Global strategy of computer manufacturers and the digital divide

Introduction

The computer industry had not existed before the Second World War, but today it will be difficult to imagine an office without a personal computer (Dedrick, 1998, 4). Over the years, the continuing changes in computing and information technology (IT) have confounded expectations and challenged the traditional concept of competition. Improvements in performance and capabilities of computer-related technologies have been dramatic to say the least and prices have declined substantially over the years. Public and private sector research on computer-related technologies is considered as being critical for advancement and multinational corporations from the United States of America have created a massive production network to cater for global demand. However, ongoing competition, changes in the market for computers and computer-related technologies together with changes in technology keep computer manufacturers on their toes. Yet, despite the advances in computer-related technologies, improvements in global standards of living and declining prices of the previously mentioned technologies, exclusion or a lack of access to computers and computer-related technologies continues to present a threat to the establishment of information societies in many countries in the developed and the developing world (Ferro, 2010, Chapter 1).

Access to Information and Communication Technologies (ICT) is important for effective participation in the twenty-first century (Ferro, 2010, Chapter 1). Without access to the ICT, it is impossible to tap into the knowledge and information available on the World Wide Web and the ability to communicate with others becomes restricted. Computers are not only needed for a wide variety of tasks that are now considered as being a part of life, such as word processing or quantitative manipulation, these tools are also useful for sophisticated modelling and simulation for business and a wide variety of other fields of human endeavour. Skills in computing are essential for employment that is better than the mediocre and without ICT lifelong learning is likely to remain a dream. Thus, those without access to computers lose out and find it difficult to progress materially or intellectually. Communities without access to the ICT find that they are cut off from the world, and that they can do little to improve their lot and that of those who are a part of them. Those who can develop websites to present their business messages find that they do have access to a global market, even if they must compete with their products and ideas.

Although the capacity of an individual or a community to afford ICT, including personal computers and the Internet access hardware and infrastructure that enable computers to communicate is a factor that contributes to digital divide, this is not by any means the only one (Ferro, 2010, 8 – 10) and (Partridge, 2007, iv). In addition, the digital divide is not a phenomenon that only afflicts the underdeveloped world. However, computer manufacturers can play a role in helping individuals and communities have better access to the ICT and their global strategy does make a difference. Clearly, the computer industry and manufacturers together with many millions around the world will benefit if many more pieces of ICT equipment are made available to users. However, global manufacturing, markets, innovation and developments in technology together with a concern for profits influence the global strategy of multinationals and other manufacturers of ICT. Thus, it makes sense to try to understand better perspectives related to digital divide and global manufacturing strategy of computer manufacturers. A literature review for global strategy of computer manufacturers and digital divide will be of interest to anyone who has an interest in technology, computing, multinationals, development and the ICT. It is with the previously mentioned considerations in mind that a literature review for the topic of discussion is attempted.

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Literature Review

IBM had played a unique role in the evolution of the computer industry in the United States of America from the 1950s to the 1990s by being both a path definer and a protagonist which integrated electronics technology with its punched-card tabulators to capture most of the world’s computer market in 1954 (Chandler, 2001, 245 – 250). Later, this firm was to develop the System 360 after very substantial investments in research to create formidable barriers to entry into the computer industry which were only challenged by Japan at a later stage. United States of America continued to dominate the computer markets when Intel released its first microprocessor and Microsoft developed an operating system for the first personal computer. Because all personal computers had to use the Intel microprocessor and the Microsoft operating system, a superb competitive advantage was created for the previously mentioned firms and their home country, the United States of America. This competitive advantage was pushed further by other firms including Sun Microsystems, Texas Instruments, Silicon Graphics, Motorola and Compaq, which developed the first laptop computer. Thus, even today, relatively few firms control computer technology and its ongoing development resulting in a situation that is close to being oligopolistic.

According to Johnson (2005, Chapter 2), a need for capturing more income and global markets prompted players in United States computer industry to try to capture overseas markets, but many other nations were only able to purchase readymade or assembled products. The very large investments required to develop computer technology, together with what was required in the form of skills meant that only Japan could present a challenge to the United States computer industry. Constant innovation and improvements in design and technology presented serious problems for those wanting to catch up. Proliferation of new ICT technology was only gradual even in the United States of America, because knowledge of core technology was lacking and licensing, external research contracts, hiring of former skilled employees and alliances or joint ventures only resulted in a gradual transfer of the core technologies (Viardot, 2004, 58 – 64). However, after core technologies had gradually proliferated, further innovation and improvement determined market leadership. Those that were committed to developing state-of-the-art technology and helping customers to apply it to solve their problems were more successful, but when technology evolved and the nature of customers’ problems changed, the firm had to change too (Viardot, 2004, xiii).

