Challenges Facing the Personal Computer Industry - Case Study Example

Introduction This report is a brief overview of some of the key characteristics and challenges of the personal computer and grocery industries. Both industries are very large and undergoing constant change, and the similarities between the two, while not lacking, are not great. Nonetheless, the challenges do suggest two key concepts, flexibility and integration, that are common to both. These ideas, while only possible to discuss in the most broad terms in this report, should form the basis of any personal computer or grocery company’s individual approach to supply chain and operations management. The issues facing personal computers are discussed first, and then the challenges of the grocery industry are contrasted with those to demonstrate the broad application of the concepts of flexibility and integration. Challenges Facing the Personal Computer Industry The most significant challenges that face manufacturers of personal computers can be characterised by two words: Smaller and Faster. Most every industry or product experiences technical development and diversification, but the speed at which these occur in the computer industry is breathtaking. Almost half a century ago, Gordon Moore expressed an idea that the complexity of computer components that could be produced for the same cost approximately doubled every year, an idea now known as Moore’s Law. (Bruner, 2008, and Moore, 1965) This has made it possible for the computer industry to grow from a few roomed-sized computers in Moore’s time to hundreds of millions of computers, some small enough to fit in one’s pocket, in the present day. As Dr. Robert Bruner, Dean of the University of Virginia’s Darden School of Business points out, the computer industry has not yet reached the limits of Moore’s Law. (Bruner, 2008) This constant physical shrinking of computer components, the speed with which it can be accomplished, and the potential for product and market diversity they represent all pose enormous challenges for the personal computer industry. Rapid innovation and diffusion of products to new markets dictate the production and therefore the supply process for personal computer manufacturers. This is not a new idea; back in 1997, Compaq was exploring ways to better address the competitive threat of build-to-order manufacturers such as Gateway and Dell that were challenging the traditional off-the-shelf store-based computer market by selling personalised computers directly to consumers. (Zuckerman, 1997) Because the rapid innovation gives consumers so many choices, satisfying customer demand either means producing an endless variation of products, or building each computer to suit. Either presents about the same problems in terms of the volume and differentiation of components and suppliers, because of the reduced opportunities for manufacturers to standarise resources or process schedules. The Changing Requirements of the Personal Computer Market The personal computer market has two major parts – hardware and software – which drive each others’ development. Software developers produce increasingly sophisticated programs to take full advantage of current hardware capabilities, while hardware developers in turn produce increasingly capable equipment in anticipation of even more advanced software. Software developers have a distinct advantage in this arrangement, because the steps in production and distribution processes are far fewer and less complex than for hardware manufacturers. Versatility, the ability to run the widest possible variety of present and anticipated future applications, is one of the three basic requirements of the personal computer market. Economy, which can be broadly defined by capability per unit of cost, is another requirement. Related to economy is longevity, which is the time a personal computer is useful to a customer before it is technically outdated and needs to be replaced. These basic requirements do not change, but the specific capabilities of personal computers that define what meets the requirements do change, often quite rapidly. Of the three requirements, longevity is perhaps the most inclusive; a computer that is useful to a customer for a long period of time is automatically also a versatile and economical computer. This is an important consideration for customers because the initial cost of a new computer is relatively high compared to the amount of time it will take before it becomes obsolete. Customers who rely on using the latest and most-up-to-date systems and require a number of machines, such as government agencies and universities, cannot treat computers as a capital acquisition that will realise value over time, but rather as an ongoing expense. (DIR, 2003) Even individual customers now look at computers in the same way, but on a much smaller scale. For the personal computer manufacturer, it is necessary to rethink the development of products. Unlike most other sorts of equipment, for which a long period of development results in an essentially sound basic model which is viable for years with perhaps only minor refinements, computers seemingly need to be remade on a constant basis, and as the success of companies like Dell has shown, sometimes from one customer to the next. This is the only way a personal computer manufacturer can hope to avoid a situation called transitory market power, wherein one player in the industry achieves temporary but overwhelming dominance through innovation, either a technology that everyone has got to have at any price or a breakthrough in price on an existing widespread technology. A very good example of that sort of situation occurred in the late 1980’s for IBM with the introduction of the 386 processor, which was a huge leap forward in computing power. (Bresnahan, Stern, & Trajtenberg, 1995) A potentially similar situation in the near future, the widespread change from magnetic (disk-type) to solid-state memory storage in computers will probably be largely avoided, because computer developers learned the lesson 20 years ago and now many are pursuing new ideas instead of just one or two visionaries. (Janukowicz & Reinsel, 2007) Alternative