario (New York, 1987), 238Google Scholar.

122 Moritz, The Little Kingdom, 326.

123 Sculley, Odyssey, 391.

124 For an extension and generalization of this idea, see Langlois, Richard N. and Robertson, Paul L., “Networks and Innovation in a Modular System: Lessons from the Microcomputer and Stereo Component Industries,” Research Policy 21 (1992): 277–313CrossRefGoogle Scholar.

125 Cheung, Steven N. S., “The Contractual Nature of the Firm,” Journal of Law and Economics 26 (April 1983): 6–7Google Scholar. Indeed, these economies of scale more than transaction costs explain the tendency of assemblers to offer preset packages. If there were only transaction costs, as Cheung, “Contractural Nature,” suggests, of discovering which parts are available and what their prices are, we would expect to see not preset packages but a proliferation of intermediaries who specialize in packaging components tailored to buyers’ specific tastes. Indeed, we see such intermediaries in the computer industry; they are called value–added resellers, and they package hardware and software systems to the tastes of particular non–expert buyers. For most appliance–like products, however, the economies of scale of assembly lead to integration of the pack–aging and assembly functions.

126 By gradually adding or swapping third–party add–ons, a buyer of the original IBM PC in 1981 could by today have created a machine with all the capabilities of the latest 386 system.

127 The definitive source here is Flamm, Kenneth, Targeting the Computer (Washington, D.C., 1987)Google Scholar.

128 Marshall, Principles, IV.x.3, 225.

129 Moritz, The Little Kingdom, 29.

130 Robinson, E. A. G., The Structure of Competitive Industry (1935; Chicago, Ill., 1958), 142Google Scholar.

131 Rosenberg, Nathan, Perspectives on Technology (New York, 1976), 125CrossRefGoogle Scholar. See also Hughes, Thomas P., Networks of Power: Electrification in Western Society, 1880–1930 (Baltimore, Md., 1983)Google Scholar. Hughes refers to bottlenecks as “reverse salients.”

132 John Gantz, “Chips and Technologies: Driving in the Fast Lane,” InfoWorld, 15 Feb. 1988, 34.

133 But for a suggestion that modularity and external economies can be important elsewhere—including in process technology—see Richard N. Langlois, “Capabilities and Vertical Disintegration in Process Technology: The Case of Semiconductor Fabrication Equipment,” Working Paper 92–10, Consortium on Competitiveness and Cooperation, Haas School of Business, University of California, Berkeley, Nov. 1992.

134 Notably those in Lazonick, Business Organization and the Myth of the Market Economy.