Viardot (2004, Chapter 1) goes further to suggest that high-tech products have a short life-cycle and use sophisticated core technologies that are difficult to copy. Moor’s Law for integrated circuits suggests that markedly superior integrated circuits, including microprocessors or memory chips, are likely to become available every eighteen month or so. Thus, after developing a high-tech product, the firm must rapidly bring it out to market and sell it to recoup its research and development expenses and the investments made in manufacturing operations. In addition, uncertainty about the direction of evolution of new technology and a need for upgrading product models requires that funds are made available for further research, development and innovation. Thus, the pricing strategy for a high-tech product requires that the sales margins provide for manufacturing costs, distribution costs, channel costs, innovation costs and costs for bringing out new models and for retooling as well as reserves for a competitor response, etc. This clearly means that, unless markets guarantee that products will sell well, the price will remain high (Jain, 1999, Chapter 15). Economies of scale operates when a high-tech manufacturing firm is assured that it can recoup its costs or when a enough units had been sold to provide for development costs. Clearly, high – tech innovators and manufacturers cannot supply ICT free to everyone because this will not make economic sense (Keyes, 2010, 59 – 73). In addition, fundamental business values and capitalism cannot permit everyone around the world to be taught how to design an integrated circuit and be provided all the sophisticated equipment required for integrated circuit fabrication or research. Wages for those working with high-technology in developed countries are far higher than in other countries, even though the laws of supply and demand do dictate what is possible to be asked for a high-tech ICT product.

Dedrick (1998, 50 – 55) states that it was the invention of the personal computer (PC) which led to the globalisation of the computer industry, with multinationals creating a production network that took advantage of local capabilities to serve markets around the world. Parts used for assembling a PC were outsourced competitively, and it was in Microsoft’s interest to be able to license its operating systems for use by all computer manufacturers because this meant capturing the market. Thus, even today Microsoft operating systems and other software products, such as Microsoft Office, remain the most popular around the world. Because Microsoft had early mover advantage, it could develop its products to present quality that remains unmatched by others even today. By trying to seek the lowest prices for its PC components, IBM encouraged suppliers to enter large volume manufacturing and this meant that prices gradually dropped. By copyrighting the Basic Input Output System (BIOS) for its computers, the program which connects computer hardware to the operating system, IBM had tried to ensure that others could not copy its personal computers. Despite this, Compaq reverse engineered the BIOS by analysing leading software applications to produce its own computer, but others who had directly copied the IBM BIOS were sued. Standardisation provided Microsoft and others in the industry with greater leverage, creating an open architecture that encouraged new players who could build their own PCs provided, they purchased microprocessors from Intel, BIOS from a suitable supplier and operating system from Microsoft.

Dedrick (1998, 58 – 75) goes on to suggest that the evolution of the global PC industry was moulded by intense competition among PC manufacturers who now had an open architecture, but could purchase licensed BIOS and Microsoft operating systems. Thus, the actual manufacturing of PCs was located in regions that presented cheap labour and close to markets in locations that optimised the interests of manufacturers. Massive investments in DRAM memory chip developments by Japanese and South Korean electronic multinationals were to mean that they retain leadership in this technology even today, but actual manufacturing has now shifted to East Asia from where labour costs are low and shipments to Japan, North America, Europe and other markets are possible. Only designing, new technology development and marketing are retained in the United States of America, with a certain shift to cheaper locations, such as Bangalore in India, where skills and expertise in certain technologies are available cheaply. Thus, it is only proper to conclude that computer manufacturers have tried to do that which will reduce prices together with making profits while providing funds for future research. However, despite this many around the world suffer from a lack of access to ICT.

A shift towards horizontal integration rather than vertical integration was the driving force behind the globalisation of the PC industry (Dedrick, 1998, 68 – 75). East Asian countries could develop strong linkages with the global production system for PC coordinated by the United States of America because they possessed national industry infrastructure and had gained an expertise in exporting, they indulged in aggressive outward-oriented national policies to develop national industries, and they had prior experience in electronics manufacturing.

Although, it may appear a casual observer that superior design and technology alone will provide a competitive advantage for the marketing of high-tech products, including the ICT, this is not quite correct. Jager (1997, Chapter 8), which presents the story of Dell Computer Corporation indicates that offering superior service and ease in purchasing quality computers over the phone can help support a superior product. In addition, reducing cost overheads involved with retail could benefit both Dell Computer Corporation and its customers. Thus, Dell Corporation which had revolutionised the idea that customers could purchase direct from the manufacturer over the phone without any retail store being involved provided better deals to its customers. This company was to grow from a $6 million company in 1984 to $69 million in 1987 and $546 million in 1991. Clearly, better pricing made possible by eliminating the retailer, superior service and the high-quality computing machines sold by Dell Corporation satisfied a vast majority of customers to make such spectacular growth possible. Obviously market capture is important, and it is right to do that which will appeal to the market.