Approaches to Supply Strategy for the Personal Computer Manufacturer In the 1970’s and early 1980’s, computer manufacture was essentially a ‘vertical’ industry, with only a few large companies – IBM foremost among them – building computers, in which the source of all the internal technology and components were the manufacturers of the complete units. Today’s computers, however, are products of a ‘horizontal’ industry, collections of technologies and components from many different sources, and these internal brands – such as Intel and Microsoft – have surpassed the brands on the outside of the machines in terms of importance to consumers. (Fine, 2000) The Dell computer brand, for example, does not really represent a product so much as it does a collection of different parts, and a particular manner of assembling and delivering them. In a horizontal industry, the supply chain is closely integrated with the production process. One relatively simple way in which this can be managed is through ‘pull postponement’, wherein final assembly and testing is moved away from the factory floor to the delivery point. (Gattorna, 1998) An example of this kind of process is purchasing paint from a hardware store; it would be impossible for the store to stock all the possible colours that customers might want, but it is relatively easy to stock an inventory of paint base and pigments, and mix colours as they are requested. This is essentially what most computer manufacturers like Dell do; the ‘paint base’ is the computer chassis, and the ‘pigments’ are the different bits – processors, memory modules, disk drives, and so on – that can be combined in different ways to produce a working computer. In order to manage this kind of horizontal process effectively in the presence of constant innovation, Dr. Charles Fine (2000: 218-221) advocates a process of “Three-Dimensional Concurrent Engineering”, leveraging the concept of integrated production teams. This requires a high degree of coordination between the manufacturer and suppliers, but can be enormously beneficial to both because it not only spreads but also sharpens the efforts in development and delivery of new products. The result is not only a computer that more efficiently meets customer demand, but also potentially great cost savings for both the component and end-product manufacturers. Challenges and Changes in the Food/Grocery Industry Groceries are a very different business than personal computers, and the comparisons of the challenges and opportunities facing each are not readily apparent. The major difference between the two is consumers’ real or perceived need for each; while computers are considered a necessity by many people, if conditions are unfavourable for purchasing one it can be postponed. Not so with food. Since people need to eat every day, this would seem to give the grocery industry a bit of a comfort zone the computer industry does not have. The grocery industry, however, is every bit as competitive as the computer industry, and perhaps even more so in some ways, and so management of the supply chain and operations is every bit as critical. Gottlieb (2006) cites four main areas that present the greatest challenges to the success of a grocery business: Profit margins for food products are generally very slim, groceries are highly dependent on overall economic conditions that affect consumers’ purchasing power, consumer attitudes are shifting to view shopping as a form of entertainment as well as a necessity, and labour management is made more difficult by poor retention rates, high turnover, and high costs. Consumer attitudes are perhaps the biggest driver of change, development, and competition in the grocery industry. In a survey of shoppers in 2000, the factors that respondents rated as “Very Important” to them were high-quality produce, neat and tidy stores, fresh products and clearly marked use-by dates, high-quality meats, and courteous employees. (Jones, 2000) But attitudes also vary with overall economic conditions, or among certain age or population segments. While price was not considered “Very Important” in 2000 in a period of generally good economic conditions, by 2001 77% of survey respondents rated price as “Very Important”, and the figure jumped to 84% by 2002 as economic circumstances dimmed further. (Gottlieb, 2006) This is obviously an even more critical factor now with the worldwide economy in an even worse condition. In addition, different factors are important to different kinds of shoppers. Speed and convenience are considered more important by younger shoppers and by working women, for example, while older shoppers place a higher importance on safety and security, and the availability of nutrition and health information for the products offered. (Jones, 2000) Just as in the personal computer industry, success in the grocery business depends in large part on the ability to be flexible in meeting consumers’ needs and expectations. Ways to Address the Challenges of the Grocery Industry One way in which to look at areas in which a grocery store should improve its performance is to compare the factors that customers consider very important to the factors they rate as excellent at the store where they do most of their shopping. The difference between the two factors is called the performance gap. (Jones, 2000) In Jones’ survey (2000: 47), the areas that showed the largest performance gap were high-quality produce, accurate shelf tags, high-quality meat, low prices, and use-by dates. This is not to say that the same factors apply to all stores, or do not change over time, because there are certainly variations. But this method of assessing performance for a grocery store, which is so heavily dependent on consumer attitudes, is definitely very effective. It is perhaps a lack of attention to areas that show a performance gap that is responsible for another serious handicap for the grocery industry, a lack of customer loyalty. In a survey conducted in 2007, IBM found that 73% of U.S. shoppers were either ambivalent or antagonistic toward their local supermarket, and that 46% of shoppers in effect served as negative advocates, recommending to others that they