The Globalization of Innovation Within the Personal Computing Industry

The personal computer (PC) has undergone considerable innovation and change since first introduced and the personal computing industry has introduced many innovations in its 25 year history. Jason Dedrick and Ken Kraemer, co-directors of the Sloan Foundation Personal Computing Industry Center, examine the nature of innovation in the PC Industry in a new paper. The paper was commissioned by the National Academy of Sciences STEP Project and is titled “Globalization of Innovation: The Personal Computing Industry.” The paper will appear as a chapter in a book to be published by the National Academy Press.

The authors show that innovation in the personal computing industry is highly global. First, most of the core innovation occurs at the component and software level in global industries led by major suppliers in the U.S., Japan, Korea, Taiwan, Europe and elsewhere. Second, there is a global network that supports system-level innovation by PC vendors who focus on incorporating component innovations into new products.

At the firm level, high level architectural design and product management are done in-house by PC makers, while physical development and manufacturing are generally outsourced. At the national level, higher value analytical, design and management activities are usually done in the U.S. by U.S. firms, whereas the development and manufacturing of the physical product, along with the more routine product and process engineering is done in Taiwan and in China. Finally, the competitive environment is global as well, with non-U.S. vendors dominating many national markets, and in some cases competing in international markets as well.

It has been argued that U.S. firms have taken advantage of globalization to retain their leadership in the PC industry, as well as in key component industries such as semiconductors, hard disk drives, graphics, printers, network equipment and all kinds of software (Borrus, 1997; Dedrick and Kraemer, 1998). Outsourcing manufacturing and product development activities lowers costs while letting U.S. companies concentrate on their strengths in marketing, branding, design, product management, and distribution. This global division of labor enables faster product cycles with quicker integration of new technologies, and a proliferation of models aimed at niche markets. Taiwanese contractors are very fast in taking a product from specification to full volume production, and there is a large supply of cost-effective engineers in Taiwan and China to handle more product introductions, changes, and upgrades.

Falling costs and more variety have sustained market growth and benefited consumers and industry leaders. Many PC companies could not keep up and failed or were acquired, but those who stayed ahead, such as Compaq in the 1990s, Dell since the mid-1990s, and HP since the mid 2000s enjoyed rapid growth and strong profits. But through imitation and competition, the firms that remain have all become much more efficient in cutting costs and getting new products to market. The resulting price wars and faster product cycles are seen by some in the industry as an expensive race to the bottom that no one really wins. The pace of innovation is getting faster, but innovation itself is more incremental, particularly in the dominant “Wintel” market, where the scope of innovation is constrained to variations within the standards set by Microsoft and Intel. From the firm perspective, it has been hard to translate rapid but incremental innovation into sustained competitive advantage, as all firms have access to the same components and work with the same contract manufacturers.

Outside the Wintel world, Apple develops innovative PCs with higher margins, but its market share is less than 4% worldwide. Looking for other markets in which to innovate, PC makers have moved into product categories such as smart phones, handheld PDAs, portable music players and digital cameras, taking advantage of the global production networks created by the PC industry. This has resulted in some hit products such as RIM’s Blackberry, Palm’s Treo, and Apple’s iconic iPod. But success has been sporadic, especially for traditional PC makers, as seen when both HP and Dell exited the portable music market.

For U.S. workers, globalization has led to a dramatic decrease in manufacturing jobs in the computer industry as most production has moved offshore. Much of the associated process engineering work has moved offshore as well, yet the total number of engineers in the industry has remained stable as U.S. engineers become more productive and graduate to higher value activities. It is true that job growth is not happening in the U.S., especially for the more routine engineering work that traditionally provided experience on the first steps of the career ladder. But without aggressive globalization, the industry might have stalled, or U.S. firms might have lost their edge to Japanese and Asian competitors as was often predicted in the early 1990s.

The perceived risks of globalization for the U.S. are that individuals, firms or related industries will lose their technological advantage and the ability to innovate. However, recent innovations such as the iPod, the Treo, and the Microsoft Xbox were developed mostly in the U.S. even though all the manufacturing and some of the low end engineering was done offshore. Today, Apple dominates in music players, Palm and RIM have strong market positions in handheld devices, and Microsoft is competing with Sony and Nintendo in the Japanese stronghold of video game consoles. In addition, many of the key components in those products, as in PCs, come from U.S. companies.

In order to assure continued leadership in innovation for U.S. companies, and a vital role for U.S. workers in the innovation process, industry executives and educators should identify skills needed for the dynamic, high value design and engineering work that is now done in the U.S. and take action to develop them. The key to innovation capacity lies in creating and developing talented individuals in areas such as concept design, system architecture, industrial design, and product management. For technology workers specifically, there is a great need for people who can work at the interface of engineering with computer science, or in functional terms, at the interface of hardware and software. There is also a need for people comfortable working in teams, across disciplines, and in a global environment. Training of such talented people is initially the responsibility of universities, colleges, and even earlier levels of education, whereas their ongoing development depends on industry. Given the offshore shift of lower skilled knowledge jobs, both academia and industry need to develop new ways for young people to gain experience and move up the career ladder. Click here to view a PDF copy of the report.