It will be right to say that over the years, economic development and consolidation of the global production system for PC has presented established markets and locations. However, the opening up of China not only provided a vast new market in which multinationals could compete, but this also enabled Chinese multinationals to compete more aggressively on international markets (Larcon, 2009, 195 – 205). Lenovo Group has been a unique success story in China’s corporate world and this group recently strengthened its position in global markets by acquiring the PC division of IBM for US$1.25 billion in cash and shares, with US$500 million in debts. IBM was more interested in focusing on service, software development and server technology. In addition, IBM hoped to benefit from the sale of its PC division to Lenovo by targeting Chinese banks, government agencies and manufacturing companies, while Lenovo was to remain a preferred supplier to IBM global services. Lenovo, which had a 27% share of the PC market in China, with an iron grip on government and education markets, and a 12.2% share in the Asia-Pacific region, (excluding Japan), now derives only 2% of its annual global sales from the Chinese markets and can compete with Dell Corporation and Hewlett-Packard. The world is now witnessing a large scale reconfiguration of value chains related to ICT as large Western firms focus their activities on core and more profitable markets in comparison to the mature markets. According to Larcon (2009, 198 – 200), the sources of competitive advantage now exhaust progressively, possibilities for differentiation are now thinner and margins erode as products become commoditised. Innovations in products are difficult to sustain because these innovations are now easily copied and claims of technical superiority are difficult to prove due to product commoditisation. However, locating in cheap labour markets with high automation in production can provide China with opportunities for competing.

The Research & Markets (2004, “Computer Company Strategy & Their New Developments in the Digital Consumer Electronics Market”) states that many computer manufacturing firms were now poaching into each other’s markets and looking for new sources of competitive advantage. According to the previously mentioned report, household penetration of computers in the United States of America had reached 80%, and it was unlikely that any further growth could be sustained even by estimates presented by the computer industry. Subsequently, the prevailing global financial recession of 2008 – 2010 adversely impacted global sales of computers and all computer manufacturers, including Dell Corporation, were trying to find ways for sustaining price declines in an effort to increase sales. Thus, moving to cheaper locations for manufacturing computers and cutting costs proved to be essential for everyone. Computer manufacturers in China continued to adjust their strategies in the face of shrinking demand and Dell Corporation announced the closure of its plant in Ireland to shift production to Poland, which offers cheaper operating cost for manufacturing (Wikipedia, 2009, “Dell”) and (C114, 2008, “Chinese computer manufacturers adjusting strategies for 2009 as market demand shrinks”). Manufacturers in China are now targeting rural markets with the assistance of the government of China, which has decided to include computers among its list of household subsidised goods for its citizens. Clearly, the previously mentioned strategy will work to bring computers into the lives of very many more people to diminish the effects of the digital divide and boost the rural areas of the People’s Republic of China (PRC).

Examination of news headlines associated with major computer manufacturers, including Dell Corporation and Hewlett-Packard, on Yahoo Finance and Google Finance suggest that efforts are ongoing to bring more innovation into offerings made available by the global computer industry (Yahoo Finance, 2010, “Search Results for Dell and HP”) and (Google Finance, 2010, “Search Results for Dell and HP”). However, it will appear that price competition will intensify in the computer industry because according to Acer CEO, Stan Shih, the trend for low price computers will continue for the coming years, but the high wages of US$20 per hour in the United States of America in comparison to US$1 in PRC make it impossible for United States manufacturers to compete with cheap products (Alberts, 2010, “Asia’s Laptop Ascendance?”). Tech vendors are now developing new products faster and chip sales have improved due to demand for newer chips for new types of computers and high-tech gadgets (Wall Street Journal, 2010, “Search Results for Computers”). Thus, it will appear that the price of the latest computer with the latest technology will fall but the prices of second hand computers, which can still work will fall even more. Thus, it appears that computers are now even more affordable than ever and this trend will continue for the future.