shop elsewhere. But the same survey found that an equal percentage served as positive advocates for smaller, specialty stores that traditionally have a better record of customer service, suggesting that attention to consumer attitudes has significant power over the success of a grocery business. (IBM, 2007) Naturally, supply chain management is an integral part of the process of attracting customers and keeping them coming back for any grocery business, for without the products that customers want when they want them, there is little more a grocery store can do to build customer loyalty. Approaches to Supply Strategy for the Grocery Industry The grocery industry can be compared to the personal computer industry in a sense because the end product is achieved in a similar manner. A personal computer is a collection of components which together form a unit that meets a particular customer’s specifications; a completed grocery order is much the same, a collection of different items in the basket that meets the customer’s needs and desires. Many of the same supply chain management ideas that are applied to the computer industry can be applied to the grocery industry, and in fact are with the advent of new technologies that allow for inventory to be continuously updated as purchases are recorded at the register. (Gottlieb, 2006) New technologies have also taken groceries onto the Internet. While the late 1990’s fad of purely online grocery shopping was a disaster, with every start-up in the business quickly going bankrupt, every major grocery retailer now has a web presence to supplement their brick-and-mortar operations. (AllBusiness, 2003) This has perhaps more implications for marketing than for supply chain management, but it does provide at least one opportunity to streamline the supply chain by reducing the handling of goods, which could conceivably go directly from a supplier to a customer rather than through a store. Another tactic in grocery marketing and inventory management has strong implications for the successful implementation of something similar to Fine’s Three-Dimensional Concurrent Engineering model in the grocery industry. Fierce competition among suppliers for limited space in store shelves has led to the adoption by stores of something called “slotting fees”, wherein the supplier literally purchases the privilege of having the store stock and display their products. (Gottlieb, 2006) The grocery retailer and the supplier can co-opt each others’ strengths in coordinating the best products and stocking levels to offer customers, with corresponding improvements in the efficiencies of the supply chain. Conclusion In studying the challenges facing two very different industries, both with a high degree of variation in product output and approaches to supply chain management, it is virtually impossible to discuss anything but broad generalities within the very small scope of this assignment. There is no single magical answer, or even two or three, that could be generally applied to one of these industries let alone both, and yet even within the limits to this study, a couple of key conclusions can be drawn. First, the demands of the market in both the personal computer and grocery industries demand an extraordinary degree of flexibility from industry players. Consumers demand highly individualised products – either a computer or a cart of groceries containing components that the customer has chosen – and rapid changes in economy or component product innovation rapidly modify consumer demand. Second, the only clear solution to successfully managing the supply chain and indeed all levels of operation is a coordinated, horizontal approach among suppliers and producers. But these are general concepts, and the very variability of both industries indicates that the challenges of supply chain and operations management are best addressed at the level of individual companies, with the benefit of the inputs of their own unique circumstances. Works Cited Bresnahan, Timothy F., Stern, Scott, and Trajtenberg, Manuel. (1995) Market Segmentation and the Sources of Rents from Innovation: Personal Computers in the Late 1980’s. Stanford Economics Working Paper #95-001, 18 October 1995. Palo Alto, California: Stanford University. Bruner, Robert. (2008) Dean’s Blog, entry 6 October 2008. Darden School of Business, University of Virginia. [Internet] Available from: [17 October 2008] Department of Information Resources, State of Texas. (2003) “PC Life Cycles: Guidelines for Establishing Life Cycles for Personal Computers”. Policy Statement, January 2003. Austin, Texas: Texas Department of Information Resources (DIR). Fine, Charles H. (2000) “Clockspeed-Based Strategies for Supply Chain Design”. Production and Operations Management, 9(3): 213-221. Gattorna, John. (1998) Strategic Supply Chain Alignment: Best Practice in Supply Chain Management. Aldershot, England/Burlington, Vermont: Gower Publishing Ltd. Gottlieb, Mark S. (2006) “Grocery Stores: An Industry Study”. MSG Accountants, Consultants & Business Valuators. [Internet/PDF report] Available from: “IBM survey finds grocery industry falls short in building loyalty with customers”. (2007) IBM [Internet/Press Release], 5 November 2007. Available from: < http://www-03.ibm.com/industries/consumerproducts/doc/content/news/pressrelease/3163175123.html> Janukowicz, Jeff, and Reinsel, Dave. (2007) Evaluating the SSD Total Cost of Ownership. White Paper, November 2007. Framingham, Massachusetts: International Data Corporation (IDC). Jones, Janice. (2000) “Consumer Trends: Future Challenges”. Journal of Food Distribution Research, March 2000: 47-49. Moore, Gordon E. (1965) “Cramming more components onto integrated circuits”. Electronics, 38(8). Available as PDF file from: < http://download.intel.com/museum/Moores_Law/Articles-Press_Releases/Gordon_Moore_1965_Article.pdf> [17 October 2008] “Online Grocery Shopping Survives”. AllBusiness, reprint from Convenience Store News, 7 May 2003. [Internet] Available from: Zuckerman, Laurence. (1997) “Compaq Computer Looks Back and Sees the Competition Gaining”. The New York Times [Internet], 16 June 1997. NYTimes.com, available from: [17 October 2008] Read More