Although today computer manufacturers have to think hard and deep to innovate new products that attract customers, it will appear that further developments and improvements in personal, handheld or notebook computers are still possible. Research in ubiquitous, mobile and context aware computing will suggest that many new innovations are possible to be included into the portable gadget that individuals are likely to carry around with them as their personal computer (Stojanovic, 2009, Chapter 1) and (Symonds, 2009, Chapter 1). It is likely that a personal computing device of the future will contain a number of sensors that will enable it to determine its location and depending on where the device is located and the context that dominates within this location, the personal computing device will interact with its human user to suite the location and the dominant context. Thus, much more can be added to what is available in the form of a laptop, notebook or a mobile computing device. However, it is likely that the computer manufacturers are waiting and saving to get out of the economic downturn to bring new futuristic products when they are likely to sell. Obviously, standardisation and further developments in networks will have to support such mobile context aware devices and this means that the economic climate must right to be able to support implementation of ideas, which have been demonstrated in the laboratory. The technology exists, but it as to be rolled out for commercialisation and mass production. Even those living in developed countries and their communities cannot upgrade their networks, computing hardware and software every day. Although laptop and notebook computers today have built-in cameras and Radio Frequency Identification Devices (RFID) as well as finger print identification, the developed world still waits for ubiquitous grids, ambient intelligence, ubiquitous networking and proliferation of applications for RFID, such as contactless payment systems (Symonds, 2009, Chapter 1). The previously mentioned will only appear when the economy is right.

Gupta (2009, Chapter 7) states that in the relatively near future, organisations will have to change their mindset to thrive and to sustain competitive advantage. It will be necessary for all to rethink their global strategy, rethink innovation, organisation and to develop a global mindset rather than a local or a national mindset. Global strategy must be designed with a view to trying to capture the largest share in the global market. Thus, emerging economies of China and India should be considered for inclusion even though the purchasing power of consumers in these countries is far below that of the developed West. Perhaps if Microsoft had been willing to sell its operating systems and other software in emerging economies at prices that considered local spending power, software piracy would have been much reduced and earnings for Microsoft boosted. Such a strategy would have benefited everyone, but this did not materialise. Customised solutions to suite the local market should be available with global players. It is important to judiciously globalise the corporate resource base and to balance the need for global integration with the need for local responsiveness. It is likely that the end game in globalisation will not be global standardisation, but global customisation to suite local markets, local requirements and local conditions. Obviously, customisation for emerging and low income countries should perhaps tilt towards making products more affordable. Innovation needs to focus on saving resources that have become depleted due to human activity and extravagance. It is important to remember that dwindling reserves of fossil fuels cannot sustain the huge international trade volumes that persist today. Thus, sustainable production for sustaining standards and innovation on all fronts is important.

Gupta (2009, Chapter 7) continues on to state that in the future, manufacturers will have to contend with a constant and rapid evolution of technology that will require that products change to suite. The author presents an example of books that used to be purchased in brick and mortar stores now being downloaded into book readers, PDAs or laptops, with these books changing dynamically as authors add new material. In the future, it will be difficult for a firm to remain secretive about its operations because the Internet will make news, information, balance sheets and other matters transparent to everyone with an interest. New competitors and alliances from emerging countries will have an impact on business and the previously mentioned example of Lenovo presenting a new force in production serves to illustrate this. Innovation directed towards developing new products in a collaborative manner to combine knowledge, resources and technologies will become necessary. Global hubs that coordinate together to operate synergistically for the global and local benefit will be the shape of the organisation of the future. A strong corporate culture will act as a cohesive force and executives will be willing to benefit from and present benefits to the global diversity rather than succumbing to it by building bridges rather than moats.

It can be hoped that when gradually conditions emerge that will enable global multinationals to give and to receive from all, digital divide will diminish more, but it is important to remember that all, including the disadvantaged, will contribute to improve the future (United Nations ESCAP, 2006, 20 – 26) and (United Nations ESCAP, 2005, 1 – 23). Governments, the civil society, the individual and ICT manufacturers must all work together to create sustainable solutions because it is important to remember that products of innovation that benefit humanity are made possible by sharing skills, knowledge, effort and making judicious investments. It costs to acquire skills, learn and to take risks to innovate. Thus, it will be unfair to blame entirely the manufacturers for not trying hard enough. However, ICT manufacturers too must be willing to lean towards customisation to suite market conditions rather than insisting on standardisation that will deliberately the underprivileged at an even greater disadvantage.

Conclusion

It is clear from the discussion presented that although the global economic recession of 2008 – 2010 and saturation in the developed markets has contributed to the downturn in the ICT industry, computer manufacturers are not yet out of ideas for new products and innovations that will benefit humanity and present a demand in the market. However, it is in the interest of ICT manufacturers to take a global view to do more to benefit and to benefit from emerging markets. Standardisation of products and prices has failed to deliver. Customisation for local conditions will result in benefits for all, but all parties including the individual, government, civic society and the non-governmental sector must contribute while trying to understand perspectives.